Tag Archives: financial contagion

Markets Collapse on Greek Referendum

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Markets across Europe have fallen heavily following the news that Greece will hold a referendum on the latest bailout plan. Eurozone leaders had agreed to write off 50% of Greek debt but the deal may now not go ahead. A no vote will probably lead to a disorderly Greek default and Greece leaving the Euro. That could lead to severe financial contagion across Europe. Worryingly opinion polls in Greece suggest a No vote is probable. The vote is unlikely to take place until January potentially creating months of uncertainty for the markets. That uncertainty could damage confidence throughout the world.

The FTSE is currently down 3.5% while the Dax was down almost 6%. The French bank Societe Generale was down 17%. Credit Agricole was down 13%.

A confidence vote on the Greek government is due to take place on Friday. Many in Greece are now calling for early elections.

US Loses Triple AAA Credit Rating

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One of the world’s three leading credit agencies has downgraded US debt. Standard and Poors cut the US credit rating one notch to AA+ with a negative outlook.

The agency argues that the deficit reduction plan passed by congress didn’t go far enough in addressing the US deficit. Whilst the US debt to GDP ratio is already high at 65.2% of GDP, total government liability is actually far greater when including government agencies such as Medicare and Fannie Mae and Freddie Mac.

The two main other credit agencies said last night that they had no plans to downgrade US debt in the near future.
Officials in Washington were furious with the decision and claimed to have uncovered a two trillion dollar error in the agencies analysis. The impact on the markets remains to be seen. Given the panic of the last week investors have been piling into US government bonds pushing yields to record lows despite the US government debt problems. This latest downgrade couldn’t have come at a worse time but we will have to wait until Monday to see the impact it has on the markets.

Investors will be worried that the downgrade may impact the wider economy, president Obama has already warned of the impact a downgrade would have. The downgrade threatens the dollars status as the world’s reserve currency. The instability could have severe consequences for the world as a whole.