Having settled Ireland, next big scare is what if this was not enough
As Wall Street Journal reports – Contagion once again emerged in Europe as investors turned from Ireland’s debt crisis and set their sights on Portugal and Spain.
Both Spanish and Portuguese bond prices fell sharply Tuesday, and the yields above German bunds rose to records. The euro slid below $1.34 for the first time in two months, though part of the weakness came as investors turned to the safe-haven status of the U.S. dollar after North Korean artillery attacks on South Korea.
“People that are betting on contagion are probably making the right bet here,” said David Gilmore, a strategist at Foreign Exchange Analytics. “There’s not really anything to stop the markets from pushing the next domino over.”
The unease over Europe, combined with the events in Korea, spread to U.S. markets as well. The Dow Jones Industrial Average slumped 142.21 points, or 1.3%, to 11036.37.
Asian markets were down in early Wednesday trading, with Japan’s Nikkei Stock Average down 1.5%, South Korea’s Kospi down 2%, New Zealand’s NZSX-50 down 0.3% and Australia’s S&P/ASX 200 down 0.6%.
Prices of Treasurys, typically seen as a haven investment, jumped.
Highlighting the concerns about European financial markets, German Chancellor Angela Merkel called Ireland’s crisis “very worrying” for the region.
The sudden turn in Europe has caught many traders off guard.
The focus in recent weeks has been on the impact of the Federal Reserve’s easing measures. And at the tail end of last week, many investors had assumed the Irish situation was on its way to being resolved. But with the unraveling of Ireland’s coalition government Monday, contagion is back on the minds of investors.
Ireland’s request for a bailout from the European Union and the International Monetary Fund followed government capital injections to prop up banks that suffered big loan losses. This has turned the spotlight to banks in Spain and Portugal.
Meanwhile, Portugal reported on Monday that its 10-month budget deficit widened from a year ago. Tuesday, Spain issued short-term debt at a significantly higher cost than a month ago.
“I think that’s the market’s realization; that these are systemic problems that are going to need a systemic solution,” said Brian Yelvington, fixed-income strategist at Knight Capital. “This is not a one-off problem with an individual country.”
Rising spreads have hit one country after the other, moving from Greece to Ireland and now to Portugal and Spain.
The worry is that those rising borrowing costs eventually may prove prohibitive, forcing countries to seek some sort of bailout.
Contagion, broadly defined as when a loss of market confidence in one economy transmits to others, can occur through trade connections, economic similarities or financial linkages. An economic downturn in one country can hit its trading partner’s exports or reduce tourism revenue.
A collapse in value of financial assets in one country can hit confidence about banks in another if those banks hold a lot of those assets.
A second source of contagion is where investors look across from a troubled economy and see similar problems elsewhere.
While Portugal doesn’t have banking problems of the scale of Ireland’s or a budget deficit as big as Greece’s, it does have a combination of budget deficits, high government debt and low growth that worries some investors……Continue to read more at WSJ…