By: Mike Campbell
After Standard and Poor’s (S&P) reduced the credit worthiness of Greek bonds to junk status, nervousness has been in plentiful supply in markets around the world. However, the substantial falls seen on Tuesday did not continue unabated yesterday; markets in Europe closed down, but by 0.3 to 1.5% and US markets closed higher.
Many traders and analysts have been focussing on Portugal which has a substantial GDP deficit and its own debt problems as the next crisis after Greece. However, Portugal, didn’t fib (as far as we know!) about its finances to get into the Eurozone and, absent of any extreme bond market rises, seems able to manage its obligations through the open market. That has not stopped the speculation. Mindful, no doubt of this, IMF chief Dominique Strauss-Kahn, cautioned that every day longer it takes to agree the Eurozone/IMF rescue package for Greece risks spreading the problem to other Eurozone members. Strauss-Kahn believes that decisive action is required to restore confidence to the financial markets. As if to emphasise his point, S&P moved to downgrade the credit rating of Spain from AA+ to AA.
The bailout package is unpopular in Germany, Europe’s largest economy, where public sentiment is that the Greeks should solve their own problems. Germany faces elections later in the year, so politicians are keenly aware of public opinion. German ratification of the Eurozone/IMF package is critical to its being implemented. Given that the consequences of dithering or rejection of the package would be disastrous for the Eurozone the hand ringing will not be allowed to continue for long. To borrow a phrase from the Americans; the Euro is just too big to be allowed to fail.