Why would financial problems at a little-known Portuguese
bank send a shudder through markets worldwide? It happened today, as
equity markets slumped sharply after the parent company of Lisbon-based Banco Espírito Santo missed payments on its short-term debt.
What’s spooking investors is the risk of a doom loop. That’s a vicious cycle in
which weakened banks lean on governments for support, draining the
public finances, which in turn drag the banks down with them. It was the
fear that overshadowed all others during the worst days of Europe’s
debt crisis. And despite the progress made in easing that
crisis, ”policymakers have done little to weaken the doom loop between
banks and sovereigns in the euro zone’s periphery,” says Jennifer
McKeown, senior European economist at Capital Economics in London.
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