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European Bonds

http://www.nytimes.com/2011/11/19/business/global/lenders-flee-debt-of-european-nations-and-banks.html?_r=1&ref=business

 

As the economic crisis in Europe continues to worsen, uneasy investors are beginning to dump the debt of European governments and banks faster than ever. Many financial institutions are creating new issues in economically weak European countries such as Spain and Italy as the begin to dump their assets in European debt. Even worse, many have also chosen to not renew their short-term loans to European banks. Financial organizations are deterred because of worries that European companies will not be able to repay their debts. The main concern is that this sort of behavior will slowly create a downward spiral for the European economy as borrowing costs increase and economic growth is stalled.

Behavior such as this is a perfect example of information cascades as well as network effects within the markets. As more and more people begin to back out of the European market, financial organizations start to reason that the others who are backing out must have other inside information that they do not; they then reweigh their options and start to back out of the crisis as well. Thus, an information cascade has started. Also, as people start to back out, financial institutions begin to reassess their value for staying in the market. With less people trying to take on the European debt, it becomes much more risky for investors to take on the debt because the chance of the banks defaulting on their loans will increase since less people are adding money into the equation.

 

 

 

 

 

 

 

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