Waking up to a nightmare

Markets: The financial world has suddenly changed its mind on a possible Greek sovereign default. Until now, it had treated the situation as a local worry. But global equity markets and commodity prices tumbled on Tuesday. The few buyers of Greek 10-year bonds can now get an 11.5 per cent yield — if the government keeps up the payments.

The market drama was an excessive response to the actual news — a sharp rating downgrade from Standard & Poor’s and the clearer reluctance of German politicians to bail out Greece. The agency was just catching up with the market and the politicians still consider default the lesser evil. But while those straws may have been small, the camel’s back had been swaying for months. Estimates of Greece’s fiscal deficits and debts keep increasing. It is increasingly clear that only a fiscal near-miracle will keep default away permanently.

For traders, the US Senate’s show trial of Goldman Sachs may also have made the world feel more dangerous. So perhaps Greece unfairly suffered with Goldman. But a country which has long relied on investors’ blind generosity has little grounds for complaint when emotion turns to equally blind fear.

Still, what is rough justice for Greece could be unfair for the rest of the world. There is no good reason for a default by one small euro zone member to lead to others, or to a break-up of the single currency. But emotional markets can turn otherwise irrational fears into grim reality.

The financial crisis that started with subprime mortgages spread until the authorities came to the rescue. That effort left most of the world’s governments in precarious fiscal condition and central banks with preternaturally low interest rates. This is certainly the raw material of another global crisis.

Steady nerves are required to keep a crisis from materialising. Politicians have to preach, and taxpayers have to accept, austerity and burden-sharing. Instead of panicking, it would be better for investors to put steady pressure on recalcitrant governments. To judge by the last two days, politicians and investors are both falling short.