Greece cut to junk; NZ$ briefly hits 70 USc; Big UK budget cuts
Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with the BNZ, including news Moody's has downgraded Greece's sovereign credit rating by 4 notches to Ba1, which is a sub-investment grade or 'junk' rating.
Standard and Poor's and Fitch have already downgraded Greece to junk, but this move dragged on global financial markets in morning trade as fears about a European financial meltdown returned.
The Dow gave up 100 points to close just slightly firmer. The New Zealand dollar rose to just over 70 USc in overnight trade before easing back in line with global stock markets to be 69.6 USc this morning.
Meanwhile in Asia, China and Taiwan have signed a new deal to reduce tariffs and boost already huge trade between the two Chinese nations. This is a good sign for intra-regional trade and shows tensions between the two has reduced significantly.
In Europe, Britain has announced its budget position is worse than expected and the new government is expected to announce the biggest cuts in a generation on June 22.
So what?
The Greek crisis and the fear of contagion to the rest of the PIGS (Portugal, Italy, Greece and Spain) have not gone away. European governments are now slashing spending in a desperate attempt to keep the bond vigilantes happier (or at least less grumpy). However, all this is doing is driving their economies deeper into recession or (in some cases) depression. That will make it even harder for nations such as Greece, Portugal and Spain to dig themselves out of their debt hole.
The real risk is of a default spreading across Europe that breaks up the Eurozone and forces German and French banks to write down the value of US$1.6 trillion of loans to Southern Europe. One response left is for the central banks there, particularly the European Central Bank, to print money. The Germans would hate it, but it may be their last resort to avoid a deflationary debt spiral.
The Eurozone is New Zealand's third largest buyer of exports, but this is not as bad as it might have been 50 years ago. Now New Zealand relies much more on China and Australia than it does on Europe. The RBNZ is relatively relaxed about Europe, pointing out it is responsible now for just 10% of trade.
The real problems hit when (or if) the European slowdown hits growth in China and America, both of whom are big exporters to Europe. That could trigger a double dip recession globally and that's why global stock markets have slumped in recent months.
The Chinese/Taiwanese trade deal is great news for us and for the region. When these two are happy and trading we can all breathe slightly easier.
The British situation is ugly. Labour left a mess and now the Lib Dems and Conservatives are having to clean it up with big spending cuts. This will make life difficult for New Zealand exporters to Britain as the pound falls further vs the NZ dollar and domestic demand for imports is hit. Britain looks like being in recession or close to it for quite some time.
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