With the latest news coming from Italy which is asking China to help by purchasing their bonds and investing in strategic companies, markets seem to have taken a break today during the European morning. But the pause seems to be finished and now the players are trading in fight mode after the Monday panic on the back of renewed European debt crisis worries.
EuroStoxx50 is falling today 1.45%, The CAC 40 declines 1.84%, the IBEX 35 eases 1.45% and the FTSE cedes 0.67% so far today.
In August Italian officials visited Beijing seeking help outside of Europe, as Italian bond yields kept steadily growing. Last week Italian finance minister Giulio Tremonti held a meeting in Rome with Lou Jiwei, chairman of China Investment Corp, one of the world’s largest sovereign wealth funds. Allegedly China is already a holder of 4% of Italian debt.
Meanwhile the increasing possibility of Greece's default, already seriously taken into consideration by investors is starting to weigh down on European banks. France is having the most trouble as many of the country's financial institutions have made considerable investments in Greek bonds. Yesterday BNP Paribas, Société Générale and fell 13% and 15%, respectively. The sell-off was also caused by Moody's plans to downgrade the banks' rating and Angela Merkel's investigation into how much the Greek default would cost German banks.
Obama urges Europe to resolve debt crisis
Yesterday, during a meeting with Spanish-language news media Barack Obama urged European leaders to coordinate their fiscal policies in order to effectively fight the debt crisis. He emphasized that the effects of the crisis influence not only American economy but that of the entire world. He said that Greece is just one of the problems and that Italy and Spain might pose an even greater threat if market pressure persists. That is why the US offers its help either through bilateral agreements or the IMF, in order to establish a rescue fund which will allow European countries adjust their fiscal policies.
Markets tumbled on Monday on debt crisis aggravation
European markets have opened with sharp declines on Monday amid growing concerns of a debt default in Greece and its consequences for the whole Eurozone, which is hurting the banking sector. In currency markets, the Euro has dropped to 10-year lows against the Yen.
Greece seems to be moving steadily towards default. Last weekend this possibility started to be openly discussed by German politicians. Philipp Roesler, German economy minister and leader of the Free Democrats (FDP) said in an interview that "To stabilize the euro, there can no longer be any taboos” and that a bankruptcy of Greece can be considered as a viable option.
Greek PM George Papandreou reacted by calling a special meeting of his government yesterday in order to approve a set of austerity measures allowing Greece for savings of additional 2.000 million euros. The program includes a one-time property tax and a reduction of one monthly salary for government officials. This way Athens will fulfill the budget deficit decrease conditions necessary for obtaining the next tranche of the bailout funds.
Nevertheless, the Germans view the Greek default as something inevitable and are already preparing themselves for this occasion. According to “Der Spiegel”, Wolfgang Schäuble has already asked for estimates how much would that cost Germany and German banks.
Fears of contagion to peripheral countries such as Italy, Spain, Portugal and Ireland are also rising, potentially creating a credit crunch with unknown consequences for the fate of the Eurozone. Inspectors from Europe, IMF are planned to come back to Greece on Wednesday to further asses the situation.
Commenting on this latest rumor, Yanis Varoufakis, economist at Athens University said: “When I hear that Germany is planning for a Greek exit from the eurozone, even for a Greek default, I immediately suspect that Germany is planning a controlled disintegration of the eurozone and, at once, I fear that it will only manage to achieve an uncontrolled disintegration whose end result will be massive recession in the European north and gargantuan stagflation in the European periphery."
In this atmosphere the German bund to ten years fell a record low, under 1.8% of profitability. The Spanish risk premium rallied until reaching the limit of 338bps and the profitability of the national bonds reached 5.2%.