The credit rating for Greece has been downgraded again. This time around it was Moody’s, which downgraded Greece three points from Aa3 to Ba1. Greek debt is now at junk status, although Moody’s said it expects the rating to remain stable now for the next year.

Meanwhile, in Spain, the banking crisis has worsened. According to Eurointelligence: “The country’s private sector is now effectively cut off from international capital markets.” According to Frankfurter Allgemeine, the inter-bank market froze last week. Spanish authorities have denied they are set to ask the EU for aid.

We would like to make two observations here. Why has it taken so long for the credit rating agencies to react? Always they seem to be behind the times, slashing the Greek credit rating long after a string of economists and columns, including this one, said they expected Greece to ultimately default.

As for Spain, it is a tad ironic. Not so long ago, the Spanish banking sector was being praised, and its regulator was receiving pats on its back. It just goes to show, it does not matter how careful a bank is, if the economy crashes, the most prudent of banks can hit trouble. A similar argument applies to government debt, by the way. Remember, before the financial crisis, the Spanish government’s borrowings were quite modest.

Maybe given the doubts that just don’t seem to die for Greece and Spain, it is not surprising that some fear another 1987-style crash. In fact, the Bank of England, no less, has raised such doubts. In its latest quarterly bulletin it revealed data showing that the number of investors betting on a 20 per cent fall in the markets has risen from 5 to 13 per cent, although at the time of the Lehman brothers collapse the percentage reached 20 per cent. See the Telegraph, Investors are betting on a Black Monday-style collapse, BoE warns

So, whenever there is doubt, we can be sure of one thing. George Soros will make a prediction of doom. And so it is. Yesterday he said it was virtually inevitable that Europe would face another recession next year. You may recall, just a few days ago he talked about Economic Crisis, Act II. See Economic crisis: Act II

And yet, markets celebrated. The Dow rose 213 points yesterday and is now almost 600 points up on the year low it reached last week. In fact, markets have been up across the board of late. How can that be?

China has helped, agreeing to pump more money into debt laden Greece. China’s vice premier Zhang Dejiang not only lauded Athens’ efforts, but said: “I am convinced that Greece can overcome its current economic difficulties… The Chinese government will encourage Chinese businesses to come to Greece to seek investment opportunities.”

The markets liked that.

The markets got it spectacularly wrong in 2007, with the Dow hitting an all-time high in October of that year, after Northern Rock had tumbled and after many warned there was major crisis in the offing. Has it erred in a similar way again, or is its optimism well founded? 

Today’s articles:
BP – the bill rises and rises
RICS points to rising supply
Japan – central bank finds the plan that UK needs
Greece and Spain see more angst
World Cup to boost economy