‘Herculean’ Europe Debt Effort May Not Save Euro Area, RBS Says


By Katrina Nicholas

June 8 (Bloomberg) — Europe’s 750 billion euro ($900 billion) aid package might fail to save the 11-year-old monetary union and usher in an “extended period” of market stress and disorder, according to Royal Bank of Scotland Group Plc.

“Maybe we reach the point where this Herculean effort works and enough policy stimulus is provided so countries can fly again,” David Simmonds, global head of research and strategy at RBS, said in Singapore today. “However I do not subscribe to this view because one cannot treat a debt-fuelled over-consumption problem with a lot more debt.”

European finance ministers yesterday put the finishing touches on a rescue fund designed to combat the region’s fiscal woes and end speculation the euro area might break apart. The crisis is threatening to slow global economic growth, pushing the euro down 17 percent against the dollar this year.

The benchmark Stoxx Europe 600 Index has retreated 11 percent from this year’s high on April 15 as Spain, Portugal and Greece had their credit ratings downgraded. The region’s economy expanded 0.2 percent in the first quarter, strained by the highest unemployment in the euro’s history, and spending cuts.

“The buck stops with the sovereign,” said Simmonds, who is based in London and is visiting the city-state to meet with clients. “There isn’t going to be some intergalactic force that comes to bail out sovereigns, and that nervousness will weigh on the market for some time.”

Financial institutions globally have combined exposure to Portugal, Spain and Greece of more than 2 trillion euros, about half taken up by banks, Simmonds said.

“About 500 billion euros or so is held by French and German banks, so the point to stress is there will be a Herculean effort to hold this thing together,” he said.

–Editors: Ed Johnson, Tom Kohn

To contact the reporter on this story: Katrina Nicholas in Singapore at [email protected]

To contact the editor responsible for this story: Will McSheehy at [email protected]

Bloomberg Businessweek