GLOBAL MARKETS WEEKAHEAD-Greek crisis goes viral

By Jeremy Gaunt, European Investment Correspondent

LONDON, May 7 (BestGrowthStock) – The Greek crisis, to borrow an
expression from social media, has now gone viral.

It is no longer just about the euro zone. It is global,
hitting financial markets across the board and threatening the
general improvement in the global macroeconomic climate.

Heading into a new week, there is no comfort for investors
either from the indecisive British general election, with its
accompanying macroeconomic uncertainty.
But it is Greece that is the domino that has started to
topple.

Rioting protestors and burning banks on the streets of
Athens have clearly grabbed the limelight the over the past
week. But from an investor standpoint, they have simply
underlined the growing scepticism about whether the European
Union can save the euro zone from a Greek default and spreading
debt meltdown.

As a result, the year’s gains in world stocks have been
wiped out and the euro is sitting on double-digit percentage
losses for the year.

So the issue facing investors now is whether this crisis —
the Greek word, appropriately, for judgement — is containable
or whether the world is heading towards another financial
meltdown akin to the subprime debacle.

“People worry that if Greece is Bear Stearns, Portugal is
Lehman and Spain AIG,” BNP Paribas said during the past week, a
phrase that gained much circulation.

Initially, the impact of Greece’s struggle with its debt and
the fear of a spread to others such as Portugal and Spain, has
mainly been seen in European assets.

Funds tracker EPFR Global, for example, reports that
European equity funds had more than $2 billion in net inflows in
the week to May 5, the most in a year.

But other assets are now getting pulled in significantly:

— The U.S. Dow Jones industrial average (.DJI: ) plunged as
much as 9 percent on Thursday before recovering to end around 3
percent down.

— MSCI’s benchmark emerging markets index (.MSCIEF: ) has
lost 11 percent since mid-April.

— The price of crude oil (CLc1: ) has fallen as much as 14
percent over the past five days, with the Greek crisis putting
the brakes on speculators as well as fears for Chinese growth.
— Commodities, as measured by the broad Reuters Jefferies
CRB index (.RJCRBTR: ), have lost more than 5 percent in a week as
investors in riskier assets have pulled in their horns.

— Emerging market sovereign debt yields (11EMJ: ) have blown
out around 55 basis points over U.S. Treasuries over the past
week.

NO WAY OUT?

The problem for investors is that there is no clear solution
to the crisis ahead.

The EU/International Monetary Fund aid plan has been greeted
with less than enthusiasm by financial markets and is anyway
under threat from legal challenges in Germany.

The riots in Greece are showing the huge task ahead for the
Greek government to meet EU demands for fiscal discipline.

Meanwhile, sovereign debt of peripheral EU economies has
come under fire and ratings agency Moody’s has warned that the
rot could spread to the banking systems of Britain, Italy,
Ireland, Spain and Portugal.

“It is very difficult to find a near-term equilibrium from a
policy and markets positioning perspective,” said Andrew
Bosomworth, a senior manager for bond fund PIMCO Europe.

“We are faced with how to deal with a state that from all
accounts is insolvent.”

The extent of the problem for investors cam also be seen in
a note from UBS which addressed the question of whether market
declines were now offering opportunities.

“The lack of a clear ‘end game’ for sovereign risk in Europe
means that despite recent sharp declines in markets, this is not
a buying opportunity,” it said.

In effect, leading investors are expecting more volatility
in the weeks ahead.

EMERGING SPILLOVER

The irony of the crisis is that it is coming at a time when
the global economy is looking better, as exemplified by Friday’s
figures showing U.S. jobs growth.

But it is being overwhelmed by the worries about another
financial crisis.

This is particularly the case in emerging markets, where
government finances are in relatively good order — in surplus
in many places — and economies are strengthening.

Poland, for example, is the only EU economy to escape
recession last year but the latest week saw investors demanding
higher premiums because of its deficit.

A two-year bond auction showed its worst result since last
July, with the yield rising to 4.80 percent from 4.54 percent at
the previous sale.

Emerging markets, particularly some of those closest to the
troubled euro zone, will be in the spotlight during the coming
week at the European Bank for Reconstruction and Development
annual meeting in Croatia.

The EBRD has already warned that Bulgaria, Romania and
Serbia may suffer as a result of the crisis in Greece. It will
announce an increase in EBRD shareholders capital to lift
investment in the region.

Investing Research

GLOBAL MARKETS WEEKAHEAD-Greek crisis goes viral