Financial Markets Respond To U.S. Credit Downgrade

Originally published on August 8, 2011 6:34 am



This is MORNING EDITION from NPR News. I'm Renee Montagne.


And I'm Steve Inskeep. Good morning. This is one of those mornings when we remember how interconnected the world economy has become. Asian investors are worried about their exports to America. Europeans are responding to their own continent's debt problems, even as they react to the Standard and Poor's downgrade in its rating of U.S. credit. And of course the Dow Jones Industrials, we'll find out how they do today.

NPR's Tom Gjelten is following the action from Madrid, Spain. He joins us now.

Hi, Tom.


INSKEEP: So I've been looking at some of the news from the European markets. Could be worse.

GJELTEN: Yes, Steve. It seems like we're seeing a little bit of a relief rally or we saw a relief rally to opening the trading here, especially in those stocks that fell the most last week. But the question is how long is this going to last. There's clearly lots of anxiety in the markets, Steve. They were down hard in Asia and people are buying gold, selling U.S. dollars, buying Swiss francs.

INSKEEP: And let's make sure we understand what the problems are here. People have heard a lot over the weekend over the S&P downgrade of U.S. debt. But Europeans have their own, perhaps even larger concerns having to do with debts, including debts to the country where you are now.

GJELTEN: Yeah, that's right, Steve. You know, interesting, the yield on U.S. treasuries around the world has actually declined this morning - that's the opposite of what some analysts had predicted. Clearly, investors still want to buy U.S. debt, even if it's downgraded. But right, as far as Europe is concerned, the action here this morning clearly has to do with what's going on in Europe. People here are really focused on their own problems. We're deep into this eurozone crisis. The countries that use the euro - Greece, Italy, Spain, as well as Germany and France - can't print money or devalue their currencies. They're dependent on borrowing money in the financial markets to finance their debts, and that's just proving to be enormously challenging. I think this little relief rally, however, in the European stock market this morning show that people here think European leaders may actually be trying to do something to address these problems.

INSKEEP: And I want to clarify a term for people who don't follow us every day. You said the yield on U.S. Treasury bonds declined, which means interest rates went down for treasuries, which means people are actually willing to pay more, some signs of strength, actually, in Treasury bonds.

Now, in this situation that you just laid out, Tom Gjelten, given that there is still a great deal of concern around the world, what can governments do to intervene?

GJELTEN: You know, they can't do a whole lot to calm stock markets because stock market investors sort of do their own thing. They can intervene in currency markets and financial markets, and that's essentially what they're talking about.

But here in Europe, the biggest conversations, the most important conversations over the weekend involve the governors of the European Central Bank. They've decided to spend hundreds of billions of dollars to buy bonds, not just Greek and Portuguese bonds, but more importantly, Italy and Spain's bonds. And that, I think, is what is having the effect. The interest rates those governments are paying are actually a little lower this morning as a result of that particular intervention.

INSKEEP: Well, let me ask about that. That's a little bit of relief if you're the Italian government or the Spanish government, and yet those governments still have, even if the interest rates improve a little bit, massive, massive debts. Is this intervention by the European Central Bank a long-term solution to the crisis?

GJELTEN: Boy, that is the real question, because the truth is, you're right. By some estimates, Italy and Spain, for example, have to finance trillions of dollars. That's not something the European Central Bank can do on its own. In the end you have to rely on private investors to do it. They have to be encouraged by this action to get involved in the markets to take the risk of buying those bonds. It's very hard to manipulate investor behavior. Markets are unpredictable. Investors don't really know if the European Central Bank is willing to go all the way, and they may test them, so that's the big question.

INSKEEP: And in a few seconds, Tom, would some kind of collapse in Europe have serious implications for the United States?

GJELTEN: Of course it would, because we see the U.S. and the European economies very tightly linked. Europe is an important market for the United States and the United States is an important market for Europe. The growth in these two regions are dependent on each other. Yes, we're totally linked.

INSKEEP: Okay. Thanks very much. Tom, thanks.

GJELTEN: You bet, Steve.

INSKEEP: NPR's Tom Gjelten in Madrid. Transcript provided by NPR, Copyright NPR.