WHILE ATHENS BURNS

While Athens is burning the crisis is engulfing the Euro area and threatens to go global.

Two days ago we signalled that Governments need to rapidly get ahead of the curve to contain the swift transformation of a serious crisis into a wider and otherwise more devastating stage when spreading sovereign debt risk morphs into the alarming perception of counterparty risk in the credit markets and creates conditions for the rapid paralysis and eventual implosion of the financial system.

Yesterday’s failure by the European Central bank to offer concrete new initiatives to stem the spiral of crisis has resulted in a worldwide sharp retreat in stock markets and a further steep dive for the already beleaguered Euro.

Today, markets will be looking into the G7 conference call and Euro area finance ministers emergency meeting in Brussels for clues as to the course of action –or lack thereof- taken by governments. If recent history is any guide governments may again fail to take full stock of the implications of the rapidly growing turmoil and expose markets to further mayhem.

A potentially positive reading of US employment numbers and short term oversold conditions ahead of the weekend could offer some temporary relief but the destructive pregnancy of the situation is unlikely to find in that a meaningful, or lasting, counterweight.

Offering a pledge to strengthen and enforce a European budgetary policy at the Brussels meeting will not assuage immediate market concerns. Nothing short of the rapid assurance that adequate means are mobilised to face the build up of pressure in vulnerable countries in the Euro area will arrest the downward spiral in the sovereign debt of Spain and Portugal.

In evidence that our warning two days ago of a swift contagion from sovereign debt to credit markets is already in its early stages,
Bloomberg reports this morning that money markets are already feeling the foretaste of occlusion. Banks this Friday are the most reluctant to lend to each other in six months and a derivatives index used to protect against European bank failures soared to a record.

US company bond sales are poised for the slowest week this year, while in Europe they all but disappeared already. Emerging market and mortgage bonds tumbled also while stocks worldwide have been battered.

In the streets of Athens protesters roam and rioters set buildings on fire, while investors fear that social unrest may weaken the political determination of the authorities in applying the stern fiscal measures approved only yesterday by the Greek parliament. A political crisis in Athens would be another difficult hurdle for markets to integrate.

With too much bad news piling up investors are rushing for the exit and in the absence of decisive action by European Governments events may continue to spiral out of control.

May 7th 2010.