Analysts blame 'pessimism' for 'grave' market tumble

PARIS: The week on financial markets began with high tension over the eurozone debt crisis and culminated in a downgrading of the US credit rating.

Attention focused on the outlook for the US and EU economies, and the eurozone lurched deeper into crisis which now affects even core countries.

The European Central Bank then took several steps, including buying bonds, to fight the crisis, but these and its downbeat comments on growth were badly received, and a stocks fall turned into a plunge.

EU leaders then saw the urgency of this new crisis and engaged in talks during their summer holidays, while markets focused on signs that a double-dip recession may be on the horizon.

On Friday, Standard & Poor's cut the US rating from the top notch triple-A to AA+.

Here is what some key figures and various analysts had to say as the drama played out:

- EU Economic Affairs Commissioner Olli Rehn said the EU is working "night and day" to finalise details of a "milestone" plan to stem contagion but "such a ... complex agreement requires time to implement" as current problems have "global repercussions and ramifications".

- In Brussels, European Commission president Jose Manuel Barroso said it was clear that we are no longer managing a crisis just in the euro-area periphery" and talked of widespread doubts regarding "the systemic capacity of the euro area to respond to the evolving crisis".

- Moneycorp analysts said Barroso's comments "rattled the markets as investors interpreted this as an admission that the plans to resolve the European debt crisis are too complex and incomplete".

- Goldman Sachs economist Dirk Schumacher said the ECB "does not like buying bonds as it does not want to fund governments -- but things are different in a liquidity crisis where there is a risk of systemic events."

- Jean Michel Six, Europe economist at Standard & Poor's, said that the "only truly efficient fireman capable of leaving the firehouse at a moment's

notice is the European Central Bank", which he said had "played its role admirably since the beginning of this crisis to calm the markets".

- Citi Economics analyst Willem Buiter said that the ECB had to step into the markets or accept the "biggest banking crisis since 1931." Buiter said that the 440 billion euros promised for the European Union emergency funds were "woefully inadequate" leaving "only the ECB as lender of last resort ... for sovereigns".

- Michael Hewson said dissappointing data on both sides of the Atlantic as well as a surging bond yields in Spain and Italy meant "pessimism about the global recovery" was taking hold "with a vengeance".

- After Italian Prime Minister Berlusconi addressed parliament in order to calm fears, Stefano Folli, a columnist at Il Sole 24 Ore, wrote that the speech was over-ridden with "generic references" to "those eternal reforms that are always evoked but never implemented."

- Italian trade unions said in a joint statement that "the situation is grave" and that it "must be confronted with maximum determination and without excuses or shortcuts."

- Financial markets are still not convinced that "politicians have a strategy for dealing with Italy and Spain, said Will Hedden, trader at IG Index.

- In London, the Centre for Economics and Business Research commented: "Realistically, Italy is bound to default but Spain may just get away without having to do so."

- Chinese state television criticised a last-minute agreement to raise the US debt ceiling as "a political performance which has more pomp and ceremony than substance" in a rare editorial broadcast on its evening news bulletin.

- Russian Prime Minister Vladimir Putin accused the United States of acting as a "parasite" on the world economy as it "is not living within its means".

- Charles Robertson at Renaissance Capital said the US Federal Reserve may have to act soon to face weak household demand in the US, but the "real problem" is that "southern Europe might never grow strongly again".

- Giles Watts, head of equities at City Index, said traders are growing "increasingly concerned" about a sharp US slowdown just as the US embarks on a sharp series of public spending cuts.

- Hugh Johnson of Hugh Johnson Advisors said markets were showing a loss of confidence "in the economy, confidence in the market, confidence in the policy makers. It's all showing up."

- At ING Rates Strategy and Research, Alessandro Giansanti said that "the equity market starts to fall on average six months ahead of the recession."

- If countries do not grow, their "debt becomes unsustainable", said Chiara Corsa, an economist at Italian bank UniCredit. "This is a crucial point and is the reason why Italy and Spain have become targets."

- "The bipartisan compromise on deficit reduction was an important step in the right direction. Yet, the path to getting there took too long and was at times too divisive," White House spokesman Jay Carney said.

- Washington needed to "come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," Beijing said in a commentary carried by the official Xinhua news agency.

- Investing guru Warren Buffett said his Omaha, Nebraska-based company would hold onto its considerable trove of US Treasury bills. "In Omaha, the US is still triple-A. In fact, if there were a quadruple-A rating, I'd give the US that."

Republican presidential candidate Tim Pawlenty said he would use the ratings downgrade to portray Obama as hapless and presiding over American shame and decline. "What we should be talking about is downgrading Barack Obama from President of the United States."

Copyright AFP (Agence France-Presse), 2011