Audit Notes: Panic in the Markets

The Dow Jones Industrial Average plunged 512 points today, some 4.3 percent, as panic takes hold in global markets. The 10-year Treasury bond’s yield tumbled to 2.46 percent, signaling the bond vigilantes long warned about by folks like the Wall Street Journal editorial page are being utterly routed.

Gillian Tett writes in the Financial Times that the crisis in Europe is “unnervingly similar to the pattern behind the American financial turmoil of late 2008.

Here’s the core of what she says is causing the euro panic now:

This has now forced some eurozone leaders to move to a new phase and admit something they long denied: namely that Greek debt will need to be restructured and not everybody will always be bailed out. On one level this is sensible; reality is finally starting to bite. But on another, it takes the crisis to a new level - again, following the 2008 playbook. For what eurozone governments have done is push investors across a crucial psychological Rubicon - and make them realise that assets that used to seem risk-free now carry credit risk. As shocks go, this is perhaps comparable with the US government’s decision to put Fannie and Freddie into conservatorship in the summer of 2008. A sacrosanct assumption is being overturned; investors no longer know what to trust.

Tett points out that short-term funding poses a big risk. Remember nothing was done about the shadow banking system after tha lst collapse. When an FT editor, particularly one as ahead of the game as Tett was in 2007, asks in print whether this panic will turn into a full-on 2008-style financial collapse, you know things are really very bad.

The Wall Street Journal’s Charles Forelle has a good piece on Italy and the European crisis:

What was a battle to avoid a costly bailout has now become a push to avoid a doomsday scenario

When The Wall Street Journal’s news pages write about a race to avert a “doomsday scenario”, you know things are really very bad.

But while Italy has shown greater fiscal rectitude than Greece, there are at least three reasons it has drawn such rapid scrutiny.

First, the U.S. debt-ceiling drama refocused investors on the risks of precariously indebted nations. With the debt ceiling lifted, investors have flooded out of risky assets and into typical havens such as U.S. Treasurys and Swiss francs…

Third, problems in Italy would hand the euro zone a far greater crisis than the one it is facing now. In just this month, Italy must repay €36 billion in government debt. That is roughly what Greece will redeem this entire year.

— Reuters’s Lauren Young writes about what investors are doing:

Where can investors hide when even gold and cash look dicey?…

Michael Kay, a financial adviser at Financial Focus in Livingston, New Jersey, talked a client off the proverbial ledge in the morning as the market resumed its sharp downward trajectory. The client wanted to liquidate his portfolio and invest in gold.

Kay’s advice? “If you think it’s the end of the world, buy Progresso soup in pop-top cans because it’s more valuable than gold. You can’t eat gold.”

When Reuters gives us “canned goods and ammunition” quotes…

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,