Renewed worries about the Eurozone's finances and the state of its banks - particularly the French ones - have sent shares sharply lower again, all but wiping out Tuesday's Bernanke bounce on Wall Street. The US market, which invoked a rule to help prevent turbulence at the open, is down more than 242 points, having started down 75 points and fallen by more than 300 points at its worst so far. Last night the US market mounted a more than 400 rise after US Federal Reserve chairman Ben Bernanke vowed to keep interest rates low until 2013, but it seems investors are now nervous about what that means for the state of the US economy, and how bad it could get. But attention also moved back to Europe, with news that President Sarkozy was locked in emergency talks with his ministers seeking ways to cut the country's deficit. That prompted rumours that the country was likely to be next to lose its Triple A rating, and also talk that one of its banks could be in trouble in the current financial turmoil, leading to hefty double digit share price falls at the likes of Societe Generale and BNP Paribas. In a note on the rating this week Citigroup said: We expect that France, with its high public debt and deficit, and popular resistance to cutbacks in its even by euro area standards extremely large welfare state is now likely to be the G7 country at the highest risk of losing its AAA rating. The markets appear to share this sentiment with French 10-year spreads over German Bunds reaching 16-years highs on Friday. 
Access Investments-Building Awareness - European Union-ROMANIA
Wednesday, August 10, 2011
Renewed worries about the Eurozone's finances and the state of its banks - particularly the French ones - have sent shares sharply lower again, all but wiping out Tuesday's Bernanke bounce on Wall Street. The US market, which invoked a rule to help prevent turbulence at the open, is down more than 242 points, having started down 75 points and fallen by more than 300 points at its worst so far. Last night the US market mounted a more than 400 rise after US Federal Reserve chairman Ben Bernanke vowed to keep interest rates low until 2013, but it seems investors are now nervous about what that means for the state of the US economy, and how bad it could get. But attention also moved back to Europe, with news that President Sarkozy was locked in emergency talks with his ministers seeking ways to cut the country's deficit. That prompted rumours that the country was likely to be next to lose its Triple A rating, and also talk that one of its banks could be in trouble in the current financial turmoil, leading to hefty double digit share price falls at the likes of Societe Generale and BNP Paribas. In a note on the rating this week Citigroup said: We expect that France, with its high public debt and deficit, and popular resistance to cutbacks in its even by euro area standards extremely large welfare state is now likely to be the G7 country at the highest risk of losing its AAA rating. The markets appear to share this sentiment with French 10-year spreads over German Bunds reaching 16-years highs on Friday. 
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The president of the European Central Bank, Jean-Claude Trichet, vigorously defended his controversial decision to buy up Italian and Spanish bonds, saying the European debt crisis held the potential for the worst market collapse for almost a century.
"It is the worst crisis since the second world war and it could have been the worst crisis since the first world war if leaders hadn't taken the important decisions," Trichet said in an interview with the French radio station Europe1 on Tuesday.
As the borrowing costs of the latest countries to be caught up in Europe's debt crisis fell for a second day running, Trichet implicitly confirmed that the ECB was behind a surge in purchases. "We are in the secondary market," he acknowledged.
The rise in demand lifted the prices of Italian and Spanish bonds, cutting their yields which represent the return to investors and the cost to the governments issuing them.
The news from the debt markets, however, did little to prevent turmoil on Europe's stock markets which extended their earlier, heavy losses before climbing back in response to the positive opening on Wall Street. Sentiment was initially depressed by the release of data showing a slowdown in German export growth.
The Federal Statistical Office said exports in June were up by 3.1% to €88.3bn($126bn) on the year, the lowest increase in 16 months. Since the introduction of the euro, Germany's export-led economy has become even more crucial to European growth than it was before.
The ECB bond buying operation – which could reach €850bn (£740bn) according to analysts at RBS – has also transferred significant risk to the balance sheet of an organisation that has traditionally stuck to its remit of controlling inflation.
Behind the scenes, moreover, it has begun to dictate – and in reportedly meticulous detail – the policies to be followed in one of Europe's biggest economies.
Before mounting the intervention that drove down Italian and Spanish borrowing costs on Monday, the ECB had spent some €75bn buying the debt of Greece, Ireland and Portugal. Under the terms of an agreement struck by eurozone leaders last month, however, the bank's bond-buying powers are to be assumed by a reformed EFSF.
It had been hoped that the changes could be ratified before contagion threatened Spain or Italy. But with parliaments in recess and European leaders on holiday, the overhaul of the fund is unlikely to be approved much before the end of September. "We cannot go any faster," France's finance minister Francois Baroin told Europe-1 radio.
But the latest move appears to have involved the ECB in far more than buying bonds. According to the Italian daily, Corriere della Sera, the bank's president, Jean-Claude Trichet, and his successor-designate, the governor of the Bank of Italy, Mario Draghi, sent a letter to Italy's prime minister, Silvio Berlusconi, at the end of last week dictating the terms on which the ECB was prepared to buy Italy's increasingly costly debt.
Amid rumours that France would follow the US in being stripped of its AAA credit rating Nicolas Sarkozy, the French president, said plans to reduce his country's budget deficit would be announced within the week.
Fears that French banks were in difficulties meant that the rally in shares prompted by the US Federal Reserve on Tuesday proved to be shortlived, with markets resuming the pattern of heavy selling seen since late July. Britain's FTSE 100 index suffered its fourth fall of more than 100 points in five days, dropping 158 points to close the day 3% lower at 5007 points.
Despite Tuesday's gain of 95 points, the FTSE 100 has now dropped by 866 points since July 29, wiping a total of £226bn off the value of the UK's biggest quoted companies.
Wall Street's Dow Jones Industrial Average continued to fluctuate wildly, with Monday's 635 point fall and Tuesday's 430 point rise followed by a drop of around 400 points by yesterday lunchtime in New York.
The jittery mood sent investors piling into the safe havens of gold and bonds. Bullion rose to a record high, briefly breaking through the $1,800 an ounce level, while bond yields in both Britain and the UK dropped sharply on expectations that dismal growth prospects would result in ultra-low interest rates for two years.
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