It's one thing to hear about Greece or Ireland in crisis. The PIIGS (Portugal, Italy, Ireland, Greece, and Spain) have long been seen as Europe's weakest-links, and the question has been whether or not 'core' European nations such as Germany and France had the political will to bail them out.

Markets have been roiled by the PIIGS's problems as it is, but should the European debt crisis spread to France or even, yes, Germany, then head for cover:

Morgan Stanley's Joachim Fels:

Crisis could migrate to the core... As we see it, there is a significant risk that the sovereign debt crisis in the euro area periphery could migrate to the core. If so, it is not obvious that governments in the core countries would be willing or able to respond with massive fiscal belt-tightening. In Germany, the coalition government has been weakened by internal divisions and has lost its majority in the upper house. In France, President Sarkozy is facing stiff opposition to his pension reform plans and faces a presidential election in 2012. In Italy, Prime Minister Berlusconi has lost his parliamentary majority and is facing crucial confidence votes over the next few months. And neither the Netherlands nor Belgium has a government at this stage.



...Pressurising the ECB into action. With governments constrained, it is possible that, should the debt crisis migrate to the core, the burden would fall on the ECB to support sovereign debt. As the bank had already decided to buy government bonds of then ‘dysfunctional’ peripheral markets, we believe it would be difficult for the ECB to refuse extending its purchases to core euro area government bonds, should the sovereign crisis migrate to the core. Autumn looks set to bring new challenges to Europe.

The most important take-away here is that the risk of France or Germany being pulled into the sovereign crisis is real, despite the fact that they these two nations are currently being discussed in terms of potential saviors for other nations, rather than nations in crisis themselves.

(Via Morgan Stanley, Crisis, Credit, and Capital, Joachim Fels, 8 September 2010)