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« Stupid Politician Monkeys | Main | Even our 50 worst Trades still returned 18.61% per Trade, SK OptionTrader »

Economic, Debt Worries Mount in Euro Zone

Wall Street Journal Logo.JPG

LONDON—The unexpected departure of European Central Bank chief economist Jürgen Stark intensified investors' worries about the euro-zone financial crisis Friday and unleashed a broad pullback from risk in European financial markets, sinking the euro to its lowest level in more than six months.

The cost of insuring European government debt against default rose to record highs as peripheral sovereign bond markets were hit by a fresh selloff, prompting the European Central Bank to step in again to support the market by buying Italian and Spanish government bonds. The cost of insuring European banks against default were also trading around record highs.

The euro fell to as low as $1.3652 against the dollar, its lowest level since Feb. 23, while France's Societe Generale led European bank shares down, ending down 10.6% at its weakest point since Lehman Brothers went bust in 2008


Share prices fell across the board, led by financial stocks. Europe's banks have now lost more than a third of their market value so far this year, marked by concerns that the euro zone's sovereign debt crisis could spread to banks, many of which hold government bonds.
The Stoxx Europe 600 index lost 2.6% at 224.59. London's FTSE 100 fell 2.4% to 5214.65, Frankfurt's DAX dropped 4% to 5189.93 and Paris's CAC-40 was 3.6% lower at 2974.59.

Greece's deepening recession and problems coping with its budget deficits were followed by threats this week that Athens might be denied further aid to stave off default unless it met conditions to the letter. Greece's government Friday denied that it had any plans to default at the weekend, with an official dismissing market talk of such plans as "rubbish."

Meanwhile, Christine Lagarde, managing director of the International Monetary Fund, said Friday that downside risks to growth across the world have increased.

"The bottom line is that global activity has slowed and downside risks have increased, and at the same time the global rebalancing in demand that we were all expecting for sustainable growth to take place has stalled," she said at a panel discussion about the global economy at the Chatham House in London.

The ECB's announcement on Thursday that it was sharply lowering forecasts for economic growth added to the gloom. News that Mr. Stark will step down from his post by the end of the year, more than two years before his term is due to end, extended the losses, amid talk of disagreements over the ECB's bond-buying program.

ECB purchases of Spanish and Italian bonds since the summer have helped buy time for euro-zone authorities as they struggle to deal with an unprecedented debt crisis, limiting the contagion from Greece by capping the borrowing costs of other indebted governments.
But some of the damage has already been done: Confidence in the euro zone is shot, prompting companies to hire less, consumers to rein in spending and the broader euro-zone economy to lurch toward a possible return to recession.

The cost of insuring European bank debt was at 287 basis points versus 216 basis points a month ago, according to the Markit iTraxx Europe Senior Financials index.

Signs that banks were increasingly worried about lending to each other also mounted, with data showing euro-zone banks' overnight deposits with the central bank rose Thursday to their highest level so far this year at €172.864 billion, reflecting ongoing fears in the interbank lending market despite a surfeit of liquidity.

In addition, the three-month cross-currency basis swap, an indicator showing how expensive it is to borrow dollars in return for euro loans, was steady after more than tripling in the previous two to three months.

"The European debt crisis has metastasized to infect the European banks, many of which are technically 'zombie banks' now, for if their holdings of sovereign bonds are marked to market, they would be considered insolvent," said Stephen Jen, managing partner at investment advisory firm SLJ Macro Partners LLP.

This article is courtesy of The Wall Street Journal

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Reader Comments (2)

It makes you wonder how long this crisis is going to go on for until the boys at the top pull the plug on the whole mess and let the average citizens sort it out for themselves.

September 11, 2011 | Unregistered Commenterdaveydog

or the citizens pull the plug on the boys at the top!

September 11, 2011 | Unregistered CommenterSilver Prices

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