Monday, February 28, 2011

Euro Fiscal Crisis, Possible China Rate Hike Roil Markets

European stock markets are following their Asian cousins lower this morning amid rising concerns about potential fiscal and monetary tightening in China along with the roiling sovereign debt issues along the edge of the euro zone.

China’s reported strong growth earlier this week, but also high inflation figures. Thus far, China has been chary about tapping on the brakes too hard, but with inflation at 5%, they may be forced to take stronger action which could curtail growth. Shanghai shares plunged 5% and other Asian markets fell 1% to 2%.

European leaders in Seoul for the G20 meeting are watching the euro-zone peripheral fiscal crisis flare anew, with Ireland firmly in the crosshairs and Portugal not far behind. Market indicators, specifically spiking Irish and Portuguese bond yields, indicate investors believe a bailout of some stripe will be required for both countries.

The two countries, along with Greece, represent about 5% of the 16-member euro-zone economy. But Spain and Italy loom as two larger possible problem spots. Bond yields for Spain and Italy are nowhere near their smaller, troubled neighbors, but fears are rising that the fiscal crisis could spread.

“The concern is that if Ireland is unable to pass a new budget, and either it or Portugal feels it necessary to consider tapping the Euro Financial Stability Facility bailout fund, markets could send [credit insurance costs higher]…and possibly start a contagion effect across Europe,” Michael Hewson at CMC Markets told Dow Jones.

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