I would equate the forces at work underlying our global economy akin to shifts in the earth’s tectonic plates. There is no doubt that we experienced a sizable financial earthquake in 2008. The question now begs whether that seismic shock was the culmination of events or merely the precursor for greater political and social shocks over the next period of years.
We see evidence of further tectonic slippage and resulting instability out of the Euro-zone overnight as rating agencies are threatening to downgrade Greece’s sovereign credit.
Bloomberg highlights this seeming inevitability in writing, Greece Risks Downgrade Within Month on Budget Worries:
Greece’s debt rating may be cut within a month as it struggles to pare the European Union’s largest budget deficit, driving up borrowing costs and renewing pressure on the euro.
Standard & Poor’s said late yesterday it may lower its BBB+ rating by the end of March and Moody’s Investors Service said today it may reduce its A2 grade in a few months. The warnings further complicate the government’s effort to persuade investors that it can slash its fiscal shortfall from last year’s 12.7 percent of gross domestic product.
The euro slumped to a one-year low against the yen, most stocks dropped and the premium on Greek 10-year bonds over German debt widened to the most since Feb. 8 on concern that the country may need EU assistance to avoid missing debt payments. Unions yesterday staged a strike to protest Prime Minister George Papandreou’s drive to slash spending.
Papandreou finds himself stuck between the increasingly narrowing rock and a hard place. He has no choice but to implement severe austerity measures in order to gain the backing of the EU, but in doing so he will clearly foment social tensions amongst the Greek citizenry. These tensions are already boiling as The Wall Street Journal highlights, Nationwide Strike Paralyzes Greece:
Tens of thousands of Greeks took to the streets Wednesday as much of the country went on a 24-hour strike against government austerity measures.
A small group of youths threw Molotov cocktails at police, who responded with tear gas. However, the 20,000 people who filed through downtown Athens—a relatively large crowd for a Greek strike—mostly limited themselves to chanting anti-government slogans.
Public- and private-sector unions called the strike to protest a range of measures aimed at reducing Greece’s budget deficit. The government has announced a freeze on civil-service wages, cuts in public-sector entitlements and the closing of tax loopholes for certain professions, including some civil servants. It has also announced a fuel-tax increase.
Will the tensions boiling inside Greece be contained? I view that question in the same light as those who thought issues within our sub-prime mortgage space could be contained. In continuing to connect the dots, Bloomberg concludes:
“It’s getting more difficult than anticipated for the Greek government to implement the spending cuts it promised,” said Susumu Kato, chief economist in Tokyo at Credit Agricole Securities Asia. Further downgrades “may spread sovereign concerns through other European nations,” he said.
This news out of Greece along with further economic weakness highlighted in the jobless claims figures released this morning have our equity markets down 1-1.5% on the open.