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Monday 8 August 2011

Don’t Panic – Revisited

Last week I looked at the falls in stock markets across the EU – including here in the UK – and concluded that the European Central Bank (ECB) was behaving conservatively, and thus keeping the Euro strong, while not being sufficiently fleet of foot to intervene when and where required.

So while the ECB’s move to buy Irish and Portuguese debt was welcome, they failed on two further scores: there was no sign of also buying Spanish and Italian debt – with the latter needing significant refinancing in the near future – and the ECB then stated that there was no intention to intervene further.

This was not what the markets needed in way of reassurance, and so on Friday the selling continued, fuelled additionally by the clumsy (and possibly downright wrong) downgrading of the USA’s credit rating by the already discredited Standard and Poors (S&P). The weekend could not come soon enough.

Fortunately, before the expected return of the mayhem this morning, wiser heads prevailed and the ECB has realised (or been caused to realise) that they need to move faster – as I’ve been saying for some time – and not behave so conservatively as to leave whole economies out to dry.

And what a difference all of that made: stock indices across Europe are still showing signs of nervousness, but the whole picture is of smaller losses and thus far (1030 hours) no panic on the trading floor. The ECB has moved to buy up Spanish and Italian bonds, and this too has helped.

Yields on Spanish ten year bonds, which had hit 6% last week, have eased to around 5.2%, with Italian bonds apparently in step. Hopefully the more dynamic approach of the ECB will continue. But there still needs to be action across the north Atlantic: the downgrading of US debt has to be reconsidered.

As Bloomberg has reported, Warren Buffett, who knows a little about investments, has said that S&P got it wrong. The agency is being called out for making what is being seen as a political, rather than an economic one, that has more to do with the politics of the Tea Party movement than the figures.

Nobel prize winner Paul Krugman put it best: “There is no reason to take Friday’s downgrade of America seriously. These are the last people whose judgment we should trust”. Time for S&P to ‘fess up, perhaps – and reverse their move.

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