Global markets brace for Black Monday mayhem
Friday’s forecasts came true this morning when markets in Australia, China, Japan and South Korea started tumbling.
The South Korean index had to be temporarily suspended this morning when it collapsed.
This is the first reaction of markets to the historic downgrade of the US credit rating on Friday evening.
Asian markets have reacted very strongly due to their vast interests in the US. Combined, Asia holds three trillion dollars of the American debt, so their vigilance is understandable.
China is the Number One holder of US debt, while Japan boasts second place, and they both have the hiccups after Standard and Poor’s sent the US one notch down to an AA+ credit rating after 70 unbroken years of dominance in the credit hierarchy.
China has already labeled the American debt situation immoral and irresponsible, insisting the US deal with its problems without delay.
It seems likely that if investors were to diversify from holdings in American treasuries, they would be sure to look seriously at the Asian markets which therefore stand to benefit most from the current situation.
Michael Wong of Ctrisks credit rating agency believes US investments will keep on depreciating while Asian countries will do their best to diversify their risks.
“They are going to buy loans issued by other countries, not simply the US ones,” he said.
Talks about moving away from the US dollar are high on the agenda this summer, though which currency might become a new reserve remains unknown. It is probable that some Asian currencies will be added to the basket of currencies that could be used as substitutes for the greenback.
Europe's markets have just started their Monday session after taking a hammering last week. Market futures have suggested that stocks are down and will continue to slide over the course of the day. This is the markets’ worst performance since October 2008.
The EU is at the epicenter of this financial tsunami that appears to be spiraling out of control.
The G7 and G20 leading economies have held an emergency conference call to say that they have got the situation under control. But investors around the world say they do not trust them.
Late Sunday, the EU central Bank announced it would buy up Italian and Spanish debt, which investors have been avoiding, on growing fears that those states will default rather than pay back.
But German Chancellor Angela Merkel has spoiled the party by saying that she would not increase the EU bailout fund suggesting that if Italy and Spain collapse and their economies go under, Europe’s largest economy will not help. Instead, Merkel is piling the pressure on struggling states for even more painful austerity measures.
Safe havens like the Swiss franc and gold have reached record highs as investors flee both the dollar and the euro.
Despite a series of calming messages from the very top in Asia, Europe and the US, there is growing concern among investors around the world that leaders just do not get how serious the situation is at the moment.
Italy’s PM Silvio Berlusconi has also pledged to speed up spending cuts – those savage austerity measures that Italy is going to have to endure to cut its debt.
However, economists are saying that will make the situation even worse because it will lead to fewer jobs and a shrinking economy – the last thing Italy needs now.“The Italian government owes €1.8 trillion. That might mean nothing to anybody but that is bigger than the total government debt of Ireland, Portugal and Greece put together. Before the end of this year Italy needs to sell bonds equivalent to the whole of the Greek bond market, i.e. all its debt,”
says economic journalist Patrick Young,“Italy is huge, it is just too big to manage to in any way be rescued in the way that other economies have so far been bailed out by the EU.”
The Italians have already said they will oppose the measures.
On Monday morning Russian stock markets also slumped in response to the US credit rating downgrade.
The S & P downgrade of the US “triple A” credit rating was made on Friday after the stock markets were already closed so the scale of the fallout is expected to become apparent only today.
One of Russia's two main bourses, the RTS exchange in Moscow, has fallen by three per cent to its lowest point this year, though some believe traders will be able to pull back from a “Black Monday” situation. Others say America’s AA+ rating is still a reliable one so nothing particularly tragic is expected to occur.