In Europe, PIGS are making the financial markets squeal: The Italian government's newly-auctioned 10-year bond has once more risen above 7 percent; Greece's Prime Minister Lucas Papademos has warned that Athens will have to leave the eurozone if Greece is unable to reach an agreement with the so-called "troika" of the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF).

All of these factors are testing the market's nerve. However, the market has predicted that the first quarter is the hardest time for those debtor countries as it is then that EU members will implement the measures contained within the more disciplined and stringent fiscal agreement reached in November last year. It will inevitably produce a series of disputes and compromises, and any further movement on the issue is likely to generate an amplified market reaction.

Another thing is obvious: financing resources have become ever scarcer. Greece is still relying on the IMF's first bailout fund of €110 billion in order to maintain day-to-day functionality. It is also working hard to secure the second bailout of 130 billion euros; Meanwhile, Italy owes 1.9 trillion euros, of which 321 billion euros are due this year, and they must also pay another 52 billion euros in interest; Spain and Portugal are no better off, indeed it's rumored that both countries are requesting help from the IMF. So, the question is: Will the IMF or ECB step in and help? Will they risk the prospect of domino defaulting?

First, for the IMF, the answer is "Yes", despite the fact that many Asian experts expressed their doubts as the IMF began its bailout of Greece. The simple fact is that 60 percent of all global financial institutions come from Europe, and they have deepened into every corner of the local economy in terms of trade, finance and infrastructure construction. Their contraction, or possible collapse, will produce a hard shock for the global economy.

Vice President of the IMF Zhu Min has expressed the same opinion that the current (and any further) deleverage of European banks will be a disaster for Asian economies. It's also a demonstration that the debtors have kidnapped the creditors, forming an integrated ecology.

The European Central Bank's leeway is narrower than the IMF's; although the ECB's fundamental rules prevent it from assuming the role of last buyer of toxic government debts. President of the ECB, Mario Draghi, also tried to stick to the rules, but we are seeing more of a Bernaky Draghi than a Trichety Draghi, lowering down the rates for troubled banks and carrying out the Long-Term Financial Operation in order to help balance those banks so that they can lend to insolvent governments. Despite of all these measures, conditions are not improving, rather, the lending rate continues its decline. Another index which helps the ECB to measure the future CPI-M3 expansion rate is also falling, signaling the potential risk of deflation (with no effective injection of liquidity). Taking all of this into consideration, the only choice for the ECB may be monetization, following the example of the Fed in 2008, as this will assure the investors (creditors) which will serve to reduce the financing cost and increase the creditor base, which is perhaps the main headache for PIGS.

According to this analysis, the troika will move ahead and bail out the debtors, assuming the role of lender of last resort. But here comes another problem: Since both the ECB and IMF will inevitably inject more liquidity into the market, Europe will face the certain risk of high inflation which will be transmitted to emerging countries. Countries such as China should pay close attention to this.

Furthermore, from a broader and more fundamental perspective, even if the IMF and ECB perform their bailout roles as detailed, it does not necessarily signal the end of the storm clouds. Two changed conditions deserve more of our attention, namely the re-pricing of financial risk and financial asset transfer. To be more specific, the sovereign financial risks changed in 2011: The United States lost its traditional AAA credit rating, the most advanced countries in Europe lost their bankability and original risk-free government debts became toxic. As a result, debtors cannot find creditors, and investors cannot find suitable investments. Such a mismatch carries too much uncertainty and too much risk.

The author is a researcher with the Institute of South and Southeast Asian and Oceanian Studies, China Institutes for Contemporary International Relations. His research interests include the global economy.

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