These were the three words that the US Federal Reserve used in their post meeting policy statement late last week. They were broadcast around the world, causing panic selling and dumping of stocks. The International Monetary Fund (IMF) then added their own warnings about the downside risk in Europe. The purpose of this warning however, was most likely to spur the political policymakers into coordinated action.
Unfortunately, this has just shattered already low confidence.
The actual problem is not just the fact that Greece has too much debt, is in recession and is effectively broke. It is, after all, only 3% of the Eurozone economy. But what has been missing so far is the cooperation between the other countries in support. There has been ad hoc assistance but all ‘too little, too late’ to have the required effect. The major countries involved – Germany and France - have had to deal with their own internal political reaction to the problem. It isn’t just an economic problem, it is a political one.
It wasn’t expected to get to this situation. Collective common sense should have prevailed over political self-interest, but it didn’t. The markets are now shouting a significant wake up call (a 20% fall) to them to fix it. Hopefully we will see large and coordinated packages required to stimulate the economy, write down debt and restore some confidence. We will have to wait and see what the response is in the coming weeks.