Heavily indebted nations on Europe's periphery may already have had the doors to European credit markets slammed shut on them, according to a major piece in the Wall Street Journal Friday.
The Wall Street Journal describes how a "home bias" has developed among core European financial institutions, so that they are no longer willing to lend beyond their borders.
The scale of the shift suggests that the euro zone isn't merely suffering from a short-term confidence crisis but that the financial lifeline of some European states is ebbing away, perhaps not to return for years, leaving some countries exposed and in danger of financial breakdown.
At worst, the squeeze could spell a wave of sovereign bankruptcies that threatens to cripple Europe's banking system, provoking a deep recession in the process. One result could be a departure by one or more countries from the monetary union, or even its breakup.
This situation makes default far more likely since the primary cost of default is losing access to global credit markets. If that access has already been lost, the costs of defaulting may be dramatically lower than the benefit of defaulting.
And, sure enough, mainstream politicians in European peripherals are already talking about stopping payment on debt.
"We have an atomic bomb that we can use in the face of the Germans and the French: this atomic bomb is simply that we won't pay," said Pedro Nuno Santos, vice-president of the Socialist Party in the parliament.
"Debt is our only weapon and we must use it to impose better conditions, because recession itself is what is stopping us complying with the (EU-IMF Troika) accord. We should make the legs of the German bankers tremble," he said.
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