FTSE 100 falls as markets price in Greek debt default

| September 22, 2011

The FTSE 100 has fallen as much as 4.28% already in morning trading, as markets price in a Greek debt default.

This comes after the failure of the US Federal reserve to implement any real strategy last night, while announcing serious financial headwinds that could potentially put the world’s largest economy into recession.

While financial stocks have been the main losers so far, all sectors have been affected as markets price in the expected impact of eventual debt default across the Europe.

So far, Greece has been left with debts it cannot pay, and an austerity program that is not strong enough to satisfy the IMF and EU, who are hesitantly providing emergency loans while the Greek economy remains on life support.

However, with national strikes taking place across Greece today, it is clear that even those austerity programs actually being enacted are extremely unpopular and facing national revolt.

The fact that Greece will eventually default on its debts is inevitable, but EU leaders are concerned that other struggling economies: Ireland, Portugal, Spain, and Italy, will all fall next.

An internal report within Morgan Stanley has suggested that while Spain should be able to survive any debt problems, Italy is already technically insolvent and is likely to fall to default eventually because it too cannot properly service its debts.

The whole issue brings to question the future of the euro. While Germany still remains Europe’s most stable and healthy economy, it too is falling back to recession.

As Europe moves to possible recession or protracted zero-style growth, the expectation remains that Europe will face its own Lehman-style crisis, caused by a double whammy of banking and sovereign debt failures.

Unlike US banks, which have come relatively clean on their losses, European banks have stubbornly tended to keep losses off their books for accounting purposes, resulting in EU leaders calling for greater capitalisation of Eurozone banks.

Overall, while markets have been very volatile these past weeks, all indications are that bullish investor sentiment is giving way to bearish fears that debt contagion is about to have a disastrous impact across European and world economies.

The expectation remains that the FTSE 100 is likely to fall over the coming months, likely reaching 4500 points before Christmas, and possible falling back to 3500 points around the New Year as the looming debt crisis slowly but surely unfolds.

This is not least because ultra-low interest rates have deferred the debt crisis, rather than addressed it.


Comments (1)

Trackback URL | Comments RSS Feed

  1. baighya says:

    it was always obvious that Greece is going to default. we just dont try to use that word so we would not make the situation look very worse.
    Greece situation is very bad and if it wont get support from the EU, it will never overcome this problem. However, if the EU helps Greece, this will encourage other countries who have debts to ask for their debts to be written off and the same thing will happen again and again. my opinion is to kick Greece from the EU, let them have their own currency and let them heal by themselves. this would hurt the market in short run but for the long run, this is the best solution for all the countries in the EU.