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The European financial crisis has now moved from being an abstract economic debate to being a painful practical economic reality that is spreading rapidly around the globe.

Crisis in Europe Tightens Credit Across the Globe

Europe’s worsening sovereign debt crisis has spread beyond its banks and the spillover now threatens businesses on the Continent and around the world.

From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets.

The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump.

This is beginning to look like the chain reaction that occurred in 2008-2009. That time the epicenter was Wall St. This time it is in Europe, but in a globalized economy, the shock waves will be felt everywhere. This time it is European sovereign debt that is the trigger rather than American housing debt.

This is phase one. The European banks have the greatest exposure to the risk of default on bonds issued by countries such as Spain and Italy. A default by Greece has already been accepted by almost everybody as an eventual reality. It is the possibility of that happening with much larger economies that is creating the panic. Cutting back on lending is a reflexive reaction on the part of the European banks. That is having an impact on the finances of both governments and private businesses.

The airplane maker Boeing recently warned that a European pullback could affect its business next year. With some European banks out of the picture, “this leaves a difference that must be made up by other sources if airplane deliveries across the industry, already set to increase in 2012, are to occur as planned,” said John Kvasnosky, a spokesman for the company.

Embraer, a Brazilian aerospace company, tempered its growth expectations despite having a pickup in commercial and business jet sales in the third quarter.

“This whole situation in Europe again has stalled this recovery process,” said Frederico Curado, chief executive of Embraer, in a conference call with investors in early November. “The way we see the world going forward is of a moderate growth.”

 

This rather major credit squeeze is being piled on top of a global economy that has never recovered from the last crash. It will not take much to trigger another cycle of cutbacks and layoffs. This is an anticipation that the euro zone and the European Central Bank will be unable to solve their problems. It seems to be a reasonable anticipation in that they have been trying to kick the can down the road for 18 months with no real progress what so ever toward a resolution of the problem.

Phase two of this crisis will come when anticipation becomes reality. If actual debt default by European governments becomes a reality. at that point major European banks will not be able to survive simply by cutting off credit. They will have to be bailed out or nationalized. This would be contagious for American and British banks. At this point it is difficult to know just how severely they would be impacted, but it is clear that it would be a very significant jolt.

The important point about today's news is that this is real. It is happening now. It seems unlikely that the various players are going to face up to this reality any more that they have to all of the other reality that has been hitting them in the face. It is truly like watching a train wreck while standing in the middle of the track.

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