Share Markets Slump; Fears For Economy …

• August 7th, 2011
• Posted by EUEditor

The business week that ended on Friday (5.8.11) saw stock markets slump, the European debt crisis getting worse, and widespread fears of a failure of economic recovery on both sides of the Atlantic.  

HOW THE STORY CAME OUT

Hard talk began on Wednesday, that a “contagion” of the European debt crisis to larger economies had arrived; as share prices continued a slump from earlier in the week, accentuated by heavy falls on the American market also.

Indications that severe pressure on European sovereign debt had spread from the small economies, Greece, Ireland and Portugal, to Italy and Spain added to growing anxiety on several fronts.

Increasing yields on  bonds  – commercial lenders demanding higher interest rates on government lending – illuminated the situation of those two economies: Italy the third largest in the European Union, but traditionally carrying stupendous public debt, and Spain carrying large budget deficits.

The picture had emerged by the end of the week of selling-off on all fronts; shares particularly, also secure currencies (including the Australian dollar, down more than six cents against the US dollar by week’s end, to US$1.04), and even gold.

Hands-up and tell! Who is taking losses, but holding all this cash around the world?

EUROPEAN CENTRAL BANK

A clear pattern had arrived on Thursday, identified by Le Monde, declaring that several moves announced by the European Central Bank had failed to head off a plunge.

“Jean-Claude Trichet, President of the European Central bank (ECB) had not convinced the markets, Thursday 4 August, of its capacity to prevent a contagion of the debt crisis across the whole Euro zone”, it said.

“The ECB tried two exceptional anti-crisis measures during the afternoon, including the announcement of re-purchases by the bank, of bonds on the secondary market.

“The gesture was too weak-hearted for the European bourses, which fell sharply on Thursday, setting some records …”

The report continued that the ECB program of buying government debt obligations, put in place in the Spring of 2010, had not been active for four months, but was revived because of the difficulties being encountered by Italy and Spain.

Mr Trichet confirmed some purchases of Irish and Portugese bonds, but would not say if Italy and Spain had been included.

The full extend of the bank’s intervention would be known this Monday (8.8.11) with the issue of a weekly statement.

The Bank has opted to maintain its base interest rate of 1.5%, and assist private banks by making supplementary funds available to them, with special loan money coming available this week, to run to March 2012. The current provision of short-term loan money at fixed rates to banks, is to continue until the start of next year.

BARROSO’S STATEMENT ACKNOWLEDGING “CONTAGION”

Le Monde quoted the President of the European Commission, Jose Manuel Barroso, in a message last Wednesday (3.8.11) to EU leaders, acknowledging the “contagion” of crisis beyond the vulnerable small economies  : “It is clear that we are no longer managing a crisis just limited to the periphery of the Eurozone.”

ITALY AND SPAIN

In Rome, the Prime Minister, Silvio Berlusconi, got a wriggle-on, in the sense of stepping-up, with language at least, to try and calm fears of debt defaults and a new recession for Europe.

Currently being put through the courts on a range of sexual and fiscal charges, he might welcome the chance to be seen getting serious, but also, might not be seen as the man for the job. (See EUAustralia Online, “Italy: 95% reject Berlusconi laws”, 15.1.11).

He was loudly jeered from the Opposition benches when telling parliament the Italian economy was sound, and that as an entrepreneur he understood well what was happening in markets.

Later he conferred with his neighbour and political friend, President Nicolas Sarkozy of France, (himself on  a round of urgent consultations with several heads of government during the week); and announced a fresh tightening of budget measures – bringing forward new taxes and a cap on pensions. (See EUAustralia Online, “Summit to step up action …”, 17.7.11).

In Spain, leading up to early elections (See EUAustralia Online, “US crisis under watch”, 30.7.11), public dissent, especially among the young, over high unemployment, flared again with fresh demonstrations in the capital and elsewhere.

EU MEASURES

While Jose Manuel Barroso was prepared to accept that the financial pressure had not been contained; other officials of the EU were pointing out too that investor insecurity appeared to have run ahead of  actual developments.

The strengthening of the European Stablisation Mechanism decided on at a summit of EU leaders two weeks ago, was still to be fully implemented, (See European Financial Stability Facility –EFSF;   EUAustralia Online, “Eurozone summit: new package for Greece”, 22.7.11; “Moves on debt contagion and Italy”, 15.7.11; “Greece, Germany, Brussels”, 18.3.10).

Critics at the time of the gathering noted that while a special, second fund had been created to aid Greece, the vesting of further powers in the Stability Mechanism – to spot a developing financial emergency, coordinate and intervene – had been limited in scope.

Its funding level was not increased, and while the billions of Euros on call was proving sufficient to sustain the smaller countries in their crisis, there was scepticism whether there’d be sufficient as a base to cushion debt in the larger economies.

TROUBLE IN AMERICA

The coinciding of Europe’s troubles with trouble in America meant things had come to a head by Friday, 5.8.11.

On the bourses; the London and Frankfurt exchanges saw overall price falls of 2-3% for the day, making 10% for the week – mirroring the same trend on Wall Street.

In the United States, major causes in the substantive economy could be easily tracked: rising oil prices linked to the political disturbances in the Middle East; adverse impacts of natural disaster in Japan on the auto industry, and, massive economic dislocation forced by protracted, severe storms across much of the country.

It was capped by the theatrical process of getting Congressional approval to lift the ceiling on government debt, enabling the US government to pay its accounts – resolved in last-minute compromise votes in the Senate and House of Representatives. (See EUAustralia Online, “US Crisis …”, 30.7.11).

In plain fiction, the embarrassing show of a “dysfunctional system” (to quote President Barack Obama), featuring a hold-out group on the Republic Party right, resisting proposals from the two Parties together, could have been invented to undermine faith in the financial system.

Lined up with the political mood for budget-tightening; an extra confidence-buster came from one of the three main commercial credit rating agencies, (none of which survived the free-wheeling splurge before the crisis of 2008, with reputations intact). It downgraded the United States government, from the customary top-rated AAA to one below, saying there’d been too much borrowing and not enough saving, for too long. The White House said the agency had made errors in its calculations.

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