Financial Markets Tumble on Risks of European Credit Crunch

Credit risk in the European banking system has surged to all time high as the market priced in more than 90% chance that Greek debts will default. Investors' fears intensified despite government's denial of imminent default and commitment to austerity measures. The situation has sent other peripheral yield spreads much higher. As far as core economies are concerned, French banks are at risk of being downgraded by Moody's. The sudden resignation of ECB executive member Jürgen Stark did nothing but aggravated the situation. It's believed the departure was due to Stark's disfavor over ECB's unilateral asset buying plan. The slump of stock markets in Asia as a catch-up with US' selloff last Friday has led oil prices lower. Gold also slipped as the US dollar gained grounds.

Over the weekend, Greece announced imposition of a new property tax policy on top of existing measures. The new system would mean a levy of 4 euro/sq meter over the next 2 years and is expected to raise around 400B euro. In addition, officials will be subject salary cut by a month. Yet, these measures failed to restore market confidence. The EU/IMF/ECB will return to Athens in coming days to discuss about the new tranche of funding to Greece. The troika aimed to complete the work by the end of September. EU Economic and Monetary Affairs Commissioner Olli Rehn said he welcomed the move but stressed that Greece 'needs to meet the agreed fiscal targets and implement the agreed structural reforms to fulfill the conditionality and ensure funding from its partners'.

New source said that Germany has prepared to give up funding Greece. Officials in the coalition government were said to have debates on ways to shore up German banks in case of a Greece default. Philipp Roesle, the German vice chancellor and also the economy minister, raised the possibility of a Greece default by stating the 'worst-case scenario' in Europe is 'an orderly default for Greece'. The default may help re-establish 'the affected state's ability to function, perhaps with a temporary restriction of its sovereign rights'.

Elsewhere in the Eurozone, largest banks in France, including BNP Paribas, Societe Generale and Credit Agricole, may be downgraded by Moody's as soon as this week due to their huge holdings in Greek debts. In June, the rating agency placed the banks on review for 'the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels'. A result will likely be believed later in the week.

All these events are detrimental to the Eurozone's outlook as well as market sentiment. The euro, and risky assets, will likely get dumped in the near-term unless extremely encouraging macroeconomic events occur.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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