This reinforces the idea that policies inspired by the “put your house in order” philosophy are not enough to insulate a domestic economy from external shocks. The Greek credit rating downgrade last April took place in a weak environment, with international investors extremely sensitive to negative events. Confidence contagion spread the shock across the region. Financial tensions quickly propagated across market segments in Europe.
Contagion from sovereign risk moved to the banking system as the market focused on the exposures of European banks to troubled euro area governments. The loss of confidence in the banking system led to new strains in money markets.