The markets are tumbling again this morning as fears of a second financial crisis continue to grow. The FTSE is down by 2.87 per cent, while the Dow Jones, which yesterday suffered its worst fall since 2008, is 4.31 per cent lower. Significantly, the turmoil has spread to Asia, with Japan’s main index down 3.7 per cent and Hong Kong’s down 4.6 per cent. Elsewhere, the Australian stock market is down 4.2 per cent.
The deal that was supposed to safeguard the single currency has started to unravel just a fortnight after it was agreed, and, as Jose Barroso was forced to admit yesterday, the crisis has spread beyond the periphery of the eurozone to the core. The markets are now questioning the creditworthiness of Italy and Spain, with bond yields still above 6 per cent, terrifyingly close to the 7 per cent that forced Greece, Ireland and Portugal to seek bailouts from the EU and the IMF. What was a banking crisis has become a sovereign debt crisis.
As Robert Peston points out on his blog: “[T]he deleveraging of the banks, the shrinkage in their balance sheets, has been transferred to the state. The overall volume of indebtedness in the economy is therefore still with us – although it has been shuffled from financial sector to public sector. And if you took the view four years ago that the quantum of debt in the system was unsustainably large, then you would argue that by propping up the banks, the day of reckoning was being postponed, not cancelled.”
David Cameron, George Osborne and Nick Clegg are now facing populist calls to return from their respective holidays, although they have so far (wisely) resisted doing so. Clegg, in any case, will be back on Sunday, and Osborne is planning to speak to Mervyn King, the EU Economic and Monetary Affairs commissioner Olli Rehn and other figures later today. Should the crisis intensify, as seems likely, one suspects that they will soon long for the halcyon days of the phone hacking scandal.