Last week US Chairman of the Federal Reserve, Ben Bernanke, announced that the Fed will slowly reduce its debt buying starting at the end of 2013. The news increased volatility of markets across the world. Still, other factors are increasing falling equities and rising interest rates on sovereign debt.
The United States is not the only country that will stop stimulus funding. China's central bank wants to mitigate a possible financial sector bubble and increase faith in its national currency. How? By draining liquidity from the markets, forcing banks to draw on important capital reserves.
This unleashed fears of a credit crunch in China and caused the country's stock market to plunge 6%. And weak economic growth could worsen China's situation further. The ripples spread to Europe, Spain in particular, as that region is undergoing significant economic challenges.
Yesterday the Ibex broke downward resistence and is in danger of beginning a downward trend. Other dangers include rising treasury yields (they could surpass 5%) and keeping the risk premium low in comparison to the German bund. The Spanish government was wrong to rely on aid from outside sources in order to meet its financial obligations this year.
If the markets worsen and Spanish debt reaches 100% of GDP this year, we run a serious risk of losing credibility again. The near-term consequence would be a possible bailout scenario for Spain just when the country has hit rock bottom and is looking at a long road to recovery.
