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Not more Euro debt!

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by Peter Switzer

It was a challenging day, not just for Wall Street, but for the rest of the world’s stock markets with fears spreading that the Greek debt ‘horror movie’ could have remakes in Spain and Portugal.

If the rumour mongers are right, but I suspect there are short-sellers and hedge funds at work here, we could have a whole new meaning of the insult — Eurotrash!

Overnight the US S&P 500 was down 2.3 per cent, Spain 5.4 per cent, Russia 3.7 per cent, Brazil 3.5 per cent and Germany 2.6 per cent. It looks spooky and expect the bad news to travel here too, especially with commodity prices down significantly in the past 24 hours. But just how bad is the predicament of the likes of Spain?

Spain is a much more important economy compared to Greece in size of GDP and importance to Europe. Also big European banks have more worrying exposure to the Spaniards.

Spook factor

On Wall Street, most of the stocks that had a great positive day yesterday had a shocker today, which is a sign that this Euro-debt concern is a big spook factor.

Remember, traders invariably live by the maxim, sell on the rumour and buy the fact and vice versa. Well the rumour mill is working overtime at the moment.

But don’t forget that this is happening as US companies are reporting very positively reinforcing the belief that the US economy is recovering. In fact, early this morning News Corp reported terrifically and it wasn’t just Avatar-related. And spending is coming back, which is a good economic omen.

Still, the Dow is now down over 278 points since it 26 April high of 11,205 but that’s only about 2.5 per cent, which keeps all of this in perspective.

Spain another Greece?

So, what’s the deal on Spain and the rest of the Euro-debtor nations?

A trigger for concerns over Spain started when a proposed merger of two savings banks stumbled bringing into question the Spanish Government’s leadership in tackling its many economic problems.

It raised the question, is Spain another Greek debt-tragedy waiting to happen?

European leaders have procrastinated on reforms and debt markets are punishing them by either not lending or doing it at high rates of interest.

The New York Times put the matter into context: “José Luis Rodríguez Zapatero, the centre-left prime minister, presented an austerity plan this year based mostly on measures that would not kick in until next year at the earliest,” it reported recently. “The measures include spending cuts amounting to a modest 2.5 per cent of gross domestic product.”

Credibility test

This follows a recent downgrade by Standard & Poor’s for Spain, however its bonds are not at junk status like Greece. Its credit rating has gone from AA+ to AA but every fall in rating means higher interest rates.

Spain’s unemployment rate is 21 per cent and private debt is 178 per cent of GDP and so any false move by the Government and the European Union could undermine the very union and really hurt the euro, which has been heading south.

If European leadership continues to fail the credibility test on sorting out these debt concerns, the stock market could remain under pressure.

Back in Oz

These developments make you wonder about the local complacency of the Reserve Bank and the Rudd Government in raising interest rates and slugging our best export-earning sector with a tax that grabbed headlines on Wall Street!

I really hope these guys have read the tea leaves correctly meaning their complacency was well-placed.

For advice you can trust, contact Switzer Financial Services.

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Published on: Wednesday, May 05, 2010