When PIIGS Squeal, Markets Reel

When PIIGS Squeal, Markets Reel

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After three consecutive weeks of declines, stock markets around the world started a fourth week deep on a downward trend as European debt worries mounted following the downgrade of Greece’s debt and the lowering of Italy’s debt outlook on Friday. 

In Europe, the UK’s FTSE 100 fell 1.9 percent and Germany’s Dax dipped by 2 percent.  In Asia, the Japan’s Nikkei index declined by 1.5 percent  and Hong Kong’s Hang Seng index fell 2.1percent. U.S. markets followed, with the Dow Jones Industrial Average slipping just over one percent to  12381.26, some 500 points below where it started the month. The Standard & Poor’s 500 index ended the day down 1.2 percent and the Nasdaq fell  1.6 percent. 

The bad news was concentrated in the euro zone’s PIIGS, an acronym coined to abbreviate the most debt-ridden countries -- Portugal, Italy, Ireland, Greece, and Spain.
On Friday, Fitch Ratings  downgraded Greece’s credit rating from BB+ to B+,  sending  its debt deeper into junk territory. Late Friday, S&P lowered Italy’s sovereign debt rating outlook to negative, which can precede a downgrade within two years if economic activity doesn’t pick up and the government continues on its current fiscal path.

Spain’s sovereign debt ratings were untouched over the weekend but tens of thousands of Spaniards protesting the government’s austerity measures emboldened voters to push out the incumbent Socialist party. This turnover in leadership raised doubts about Spain’s ability to improve its financial situation in a timely manner.  Prices of Spanish sovereign bonds plunged.

Meanwhile, adding to the uncertainty about events in Europe, the International Monetary Fund (IMF) has yet to appoint a new managing director to fill the top position recently vacated by Dominique Strauss-Kahn after his arrest in New York on attempted rape charges.  French Finance Minister Christine Lagarde is widely considered a frontrunner for the position.  But many are pushing for a non-European to fill the chair that has been occupied by a European since the IMF’s founding in 1946.  The IMF plays a key leadership role in the euro zone’s debt restructuring, creating pressure on the price of euro zone’s sovereign bonds.

News out of Portugal and Ireland, the remaining two PIIGS, was relatively tame over the past few days.  President Barack Obama’s visit to Ireland on Monday was highlighted only by his armored limousine getting stuck in the driveway of the U.S. Embassy.  However, based on prices for credit default swaps, considered a measure of default risk, Portugal and Ireland are, respectively, the second and third most financially troubled nations among the PIIGS.

Then on Monday afternoon, Fitch cut its debt rating outlook for Belgium, another member of the euro zone, to negative.

This spate of news caused the euro to dive against the dollar, which is widely considered a safe haven for investors.  This is ironic because Standard & Poor’s recently lowered its outlook for U.S. sovereign debt  to negative.