NEW YORK (CNNMoney.com) -- The European contagion is back, as virulent as ever, posing a new risk to the health of the global financial system and economic recovery.
In the spring, the Greek debt crisis and looming problems in the other so-called PIIGS countries of Portugal, Ireland, Italy and Spain caused markets around the world to fall and raised fears of a global double-dip recession.
The worry then was that a default in Greek government debt would ripple across the continent and then around the world, causing problems for major global banks that invested in the debt and once again locking-up financial markets.
The Greek bailout plan and the establishment of a European bailout fund for future problems in May quieted those fears for a little while. But within the last week there have been new worries in Europe.
Ireland The Irish government recently had to backstop losses at its major banks, turned to the European Union and the International Monetary Fund last weekend to ask for a bailout of about €85 billion.
On Tuesday, Ireland had its debt downgraded by Standard & Poor's. A day later, the Irish government announced a painful austerity plan of deep cuts in spending, a lower minimum wage and higher taxes.
Portugal The small nation is struggling to come up with a new budget by the end of this week to avoid needing a bailout of its own.
Even if Portugal is successful at this juncture, many experts believe a bailout may still be necessary early next year when Portugal will have to turn to markets to refinance existing debt. The country was hit by a widespread strike Wednesday to protest the looming cuts there.
Spain While Portugal's neighbor has relatively little debt compared to the size of its economy, it is suffering from a 20% unemployment rate and sharp plunge in its construction and tourism industries.
Spain's major banks also have a great deal of exposure to Portugal's debt, although the exact amount is not certain. So there are worries that the sovereign debt crisis in Portugal could spill over into Spain.
If Spain, Portugal and Ireland were all to need a bailout, that would probably exceed the €440 billion limits of the European bailout fund established in the spring.
Contagion is not an overstatement Experts say fears about the problems in Europe worsening are well-founded, given the debt levels and the austerity measures that will be needed for bond holders in various EU nations to be fully repaid.
Andrew Karolyi, professor of international finance at Cornell University, said the worries about problems spreading from one country to another in Europe "are very much justified based on fundamentals."
Sean Egan, principal at independent debt rating firm Egan-Jones, points out that Ireland's per capita debt has soared to about 135,000 euro, or about $180,000. That's roughly five times the per capita debt level in the United States.
"Ireland simply can not shoulder the burden that is being placed on them," he said. "In another year or so the whole world will understand it's unsustainable, so there will be a restructuring, which is a euphemism for default."
Katharina Jungen, a Western Europe research analyst for Roubini Global Economics, said the measures being taken in Ireland and Portugal may eliminate the near-term risk of default, but long-term problems that remain.
"There are one-time measures to beautify the books in Portugal right now, but in 2011, it'll be much harder," she said. "Clearly if social unrest continues to rise, the government will find it harder to push through any action."
Julian Callow, chief European economist of Barclays Capital, said the budget problems will only get tougher as investors demand higher and higher interest to buy the debt of the troubled countries.
"The sheer burden of dealing with the interest starts to overwhelm the economy," he said.
Karolyi added that problems with the PIIGS could eventually hurt the more wealthy countries that are part of the euro-zone as well.
"Even the safe nations like Germany and France will have to face up to the burden of supporting their weaker brothers and sisters," he said.
What it means for the U.S. Slower growth or another recession in Europe caused by these problems could soon weight on the entire global economy. Americans will not be spared if there's a recession in Europe, even if U.S. bank exposure to European government debt is relatively limited.
The European Union is the second largest market for U.S. exports, behind only Canada. The EU bought about $175 billion in U.S. goods in the first three quarters of this year. That's up about 8% from a year ago.
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