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While you were sleeping: Debt crisis centre stage

Wednesday 14th September 2011

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While stocks on both sides of the Atlantic advanced, concern about Europe’s debt crisis was on the forefront of political and financial leaders.

Unfortunately opinions on how to solve the euro zone’s fiscal problems vary.

Mario Blejer, a former Bank of England adviser who took charge of Argentina’s central bank after its 2001 default on US$95 billion, said Greece should default on its bonds to prevent its economy from slumping further.

“Greece should default, and default big,” Blejer, who was an adviser to Bank of England Governor Mervyn King from 2003 to 2008, told Bloomberg News. “You can’t jump over a chasm in two steps.”

But that is a road German Chancellor Angela Merkel has said she doesn’t want to take because the risks of contagion from a Greek default were too large.

In a radio interview today, Merkel said Europe was doing everything it could to prevent a Greek default and that an “uncontrolled insolvency” would further unsettle markets.

While speculation surged that Merkel and French President Nicolas Sarkozy were poised to announce some new measures to contain the crisis, the rumours proved false.

The level of concern about the future of the euro zone is high. The premium for options granting the right to sell the euro over those that allow for purchases reached the most yesterday since at least October 2003, when Bloomberg began tracking the data.

"I think there is a possibility, if the wrong steps are taken, that the system goes off the rails," Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro's survival was at risk, according to Reuters.

Meanwhile, U.S. President Barack Obama encouraged action, as he told Spanish journalists in a group interview published on Tuesday that euro zone leaders needed to show markets they were taking responsibility for the debt crisis, Reuters reported. Weakness in the global economy would persist as long as it was not resolved, he said.

Despite the increasing alarm about Europe, equity markets advanced as investors considered some stocks decent value after recent losses.

In late afternoon trading, the Dow Jones industrial average rose 0.68%, the Standard & Poor's 500 Index gained 1.15% and the Nasdaq Composite Index climbed 1.58%. In Europe, the Stoxx 600 index ended the day 0.9% stronger.

Investors may have priced in a "worst-case scenario," including a Greek debt default, Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management, in Champaign, Illinois told Reuters.

They're now "evaluating whether or not the recent decline has created some opportunity," said Evans, adding he saw technology as a good bet.


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