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Europe’s fiscal agreement falls short for global markets
Despite much fanfare at a summit last week, European leaders failed to convince global investors that they are on their way to solving their massive problems with debt and recession.
Global markets swooned Monday, with the Dow Jones industrial average losing as much as 234 points and European stock indexes plummeting by up to 4 percent, after two more Wall Street credit agencies warned that the summit’s debt reduction accord does not go far enough and worsening economic and financial conditions continue to threaten the health and existence of the eurozone.
Moody’s Investors Service noted the “absence of decisive policy measures” at the summit to ease severe financial stress, and said it will consider downgrading many European countries early next year.
“The longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area,” said Alastair Wilson, managing director at Moody’s.
Fitch Ratings also panned the outcome of the summit, saying it did little to prevent “a significant economic downturn” that will last for all of next year and probably beyond.
Standard & Poor’s Corp., the first Wall Street agency to put the eurozone on notice this month, was silent Monday.
But it earlier warned that it likely would downgrade even AAA-rated Germany and France if the summit failed to take significant steps to resolve the crisis.
The spate of credit warnings reawakened worries in financial markets around the world.
Stock markets in Europe plummeted, losing 3 percent to 4 percent of their value, and the interest rates on securities offered by Italy and other debt-strapped countries remained perilously high.
In the U.S., stocks fell as much as 2 percent, but then steadied amid hopes for stronger growth in the U.S.
Treasury bonds continued to benefit from investors seeking safe havens from the storm in Europe, despite the Treasury’s own huge debt financing needs, with the yield on the Treasury’s 10-year bond falling to just a sliver above 2 percent.
“Once again, Europe’s leaders did not brandish the big bazooka that the markets are crying out for,” said Thomas Kleine-Brockhoff, director of the German Marshall Fund’s EuroFuture Project.
“Instead, Europe is doggedly pursuing its step-by-step approach as introduced several summits ago.
Given the continuing disconnect between markets and politicians,” he said, European leaders will have to “scramble” again within a few weeks or months “for what to do next to prevent a market meltdown.”
In a pattern repeated often in the past two years, markets initially applauded the summit accord, but then “realized that the latest comprehensive plan wasn’t all that comprehensive; that there are not enough short-term crisis resolution measures … and that long-term fixes are impressive, but incomplete,” Mr. Kleine-Brockhoff said.
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