London (CNN) – The unprecedented downgrade of the U.S. debt rating Friday triggered mass sell-offs in equity markets around the world, with $2.5 trillion wiped off global stocks yesterday following last week’s losses.
While markets are steadying, the dramatic slump and unhealthy economic data has raised questions over the risk of another U.S. recession – one which could tumble into Europe.
The debt crises on either side on Atlantic have also thrown into sharp contrast the different strategies employed to deal with financial meltdowns.
The U.S. used stimulus; Europe turned to austerity. Both strategies are struggling to stave off economic pain.
How did Europe react to the U.S. debt deal?
The U.S. debt ceiling deal has been signed into law but European stocks fell amid fears around the country’s economic recovery and its ability to avoid a major credit downgrade.
The debt debate revealed the country’s political intransigence and threw more doubt over the world’s recovery, already struggling to deal with the financial crisis in Europe.
Questions are now being raised around the damage caused to the reputation of the U.S. Treasury and currency markets as the world’s safe investment haven.
The fractured 17-nation eurozone is heading toward the first default of one its members after Greece was last night forced to accept its second bailout in the face of an overwhelming mountain of debt.
The EUR109 billion bailout, which follows last May’s EUR110 billion bailout, introduces new measures including extensions on the time allowed for Greece to pay back its debts, decreased interest rates and a financial hit for private sector investors, who were previously regarded as sacrosanct.
London (CNN) - The European Central Bank president Jean-Claude Trichet continued his contortions around the eurozone crisis this week, while he juggled the demands of a two-speed economic bloc.
In this week’s closely watched press conference Trichet announced the bank will accept Portuguese sovereign bonds as collateral in return for loans, despite ratings agency Moody’s dumping them into junk category this week.
Trichet created this precedent when the ECB continued to accept Greek bonds in May last year, after they had been junked by ratings agency Standard & Poor’s.
Trichet’s move on Greek sovereign bonds was an economically expedient twist on the rules, which had previously dictated bonds had to have ratings of BBB -. That rating had, in turn, been dropped from the pre crisis requirements for an A- minus rating.
London (CNN) – As the grave is dug for the world’s most widely read English newspaper, News of the World, focus is turning to how much of a role financial pragmatism played in its demise.
While the headline was its closure in response to the avalanche of hacking allegations, including accessing the phones of murder and terror attack victims, politicians and celebrities, the move could also prove a financial win for its parent, News Corporation.
Observers point to Rupert Murdoch, the brains behind the empire, and the bid to take full control of satellite television broadcaster British Sky Broadcasting or BSkyB. His son James's influence is also being felt: As chairman of News International, he closed the paper.
As investors absorbed news of the tabloid’s demise, focus quickly turning to its impact on News Corp.’s pitch for the 61% of BSkyB it doesn’t already own.
Collins Stewart estimates the News of the World’s closure will hurt News Corp.’s valuation by $0.25 a share. The Nasdaq listed stock is currently priced at just under $18. Collins Stewart analysts said in a note the move is: “an important sacrifice in an effort to reduce additional delay to the (BSkyB deal) approval process.”
Brian Lenihan, the former Irish finance minster for Fianna Fail who Friday died of pancreatic cancer aged 52, played a pivotal role in the country's bailout, following its near economic collapse.
It was Lenihan who fronted the 2008 legislation that guaranteed full repayment of loans lent to the banks by private creditors. The guarantee was designed to create confidence and fend off a run on the banks, which were under pressure due to investments in overheated property deals.
And it was Lenihan who took center stage in navigating the country through last year’s bailout by its eurozone peers and the International Monetary Fund, the result of the country’s financial meltdown.
Irish houses sold at cut-price Friday in a massive auction that cleared out properties repossessed as the country’s financial crisis hit.
The auction in Dublin - seen as an example of the woes afflicting Ireland following the banking sector’s splurge on bad loans - proved prime pickings for bargain hunters.
Properties sold at a third of their peak price -– including a four-bedroom home in the prime area of Ballsbridge, Dublin 4. It went for €550,000 ($794,000), from a boom time estimate of between €1.5 million to €2 million. A three-bed penthouse flat in Dublin sold for €345,000 from a market peak of more than €900,000 – €1 million.
The BP shareholders’ meeting, held in London Thursday, fell almost a year after the Deepwater Horizon explosion in the Gulf of Mexico.
The explosion killed 11 men, released the biggest oil spill in U.S.history and cost the company tens of billions of dollars.
The men were not forgotten, with the deaths prompting emotional exchanges between BP’s executives, including its new chief executive Bob Dudley, and shareholders.
At one point, an audience member read a letter from Keith Jones, the father of Gordon Jones who had died on the rig. The message to BP executives: “You were rolling the dice with my son's life, and you lost."
The meeting came the same day BP announced a last minute deadline extension for its $16 billion share swap deal with Russian oil giant Rosneft. The deal – which would allow exploration into Russia’s Arctic shelf – has been met with hefty resistance from shareholders in TNK-BP, BP’s Russian partner. The deadline has now been extended from Thursday to May 16, 2011.
And so BP’s troubles continue, with hopes the Rosneft deal might have signalled a new start now dashed.
The political crisis in Portugal has ratcheted up its chance of a financial bail-out, with investors driving the cost of the country’s borrowing to euro-era highs Friday.
The drama playing out in Lisbon rippled through the 17-member eurozone, coming as it did on the eve of this week’s European Union summit in Brussels.
CNN correspondent Jim Boulden was there, and reports the summit was dominated by discussions of the Libya conflict and Germany’s bail-out fund negotiations.
It was also meant to be the meeting which would cauterize the bloc’s fiscal crisis. Instead, there was talk of a $99 billion bail-out package for Portugal.
The European leaders did reach some answers on the bloc’s fiscal crisis: Outlining details of the new eurozone bail out fund, which will have a lending capacity of €500 billion and be in place when the temporary fund expires in 2013.
It follows the bloc’s scramble to deal with the Greece fiscal crisis and subsequent Ireland bail-out.
But it’s done little to calm investors in Portugal, who Friday pushed the cost of the country’s borrowing – as calculated by the costs of its ten-year benchmark sovereign bond – to near 8%. Rising costs make it increasingly untenable for countries to borrow in the capital markets, pushing them toward bailouts.
The costs have risen steadily since Portugal prime minister Jose Socrates’ dramatic resignation Wednesday, which put the nation's fragile economy squarely in the spotlight. Ratings downgrades from Standard & Poor’s and Fitch Ratings this week didn’t help.
Comparatively, Greece and Ireland’s bond yields of similar maturities both cracked 9% before they turned to their eurozone peers for support, according to data from financial services firm Markit.
While the situations in Greece and Ireland were more urgent – Greece was facing significant bond repayments and Ireland’s banking sector was a black hole for cash – those levels of borrowing are painfully expensive for a country trying to balance its books.
While Portugal could arguably fund itself for a limited time at those levels, it would be a problem in the long term. And cheaper money appears to be available.
Eurozone watchers will be seeing the pattern. Denials that a bail-out is on the agenda mean little. Both Greece and Ireland protested loudly before swallowing fiscal medicine.
As Portugal marches toward sovereign bond repayments of around $13 billion by June, it remains to be seen if the country can do it alone, and what it means for the bloc if it can’t.
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