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Greece goes Junk – jitters felt globally ! Crisis Gradually spreading across Europe

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What happens next when a particular area witnesses a horrifying earthquake with a magnitude of over 6 on the Richter scale? Of course, the event does not end there and the region goes on to witness many smaller after-shocks after the grand disaster.

Similarly, after witnessing what could be termed as the worst recession after the Great Depression of 1930’s, the global economy is now feeling the after-shocks of the financial disaster that the world witnessed a couple of years back.

The immediate fall out of the global recession was initially felt in the form of Dubai financial crisis followed by recent problems in European countries like Greece and now spreading to Portugal and Spain. The cost of insuring all these three countries against a debt are at record high levels.

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Another global aftershock comes in the form of Greece debt crisis. The European Commission last week estimated the fiscal deficit of Greece at a whooping 13.6%, way above analyst’s estimates of around 12.7% of GDP which a percentage lower than the actual estimates.

In a latest development, Europe faces yet another bout of economic crisis just as Greece’s credit rating was slashed to ‘junk status’ by Standard & Poor’s due to perceived high risk of defaulting. The rating agency has also downgraded Portugal’s debt by two notches but it still remains at investment level.

The junk rating makes it harder for the country to finance its debt on the back of sky rocketing interest rate expectations for their risk involving investments. The downgrades for Greece and Portugal have led fears in the mind of investors that the contagion could spread across other weaker European countries.

This has led to a sell-off across the global stock markets including stronger Asian economies amid fears that the worsening European crisis could act as a jolt to the rebound in the world markets.

Even as I am writing this, Indian Benchmark Nifty has opened gap-down by 50 points (and further down by 100 points) from 5310 levels to 5210, mirroring the concerns of contagious European crisis led by Greece.

Asian stock markets along with European and the US markets were all down overnight. The Euro tumbled to 52 week lows and oil prices dropped toward $82 a barrel on the back of fears of falling demand in case the European crisis worsens further.

The joint effort to fund Greek’s crisis by Europe and I.M.F. with a support loan worth 45 billion euro ($60 billion) package has not been able to sooth the investor’s nerves who are betting that the crisis could further deepen involving all the three countries.

This messy deficit figures are no where near the 3% limit set for the member countries of the European Union. Greece has set a goal to bring down the fiscal deficit to 8.7% of GDP this year.

Down gradation has led to spike in the interest rates of 10–year government bonds of these economies. The benchmark Greek’s 10-year bonds surged to its highest levels at 10% leading to hammering down of Euro.

How far can the European contagion spread? Any Guesses…

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