As Europe's problems deepen, many global stocks sink

McClatchy NewspapersSeptember 12, 2011 

WASHINGTON — Fears of a European banking crisis spread across the globe again Monday in the latest outbreak of financial anxiety that's becoming all too commonplace. Experts warn that investors had better get used to it because Europe's problems — and their threat to America and the rest of the world — will take time to sort out.

European stocks plunged again on concerns that the Greek debt crisis was nearing an endpoint of default. That came after German Economic Minister Philipp Roesler wrote in a newspaper editorial Monday that Europe couldn't rule out an "orderly default" for Greece.

Leaders of the European Union have struggled for more than a year with how to prevent Greece from defaulting on its government bonds, something that developing nations often experience but developed economies rarely do.

So when the German economic chief put default on the table, markets panicked. The comments also followed Friday's resignation by Jurgen Stark, the chief economist and top German official at the European Central Bank. He quit in protest over continued efforts by the bank to prop up struggling economies such as Greece.

As Europe's richest and most stable economy, Germany is increasingly unwilling to rescue Greece, in part because Germany fears it'd be expected to do the same later for other weak economies such as Spain and Portugal, which are much larger and thus would be more costly.

So Germany's nerves rattled global markets. Germany's DAX index dropped another 2.3 percent Monday, while France's CAC-40 index plunged 4 percent to close at its lowest point since April 2009. The Euro Stoxx 50_ Europe's equivalent of the Dow Jones blue chip index — shed 3.8 percent to 1995.01, finishing below its crucial threshold of 2000 points for the first time since March 2009.

Bad? Yes, and few analysts think the worst is over.

"The risk is that this turmoil worsens, that banks become increasingly fearful of lending to each other, lending costs rise, you potentially get a freezing up of financial markets like we did in 2008, and that would spread globally," said Nigel Gault, the chief U.S. economist for forecaster IHS Global Insight. "It's very clear from 2008 that the financial crisis and complete seizing up of financial markets was a global event."

Harvard University economist Kenneth Rogoff, an expert on debt crises, said Europe's problems must get worse before they get better. Just as the executive branch and Congress failed to address the U.S. financial crisis until it had reached a break point, the same dynamic is unfolding in Europe.

"I think the parallel here is that it is impossible for Germany to take the steps that are needed to protect Spain and Italy ... until the crisis has gotten a lot deeper," Rogoff told McClatchy.

Paradoxically, U.S. stocks traded down most of the day before turning positive near the close of trading on a Financial Times report that a Chinese state-owned investment fund was negotiating a "significant" purchase of Italian debt to help stabilize the eurozone. The Dow finished up 68.99 points to 11,061.12, the S&P 500 was up 8.04 points to 1162.27 and the Nasdaq edged up 27.10 points to 2495.09.

Despite that, investors can expect more head winds from Europe in coming months.

"This is going to be a source of volatility until the global economy starts to grow again at a reasonable rate ... and we're still going to have this problem out there until the Europeans form a more perfect fiscal union," Aaron Gurwitz, the chief investment officer at Barclays Wealth, part of London's banking giant Barclays, said in an interview.

Europe, he noted, has a common currency, but each country controls its own tax-and-spend fiscal policy, which explains why Germany is healthy and Greece is near collapse.

Earlier Monday, Gurwitz put out a research note that warned investors, "Euro area fiscal problems will remain a source of occasional extreme market volatility for a long time to come."

France's stock market fell hardest Monday as rumors swirled that the credit rating agency Moody's Investors Service was poised to downgrade French banks, which hold large amounts of Greek debt as well as government bonds from other struggling economies such as Spain and Ireland. Shares in France's top three banks fell by more than 11 percent Monday.

In another parallel to the U.S. crisis of 2008, the cost of insuring against the chance of Greek default — through the same credit-default swaps that exacerbated the U.S. crisis — soared to record levels Monday. Investors also are demanding an interest rate of more than 70 percent for purchasing Greek bonds, a punishing level that no government could offer. It's a clear sign that markets expect a default.

The cost of default insurance for bonds issued by other European governments — namely Spain and Italy — also rose dramatically Monday. The European Central Bank has been purchasing large amounts of Spanish and Italian government bonds in an effort to hold down the interest rate investors are demanding because of rising default risks.

European banks are having difficulty getting dollars because their common currency, the euro, continues to lose value. Banks are sitting on dollars, some of which are needed to repay loans, as a haven. They're also increasingly doing less business with each other, something reminiscent of the U.S. crisis. In 2008, failing banks insisted that they weren't insolvent but rather illiquid, unable to get access to credit. That appears to be what's unfolding in Europe now.

However, the head of France's central bank, Christian Noyer, said in The Wall Street Journal that French banks had sufficient reserves to absorb Greece-related losses.

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McClatchy Newspapers 2011

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