The Fear Returns
Europe’s policy panic is feeding another financial panic.
Anyone who thought that last week’s IMF-EU bailout would calm markets has had a rude awakening this week, especially after yesterday’s global selloff in stocks. It rarely gets uglier than a 3.6% one-day fall in the Dow and 4.1% on the Nasdaq.
Even more ominous is the return of fear in the credit markets, with interbank risk spreads hitting their widest levels since spring 2009. Investors are fleeing riskier assets and moving back to the relative safety of the dollar and U.S. Treasurys, which means less credit available to finance business and risk-taking. The plunge of the euro has exacerbated this flight to the greenback, and the rapid exchange-rate movements of recent weeks are always more disruptive to investment decisions and capital flows than conventional economic wisdom cares to admit.