Europe’s deepening debt crisis is likely to play out on U.S. shores Friday as financial markets digest the downgrade of the creditworthiness of 16 Spanish banks and the arrival of France’s new socialist president at the White House for meetings with President Barack Obama.
U.S. stocks fell sharply at the close of trading Thursday on rumors that at least one of major credit-rating agencies would downgrade Spain’s big banks. Shortly after the closing bell, Moody’s Investors Service lowered the ratings of 16 Spanish banks and one Britain-based subsidiary, deepening the European financial crisis and adding to worries of regionwide bank runs.
The European Union is facing voter backlash over austerity measures. France recently tossed out its conservative president, and basket case Greece proved unable to form a government and appointed a caretaker. If that wasn’t enough to deepen concerns about Europe, the action by Moody’s will make it harder for banks to lend and the Spanish government to issue bonds.
Moody’s also issued negative outlooks for 10 of the Spanish banks, and seven others are still on review for a future downgrade, which effectively tells investors that these banks present a greater risk of defaulting on their debts because of Spain’s deteriorating economy and rising loan delinquencies.
The downgrade came as the European Central Bank confirmed that it had stopped some emergency lending to Greek banks, amid widespread fears that Greece will attempt to exit the European Union and spark bank runs and panic in other struggling European economies. Adding fuel to the fire, the leader of Greece’s radical leftist party, trying to secure the prime minister’s post, effectively challenged European leaders to expel Greece.
In an interview that appeared Thursday on The Wall Street Journal’s website, Alexis Tsipras said that if European leaders cut off emergency funding to Greece as threatened, “then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors.”
Greece agreed to a deal with bondholders late last year, asking banks to eat losses in exchange for new Greek debt. Europe’s emergency lending to Greece was contingent on a deal and tough belt-tightening measures that have since led to electoral chaos as angry voters try to toss out established Greek political power. Anger over austerity also led French voters to select a new leader, Francois Hollande, who took office Tuesday and will meet Friday with Obama.
Hollande has championed greater government stimulus efforts to offset revenue losses from austerity. It’s a view the Obama administration shares. The administration thinks controversial stimulus efforts here kept the economic decline from being worse and helped the U.S. economy return to growth, albeit at a tepid rate.
The French president will get U.S. support when leaders of the G-8 industrialized nations meet over the weekend at the Camp David presidential retreat. The administration cautioned that no breakthroughs are expected, especially since European leaders are scheduled to meet next week.
Appearing Thursday on PBS, Treasury Secretary Timothy Geithner said that “you’re seeing a very welcome and encouraging debate now in Europe with these elections about how to get a better balance between growth and austerity, how to make sure they’re doing things to help get these countries growing again, and that’s very important.”
It all makes for a potentially volatile Friday on Wall Street after Thursday’s 156.06 point loss on the Dow Jones industrial average to close at 12,442.49, the 11th down day in the past 12 sessions. The S&P fell 19.94 points to 1,304.86 and the Nasdaq was off 60.35 points to 2,813.69.
Time may be working against Europe.
Financial markets are demanding higher interest rates in exchange for buying new European debt, making the hole from which Europe must dig out even deeper. And there’s evidence that a slow but continued run on banks has been occurring in Greece and Spain, although European authorities dispute news reports of such runs.
An economist with the European Union mission in Washington, who spoke on the condition of anonymity, said the Bank of Greece would guarantee all deposits, with the backing of the European Central Bank, and nerves would calm. She denied that Europe was seeing the early stages of bank runs.
She did say that savings were leaving Greece for other banks throughout the EU.
“But that’s not new, it’s been gradual,” she said.
The EU economist also said the idea of pushing Greece out of the eurozone “is a complete no-go. It would be so very disruptful,” and she insisted that European cohesion remains.
“This doesn’t call into question our common future,” she said. “Right now this is still a political crisis that is within the eurozone.”
New elections are expected to be announced soon, and polls suggest Tsipras remains a likely next prime minister. His problem, however, remains that while European leaders back his ideas, they’ve demanded real economic reform in Greece before going ahead with them.
So all eyes are on Greece, from Wall Street and Washington to London.
Britain’s key tourism sector already is feeling the European pain, with visits sharply down this spring from previous years.
Mihir Agrawal, who was manning an empty souvenir shop Thursday evening on Queensway in central London, said he’d seen "almost no business for the past two to three weeks" as the usual springtime flow of tourists from Italy, Spain, Germany and elsewhere had slowed to a trickle.
"I’ve worked in this place for three years and I have never seen it this kind of slow," Agrawal said, adding that other shop owners on the busy street near Hyde Park have been grumbling about the same thing.
Agrawal and others are still hoping that the Summer Olympics in London, as well as next month’s celebrations for the queen’s diamond jubilee, will restore tourism to its usual summertime frenzy. But they’ve braced for losses this year amid concerns that the uncertainty in Europe will cause visitors from as far away as the United States and East Asia to curtail their travel budgets.
Saif Osman, a young man who was hawking theater tickets and bus tours along Queensway, said he hadn’t made a single sale by dusk Thursday. He blamed a spot of unseasonably grim weather and hoped that business would pick up over the weekend, but he wasn’t feeling optimistic.
"It’s very quiet, the most quiet that I have seen in five years" since he moved to the city, he said.