World markets unfazed by Greece’s financial woes
In Europe, the unthinkable is about to happen: The Greek government, struggling under a massive debt load, has been forced to seek a bailout from the 15 other countries that share the euro currency.
Yet world financial markets, which a few months ago shuddered at the prospect of Greece’s woes fueling another crisis of confidence across the global economy, this week largely took the bailout expectations in stride.
Instead of fleeing for safety as they did in 2008 and early 2009, many investors have continued to pour money into stocks and bonds — allaying fears that the fiscal crisis in Athens would be the trigger for another round of market mayhem.
Much of the credit for the resilience of the markets goes to the surprisingly robust global economic recovery, experts say.
“You look around the world and the economic news is quite good,” said Ethan Harris, an economist at Bank of America Merrill Lynch in New York. “That has steadied the nerves of markets as they look at Europe.”
On Friday, key U.S. stock indexes hit their highest levels in 19 months, with the Dow Jones industrial average rising 69.99 points to 11,204.28.
A day earlier, even as doubts mushroomed about Greece’s ability to repay its lenders, Russia’s government raised $5.5 billion by selling bonds to foreign investors for the first time since 1998.
In the U.S., sales of new homes surged 27% in March from February, helped in part by a federal tax credit for buyers that expires next week, the government said Friday.
A separate report showed that orders for most big-ticket items, such as appliances and machinery, were up sharply last month.
The U.S. stock market also has been buoyed by strong first-quarter profit reports from many multinational companies — another indication that the economic recovery has legs, analysts say.
Earnings of the companies in the blue-chip Standard & Poor’s 500 index are expected to jump almost 50% from the depressed results of a year earlier, according to analyst estimates compiled by data tracker Thomson Reuters.
“Company earnings results are spectacular,” said Allen Sinai, head of Decision Economics in New York.
In Asia, many economies continue to be buoyed by China’s powerful growth. The Chinese economy grew 11.9% in the first quarter from a year earlier, the government said last week.
Earlier this year, as it became more apparent that the Greek government’s finances were unraveling under the weight of the country’s debt load, investors began to fear a new chapter in the financial crisis that rocked the world beginning in the fall of 2008.
That triggered a sell-off in global stock markets, but most quickly bounced back as economic data continued to underpin faith in a sustainable economic rebound.
Growth has been strong enough that some countries, including Australia, India and Malaysia, have begun raising interest rates to keep inflation in check.
Europe has, to a large degree, been the odd man out.
“Europe right now is being handicapped not only by the Greek debt situation but also by expectations of weaker growth than in the U.S.,” said Michael Woolfolk, a foreign-currency strategist at Bank of New York Mellon Corp.
That has made Europe’s stock markets, overall, the world’s worst performers this year. But the contrast between the European economy and the rest of the planet also has helped to damp fears that Greece’s need for a bailout has implications beyond Europe’s borders at the moment.
In particular, investors in recent months have become far more discriminating in their views of the creditworthiness of governments.
In the past, fiscal trouble in a country like Greece could reverberate around the planet, leaving investors unwilling to buy the bonds of other so-called emerging-market countries.
But the economies of many emerging markets, including India and Brazil, have come through the global financial crisis in healthy shape. Indeed, many of those countries now are net creditors within the world financial system — meaning they’re lending more funds to the rest of the world than they’re borrowing from it.
To some investors, that means the bonds and IOUs of some emerging-market countries carry less long-term risk than the debt of some developed countries.
Besides Russia, Egypt also sold new bonds this week. And Chile announced plans for a debt offering aimed at foreign investors.
For developed countries including the U.S., Britain, and Japan, however, Greece is a warning of what could await governments that have gone deep into debt to pull their economies out of the worst recession since the Great Depression.
From investors’ perspective, “The irresponsible [borrowing] behavior happened at the core of the global economy — in the developed countries,” said BofA’s Harris.
In the near term, even if Europe and the International Monetary Fund successfully bail out Greece, many experts fear that Portugal and Spain also may need help as they wrestle with onerous debt loads.
“If Portugal demands the same [help], that’s a game-changer” for financial markets, said James Bianco of Bianco Research in Chicago. Global investors, he said, may not remain sanguine in the face of a European debt crisis that spreads beyond Greece.
As for the U.S., which is running unprecedented budget deficits, some investment advisors say they’re worried enough about government debt levels to recommend that clients avoid long-term Treasury bonds entirely — on the fear that investors will eventually demand much higher interest rates on new debt, severely devaluing older bonds.
If Washington fails to bring the deficits under control soon, Sinai said, “the prospects for U.S. debt are very, very bleak.”