European leaders still don’t understand what caused the Aegean Contagion that swept through the eurozone in late April and early May. Swedish Finance Minister Anders Borg blamed “wolf-pack behavior” by speculators. Others have railed against clueless rating agencies, feckless debtors, and unreasonable creditors. Then there are those who ask if there’s an inherent flaw in the bond markets that made them cascade, turning vague worries into scary, self-fulfilling prophecies.

You can’t defeat an enemy you don’t understand, and unless Europe gets a better grasp on what went wrong, it will be vulnerable to more turmoil, even with the nearly $1 trillion backstop lending authority that calmed markets. “I still think it’s a very fragile situation,” says Gary Gorton, a Yale University economist.

The reality isn’t all that complicated. Europe was vulnerable to contagion, and remains so, because its governance and its financial system are weak. It was lax fiscal oversight that allowed nations such as Greece to violate European Union rules on the size of their budget deficits in the first place. Overleveraged investors made matters worse: When the value of their Greek debt fell, they were forced to reduce the size and risk of their portfolio by selling other assets—the debt of Portugal and Spain, for example.

Read More: – By Peter Coy, Businessweek

Former U.S. Treasury Secretary John Snow suggested the euro may not survive unless member nations agree to merge policies from budgets to labor markets.

“I hope it works, I believe in it,” Snow said in an interview late yesterday at the University of Oxford’s Said Business School in Oxford, England. “But the economist in me says that it’s going to be tough without accommodations.”

The common currency has weakened against the dollar this year amid investor concern on how indebted nations will cut budget deficits and access aid if needed. European Union officials agreed to a $1 trillion bailout this week to keep Greece from defaulting and stem a rout in government debt that jeopardized the ability of Spain and Portugal to borrow.

“For the euro to be able to survive long term, fiscal consolidation of some kind — tax policy consolidation, fiscal policy consolidation — is probably necessary,” he said. “But that’s not enough, you really need one labor market, one capital market. Europe is going to face hard choices in the future to make this thing work.”

Read More: – By Jennifer Ryan, Bloomberg

A widening financial crisis in Europe is threatening to put a damper on the economic recovery here and abroad just as the American economy is gathering steam.

A credit contagion that began in heavily indebted Greece spread Wednesday to Spain, whose economy is much larger than Greece’s, as Standard & Poor’s cut the Madrid government’s credit rating, just one day after slashing Athens’ bonds to “junk” status and downgrading Portugal’s debt as well.

European officials pledged Wednesday to act swiftly on a hefty package of loans for Greece, but skepticism remained that Germany, the continent’s strongest economic power, would ultimately agree to the plan.

Even under the rosiest scenario in which a rescue package comes through and the problem is contained, analysts say, European economic growth will slow as more countries feel pressure to raise taxes and take other tough measures to get their fiscal affairs in order.

Read More: – By Don Lee, Los Angeles Times

Greece was pushed to the brink of a financial abyss and started dragging another euro zone country — Portugal — down with it Tuesday, fueling fears of a continent-wide debt meltdown.

Stocks around the world tanked when ratings agency Standard & Poor’s downgraded Greek bonds to junk status and downgraded Portuguese bonds two notches, showing investors that Greece’s financial contagion is spreading.

Major European exchanges fell more than 2.5 percent, and on Wall Street, the Dow Jones industrial average finished down more than 200 points. The euro slid more than 1 percent to nearly an eight-month low.

“We have the makings of a market crisis here,” said Neil Mackinnon, global macro strategist at VTB Capital.

Greece is struggling with massive debt, and with prospects for economic growth weak it could end up in default. Its 15 euro zone partners and the International Monetary Fund have tried to calm the markets with a 45 billion euro ($59.51 billion) rescue package, but it hasn’t worked.

Read More: – the Associated Press

Standard & Poor’s on Tuesday downgraded Portugal’s ratings, citing concerns about its ability to deal with high debt levels and urged more measures to cut the country’s budget deficit.

The agency cut the rating by two notches to A-minus, or four notches above speculative, or “junk” status.

“The two-notch downgrade reflects our view of the amplified fiscal risks Portugal faces,” said Standard & Poor’s credit analyst Kai Stukenbrock.

The agency said Portugal’s public finances remained structurally weak despite public sector reforms introduced in recent years.

S&P’s rating on Portugal is now the lowest of the credit agencies.

The action “reflects our view of the amplified fiscal risks Portugal faces,” said the agency. “Under our revised base case economic growth scenario, we expect the Portuguese government could struggle to stabilize its relatively high debt ratio over the outlook horizon until 2013.”

Read More: – Reuters

The cost of insuring Portuguese government debt against default jumped to a record high on Monday on concern that Portugal could be next to suffer a Greek- style debt crisis if no lasting solution was found for Athens.

The price of insuring against a Greek debt default also rose, to 619,000 euros ($824,250) per 10 million euros of exposure from 614,600 euros at the New York close on Friday, according to credit default swaps data from CMA DataVision.

Portuguese 5-year CDS rose to a record 318 basis points from from 278.8 bps at the New York close on Friday.

They were last seen at 305.5.

Read More: – Reuters

Speculators have begun to zero in on another small member of Europe’s troubled monetary zone, highlighting the same economic flaw that brought Greece to the verge of insolvency: a chronically low savings rate that forces a reliance on the now-diminishing appetite of foreign investors to finance persistent deficits.

Just as investors are turning their attention to the next vulnerable country, Greece moved a step closer on Thursday to activating a $61 billion rescue package, as Prime Minister George A. Papandreou asked the European Union and the International Monetary Fund to meet in Athens next week.

The aid package agreed on last weekend — aimed at calming fears of a Greek default — has not yet had its desired effect. The yield on Greek 10-year bonds briefly topped 7.3 percent Thursday, not far from the 7.5 percent it was at before the rescue package was announced. Interest rates on 10-year government bonds for Portugal have also been rising, hitting a high of 4.5 percent on Thursday.

Read More: – By Landon Thomas Jr. , the New York Times

Fitch Ratings cut Portugal’s sovereign credit rating by one notch to AA- on Wednesday, citing budgetary underperformance in 2009 and warning that a similar outcome this year and next could cause another downgrade.

The change underlined concerns that the debt troubles that have afflicted Greece will move to other of the euro zone’s weaker economies, and it drove European stocks and an already battered single currency lower.

The premium Portugal has to pay on its bonds compared to German Bunds briefly hit a high of 129 basis points after the announcement but then began to tighten again, and analysts said the move had been well-flagged by Fitch and still left the rating comparable with other agencies.

Fitch also said the government’s long-term budget austerity plan was broadly credible and it did not expect political instability to upset the passage of the necessary legislation.

Read More: – Reuters

Fears of another crisis spiral for the world economy deepened Friday after the Portuguese parliament defeated a government austerity plan, triggering renewed concern that the financial crisis in that country and in Greece could spread through the eurozone and spill across its borders.

Spooked investors worldwide were fleeing risky assets like stocks. And from Shanghai to Sao Paolo, people were awakening to the reality that what is happening in these European minnow states has vast implications for the fate of the fragile global economic recovery.

Stocks fell in Asia and Europe as governments in Portugal and Greece pushed against fierce political resistance at home to cutbacks aimed at getting their deficits under control.

Read More: – the Associated Press