Europe on the Verge of ... Stability?

Europe on the Verge of ... Stability?

Well, they’re trying.

Despite yet another downgrade for Italy’s sovereign debt rating that was announced Tuesday, markets have been cautiously optimistic this week. (Remember the plunge when Italy’s rating was cut last time?) Investors are waiting to see if officials will do something to stabilize troubled banks across the Atlantic.

According to Antonio Borges, the European Department Director of the International Monetary Fund (IMF), Europe will need €100-200 billion to recapitalize its banks and make investors feel confident again.

This “recapitalization” would involve restructuring the mix of how much debt these banks have compared to their actual cash. A lot of banks hold a significant amount of debt from other countries’ governments, such as French banks holding Greek debt. (Which is a problem in its own right: French banks are in particular trouble.) If Greece defaulted, banks could also falter. And if banks falter, whole new economies could be at risk for a meltdown.

In the past, government debt was traditionally seen as a safe investment, so many companies invested in it. But now, even a few countries with serious debt issues could catapult the whole system into trouble.

Although the details haven’t been worked out yet, this new plan would involve governments infusing extra cash into banks to fortify them against losses. This could look a lot like the U.S. government intervention in 2008 to help our own ailing financial sector.

The key takeaway here is that our world is way more interconnected than it used to be: A problem in one area of the world is no longer limited to that particular place, and Europe may be an example for the ages.

Here’s a rundown of how Europe got into this mess.

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