Wednesday, August 3, 2011

Lunchtime news break: more on the financial crisis in Europe; bond and stock markets remain a bit unsettling

I know these financial news items are not very "new media" oriented, but as a former newspaper and magazine publisher I am tend to be hypersensitive to financial news that may ultimately effect the advertising environment.

There doesn't appear to be much panic in the pages and on the websites of media properties in Europe when reporting the current financial situation, at least not yet. But the news has been grim and people are starting to pay more and more attention to what the stock and bond markets are doing – on both sides of the Atlantic.

Today marked the third day in a row that the German DAX has closed down over two percent in value – today closing at 6640.59, down 156 points, or 2.3 percent. While the UK's FTSE index has also been down the past few days, its declines have been more modest. That is until today, when the stock index also closed down over two percent. The French CAC 40 followed suit, as well.
What has been driving the market can be guessed at, but the steady stream of bad news has to be having an effect.

The U.S. media has been obsessed, of course, with the spectacle in Congress. But if the agreement on the debt ceiling was supposed to calm things down, well that is not what is happening. Today, for instance, the Dow is currently down over 100 point, though not at the low point in day thanks to a sharp tumble near the open.

But for Europe, the truly frightening thing has been bond prices. Although few, other than maybe the NYT's Paul Krugman has been talking about this area, the fact is that European newspapers such as Die Welt are paying close attention.

The trouble lies in the fact that both Italy and Spain are seeing the interest rates it is forced to pay on its debt climb. Let me give you some examples: today the U.S. pays 3.125 percent on its 10 government bonds, Germany is paying 3.25 percent on the same bond. But Italy's rate today climbed to 6.21 percent – a three percent increase in prices just today. Spain's rate is even higher, at 6.34 percent.

What does all this mean? Last fiscal year the U.S. paid $413,954,825,362 in interest on its total debt according to the treasury department. If U.S. bond prices were to climb as Italy's has, the U.S. would be paying close to a trillion dollars in interest alone on the national debt.

But the potential crisis is not that U.S. bond prices will rise. As many economists have pointed out, this has been a favorite talking point by those advocating austerity measures. In fact, bond prices have gone down slightly, not up. No the crisis for now is centered in European countries such as Italy, Spain and Greece.

Just to personalize all this, imagine getting the mail today and finding out that your payment of your adjustable rate mortgage had just gone from $1500 per month to $3000, this might just have an impact on your budget, right? That is what Prime Minister Silvio Berlusconi and Prime Minister José Luis Rodríguez Zapatero and dealing with today.

Update: One hour before the closing bell, the U.S. markets have turned slightly positive. But the NYT's Rachel Donadio has just posted an article concerning Italy's Silvio Berlusconi and the pressure that is starting to mount on his government as its government bond rates continue to rise.