Europe’s financial contagion

Greece sneezed, and now most of Europe has a cold. The European debt crisis has already spread like a virus from Greece to Ireland and Portugal, and other countries are now at risk: Spain, and Italy are probable candidates for financial problems.

Contagion also has much to do with actual economic links among countries. Researchers have identified financial ties in particular as responsible for the “fast and furious” spread of crisis from one country to another. Trading activity between countries, however, can propagate economic sickness more slowly.

    Who's exposed?

  • Through banking
  • Through trade

When an ailing country becomes over extended and unable to handle its debt, banks and other financial firms that have lent it money could be exposed to major losses. This could unsettle the home country of the banks or even spread the troubles to a third country. That can occur, for instance, because banks may try to cover their losses in one country by calling in loans in another.

Loans extended as a percentage of GDP

Taking their temperature

When investors begin to lose confidence in a country’s ability to pay off its debt, they demand higher interest rates on the country’s bonds to cover the risk of loaning it money. When its borrowing costs rise, an ailing country has an even harder time raising money to pay off the debts it has. Borrowing costs are up this year in European countries considered more vulnerable as investors look to put their money somewhere they think is safer.

Borrowing costs 10-year bond yield spreads over benchmark German bonds

NOTE: Bank loan figures are the total outstanding as of December 2010. Export figures are annual, 2010.

SOURCES: Global Trade Information Services, CIA World Factbook, Bank for International Settlements.

GRAPHIC: Wilson Andrews and Alicia Parlapiano - The Washington Post. Updated July 18, 2011.

The state of the euro zone

The debt crisis in the 17-country currency union continues to escalate as financial woes spread from small nationslike Greece, Portugal and Ireland to Italy and Spain, the zone’s third- and fourth-largest economies.

Our mountain of debt

Explore the $4.4 trillion in U.S. Treasury securities held by foreign governments.