Watch for markets taking a dive tomorrow. Or for governments to heavily interfere to try to prevent plunging stock market indices. It ain’t going to be pretty. From the New York Times:
After a brief respite following the announcement last week of a nearly $1 trillion bailout plan for Europe, fear in the financial markets is building again, this time over worries that the Continent’s biggest banks face strains that will hobble European economies.
In a sign of the depth of the anxiety, the euro fell Friday to its lowest level since the depth of the financial crisis, as investors abandoned the currency as well as stocks in favor of gold and other assets seen as offering more safety. And in an interview published Saturday, the president of the European Central Bank, Jean-Claude Trichet, warned that Europe was facing “severe tensions” and that the markets were fragile.
Contagion, a loss of confidence that feeds on itself and leads investors to sell assets in one country after another, remained a possibility, he said.
For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, crimping economic growth.
At the same time, seemingly safe institutions in more solid economies like France and Germany hold vast amounts of bonds from their more shaky neighbors, like Spain, Portugal and Greece.
Investors fear that with many governments groaning under the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds. That would hit European financial institutions hard, and may ricochet through the global banking system.
Bourses and bank shares in Europe plunged on Friday because of these fears, with Wall Street following suit. Shares were also down in Hong Kong and Tokyo in early trading on Monday…