Greek Debt Woes Ripple Outward, From Asia to U.S.

The fear that began in Athens, raced through Europe and finally shook the stock market in the United States is now affecting the broader global economy, from the ability of Asian corporations to raise money to the outlook for money-market funds where American savers park their cash.

“Greece may just be an early warning signal,” said Byron Wien, a Wall Street strategist. Above, the Acropolis in Athens.

What was once a local worry about the debt burden of one of Europe’s smallest economies has quickly gone global. Already, jittery investors have forced Brazil to scale back bond sales as interest rates soared and caused currencies in Asia like the Korean won to weaken. Ten companies around the world that had planned to issue stock delayed their offerings, the most in a single week since October 2008.

The increased global anxiety threatens to slow the recovery in the United States, where job growth has finally picked up after the deepest recession since the Great Depression. It could also inhibit consumer spending as stock portfolios shrink and loans are harder to come by.

“It’s not just a European problem, it’s the U.S., Japan and the U.K. right now,” said Ian Kelson, a bond fund manager in London with T. Rowe Price. “It’s across the board.”

The crisis is so perilous for Europe that the leaders of the 16 countries that use the euro worked into the early morning Saturday on a proposal to create a so-called stabilization mechanism intended to reassure the markets. On Sunday, finance ministers from all 27 European Union states are expected to gather in Brussels to discuss and possibly approve the proposal.

The mechanism would probably be a way for the states to guarantee loans taken out by the European Commission, the bloc’s executive body, to support ailing economies. European leaders including the French president, Nicolas Sarkozy, said Saturday morning that the union should be ready to activate the mechanism by Monday morning if needed.

In Spain Saturday, Vice President Joseph R. Biden Jr. underscored the importance of the issue after meeting with Prime Minister José Luis Rodríguez Zapatero. “We agreed on the importance of a resolute European action to strengthen the European economy and to build confidence in the markets,” Mr. Biden said. “And I conveyed the support of the United States of America toward those efforts.”

Beyond Europe, the crisis has sent waves of fear through global stock exchanges.

A decade ago, it took more than a year for the chain reaction that began with the devaluation of the Thai currency to spread beyond Asia to Russia, which defaulted on its debt, and eventually caused the near-collapse of a giant American hedge fund, Long-Term Capital Management.

This crisis, by contrast, seemed to ricochet from country to country in seconds, as traders simultaneously abandoned everything from Portuguese bonds to American blue chips. On Wall Street on Thursday afternoon, televised images of rioting in Athens to protest austerity measures only amplified the anxiety as the stock market briefly plunged nearly 1,000 points.

“Up until last week there was this confidence that nothing could upset the apple cart as long as the economy and jobs growth was positive,” said William H. Gross, managing director of Pimco, the bond manager. “Now, fear is back in play.”

While the immediate causes for worry are Greece’s ballooning budget deficit and the risk that other fragile countries like Spain and Portugal might default, the turmoil also exposed deeper fears that government borrowing in bigger nations like Britain, Germany and even the United States is unsustainable.

“Greece may just be an early warning signal,” said Byron Wien, a prominent Wall Street strategist who is vice chairman of Blackstone Advisory Partners. “The U.S. is a long way from being where Greece is, but the developed world has been living beyond its means and is now being called to account.”

If the anxiety spreads, American banks could return to the posture they adopted after the collapse of Lehman Brothers in the fall of 2008, when they cut back sharply on mortgages, auto financing, credit card lending and small business loans. That could stymie job growth and halt the recovery now gaining traction.

Some American companies are facing higher costs to finance their debt, while big exporters are seeing their edge over European rivals shrink as the dollar strengthens. Riskier assets, like stocks, are suddenly out of favor, while cash has streamed into the safest of all investments, gold.

Just as Greece is being forced to pay more to borrow, more risky American companies are being forced to pay up, too. Some issuers of new junk bonds in the consumer sector are likely to have to pay roughly 9 percent on new bonds, up from about 8.5 percent before this week’s volatility, said Kevin Cassidy, senior credit officer with Moody’s.

To be sure, not all of the consequences are negative. Though the situation is perilous for Europe, the United States economy does still enjoy some favorable tailwinds. Interest rates have dropped, benefiting homebuyers seeking mortgages and other borrowers. New data released Friday showed the economy added 290,000 jobs in April, the best monthly showing in four years.

Further, crude oil prices fell last week on fears of a slowdown, which should bring lower prices at the pump within weeks. Meanwhile, the dollar gained ground against the euro, reaching its highest level in 14 months.

While that makes European vacations more affordable for American tourists and could improve the fortunes of European companies, it could hurt profits at their American rivals. A stronger dollar makes American goods less affordable for buyers overseas, a one-two punch for American exporters if Europe falls back into recession. Excluding oil, the 16 countries that make up the euro zone buy about 14 percent of American exports.

For the largest American companies, which have benefited from the weak dollar in recent years, the pain could be more acute. More than a quarter of the profits of companies in the Standard & Poor’s 500-stock index come from abroad, with Europe forming the largest component, according to Tobias Levkovich, Citigroup’s chief United States equity strategist. All this could mean the difference between an economy that grows fast enough to bring down unemployment, and one that is more stagnant.

The direct exposure of American banks to Greece is small, but below the surface, there are signs of other fissures. Even the strongest banks in Germany and France have heavy exposure to more troubled economies on the periphery of the Continent, and these big banks in turn are closely intertwined with their American counterparts.

Over all, United States banks have $3.6 trillion in exposure to European banks, according to the Bank for International Settlements. That includes more than a trillion dollars in loans to France and Germany, and nearly $200 billion to Spain.

What is more, American money-market investors are already feeling nervous about hundreds of billions of dollars in short-term loans to big European banks and other financial institutions. “Apparently systemic risk is still alive and well,” wrote Alex Roever, a J.P. Morgan credit analyst in a research note published Friday. With so much uncertainty about Europe and the euro, managers of these ultra-safe investment vehicles are demanding that European borrowers pay higher rates.

These funds provide the lifeblood of the international banking system. If worries about the safety of European banks intensify, they could push up their borrowing costs and push down the value of more than $500 billion in short-term debt held by American money-market funds.

Uncertainty about the stability of assets in money market funds signaled a tipping point that accelerated the downward spiral of the credit crisis in 2008, and ultimately prompted banks to briefly halt lending to one other.

Now, as Europe teeters, the dangers to the American economy — and the broader financial system — are becoming increasingly evident. “It seems like only yesterday that European policy makers were gleefully watching the U.S. get its economic comeuppance, not appreciating the massive tidal wave coming at them across the Atlantic,” said Kenneth Rogoff, a Harvard professor of international finance who also served as the chief economist of the International Monetary Fund. “We should not make the same mistake.”

James Kanter contributed from Brussels.

http://www.nytimes.com/2010/05/09/business/global/09ripple.html?src=me&ref=business

Global Financial Crisis II

Fears that the Greek debt crisis could drag down the world economy

More market turmoil looms
PHILIP WEN
May 10, 2010

AFTER a horror week during which $90 billion was wiped off the Australian sharemarket, investors are bracing themselves for more financial market turmoil over the mounting debt crisis in Europe.

Australian stocks fell 7 per cent last week, the worst weekly loss since November 2008. And the worst may not be over, with the SPI futures index pointing to further losses today, following more losses across all major global indices.

With markets worldwide taking a battering, European leaders have scrambled into action as fears intensify that the spread of the region's debt woes could pitch the world back into a recession.

''The problem now is contagion risk and where will it stop,'' said credit markets expert Philip Bayley, of ADCM Services. ''The markets fear that we are now entering the second leg of the global financial crisis - GFC II.''

Fears that a debt default by Greece could paralyse the world's financial system - just as the collapse of Lehman Brothers did two years ago - sparked another wave of heavy selling on European and US markets on Friday.

Treasurer Wayne Swan said Australia was better placed than any other advanced economy to deal with any global slowdown caused by the sovereign debt crisis in Greece. Mr Swan will hand down his third budget tomorrow.

His comments followed the Reserve Bank of Australia last week cautioning that the economy could be buffeted by global fallout.

The market plunge could have serious ripple effects through its impact on confidence.

Some of the nation's major banks were believed to be looking over the weekend at measures to keep holdings of liquid assets topped up given increased risk on European credit markets.

Even home buyers appeared to be responding to global jitters. Melbourne's property market recorded its second lowest auction clearance rate so far this year, the figure dropping to 78 per cent on the weekend.

REIV chief executive Enzo Raimondo said the six rate rises, affordability concerns and the unseasonably high stock levels were all having an impact on demand. On Friday, euro zone governments approved the $A160 billion Greek bailout package, in a last-ditch effort to keep the nation afloat.

But markets were unconvinced. The Dow Jones shrugged off stronger than expected US jobs data to close 1.3 per cent lower.

In Britain, shares fell 2.6 per cent - a result exacerbated by uncertainty over the British general election.

The cost of protecting European bank debt against default has reached levels not seen since the height of the global financial crisis. Bond yields soared in Portugal and Spain, while the failure to constrain the debt crisis led to the euro plunging 4.3 per cent last week. Portugal, Ireland, Italy, Greece and Spain collectively owe $US3.9 trillion ($A4.39 trillion) to other countries.

Apart from Australian banks' $A56.4 billion in exposure to Europe at the end of December, most analysts say the economy has few other direct links to the troubled region.

US President Barack Obama admitted he was ''very concerned'' about the debt crisis. Understandably so, given the extreme volatility in US markets last week, including an extraordinary 10 per cent intra-day plunge on Thursday. The Dow Jones index retreated 6.4 per cent last week, the heaviest decline since March 2009. Wall Street's so-called ''fear gauge'', the CBOE volatility index, jumped 25 per cent in the same period.

ADCM's Mr Bayley said markets were pointing to a Greek debt default as an ''all but foregone conclusion'', with the rescue package likely to have little impact.

With NATALIE PUCHALSKI

Source: The Age

http://www.smh.com.au/business/more-market-turmoil-looms-20100509-ulse.html