Will Fiscal Crisis Spell Doom for Eurozone?

Financial markets across the world were rattled Tuesday after Standard & Poor’s slashed its debt rating for Greece to junk and cut its Portuguese bond rating one notch.

This has triggered fears that a slew of European countries will face national bankruptcy and the eurozone will face collapse.

European and American stocks plummeted the same day. Major stock indices in Europe fell by their largest margin in five months, with the U.K. benchmark FTSE 100 falling 2.61 percent. The U.S. Dow Jones Industrial Average sank 1.9 percent to fall below the psychologically sensitive level of 11,000.

Asian stocks also fell sharply. Stocks in Tokyo fell 2.57 percent and Korea’s KOSPI dropped 0.89 percent.

The euro fell below 1.32 dollars for the first time since April, causing investors to flock to dollars as a safe asset. The won-dollar exchange rate fell 8.6 points to close at 1,118.7.

The slash in the Portuguese bond rating followed by the cut in Greece’s debt rating raised fears that Portugal, Ireland, Italy, Greece and Spain will face a sovereign debt crisis. Greece is supposed to receive 45 billion euros in emergency loans from the European Union and the International Monetary Fund.

If a string of bankruptcies occurs, certain experts say the eurozone could disintegrate. New York University professor Nouriel Roubini said the European debt crisis could potentially lead to the breakup of the European monetary union.

To deal with the crisis, the IMF will add 10 billion euros to the 45 billion-euro rescue package for Greece, according to the Financial Times.

German Finance Minister Wolfgang Schaeuble said Berlin will approve a plan to help Greece as early as Monday. Leaders of the eurozone will also hold an emergency meeting May 10 in Brussels, Belgium.

AFP said the meeting’s date was set one day before German state elections to lift the burden on German Chancellor Angela Merkel. The overwhelming majority of Germans oppose the bailout package for Greece.

pisong@donga.com