General

World stock markets rallied on Tuesday with expectations that euro zone officials were close to developing further strategic moves in order to combat the crisis that has plummeted European economies.  Despite the lack of commitment by Dutch and Finnish officials for a euro-area bailout find, the rally in stock markets still continued.

Not only did Asian stocks rebound from their lowest levels since May 2010, European and US stocks also rallied. On Wall Street, the Dow jumped 2.53 percent; the S&P 500 added 2.33 percent and the Nasdaq Composite rose 1.35 percent. In Europe, London’s FTSE-100 gained 0.45 percent, the Paris CAC 40 added 1.75 percent and Frankfurt’s DAX was 2.87 percent up (AFP).  After three sessions of swings on the commodities markets, oil, copper, gold and silver all rose. U.S. crude jumped nearly $2 a barrel. In addition, the US dollar, US Treasuries and Japanese government bonds all eased.

In a meeting which is to take place within the ECB on October 6th, finance officials are likely to debate restarting covered-bond purchases and may discuss interest-rate cuts in order to ease the funding strains.  Further adding to the speculation is that France is expected to draft plans to re-capitalise the country’s over-exposed banks.  Senior ECB officials have also indicated that the 440 billion euro bailout fund is likely to be increased in size.

The euro-zone is coming under increasing pressure to resolve its growing debt problems as the US, China and other nations urge further action within the region.  In an interview with ABC’s “World News with Diane Sawyer” program, the U.S. Treasury Secretary Timothy F. Geithner mentioned that Europe’s crisis is “starting to hurt growth everywhere, in countries as far away as China, Brazil and India, Korea. And they heard the same message from us they heard from everybody else, which is it’s time to move.”

Major market players still insist that the markets are as turbulent as ever. Markets still lack the confidence and are thus highly susceptible to contagion. Fears still loom over a double crisis with the expectation of a renewed recession in the US and the ongoing euro-zone crisis. This has caused the euro to exhibit volatile swings over the past months. The IMF has warned that the global economy had “entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action” to cope with Europe’s unstable financial situation.

In a move that is expected to send shockwaves throughout world markets and particularly through the euro zone, Standard and Poor’s (S&P), the credit rating agency, downgraded Italy’s long-term credit rating to A from A-plus and cut its short-term rating to A-1 from A-1-plus with a negative outlook. The downgrade caught the financial world by surprise as a credit rating was primarily expected from the rating agency Moody’s which had announced last week that it had put Italy’s credit rating under review.

S&P’s sighted ‘political’ and ‘debt’ scores as the primary reason for the downgrade as per the agency’s sovereign ratings criteria. Furthermore, the agency’s rating reflected the view that the ‘fragile governing coalition and policy differences within parliament will likely continue to limit the government’s ability to respond decisively to the challenging domestic and external macroeconomic environment.’

Measures adopted by the Italian government, particularly the fiscal austerity program and tightening financial conditions have been rejected by S&P as reliable conditions for the rebounding of economic performance. The rating agency outlines three main reasons for their reduced expectations for the growth of the Italian economy: ‘low labor participation rates and tightly regulated labor and services markets; what we consider to be an inefficient public sector; and relatively modest foreign investment inflows.’ S&P also stated that it has lowered its outlook for Italy’s annual average growth to 0.7 percent for 2011 to 2014, from a prior projection of 1.3 percent.

Borrowing costs are predicted to rise for the Italian economy. A scenario as such would further cause the situation to deteriorate as the nation is about to initiate a refinancing program of  nearly 30 billion euros (USD 41.3 billion) of gross bond issuance in October and November, according to Boris Schlossberg, director of currency research at GFT. A bailout for Italy would drain the euro zone’s resources placing the entire region in turmoil. In addition, the fear of contagion is becoming clearly visible as the anticipation of a Greek default on French banks is continuing to rise.

The IMF has stressed the need for Europe ‘to get its act together’ and work towards resolving the debt crisis. Furthermore, the IMF warns that if a proper road map for recovery is not planned and executed, global expansion will be at stake and these economies could ‘tip back into recession.’