Resurgence of worries about eurozone spark Friday sell off

Stock markets fell heavily around the world and the euro fell to a 19 month low against the dollar on concerns that austerity measures may curtail growth and that the bail out may be too small to prevent further problems in the PIIGS economies (Portugal, Italy, Ireland, Greece and Spain). In addition, there are worries that cuts in public spending and increases in tax will lead to civil unrest as we have already seen in Athens which may make them difficult to implement, keeping debt levels too high.

The DOW industrials are currently down 170 points or 1.6%, the FTSE 100 fell 171 points to 5,263 (a 3% drop) and the Spanish stock market fell over 7% today.

Fears are growing that one of the engines of recovery, consumer spending, will reduce as consumers are faced with higher taxes as European governments struggle with large structural public spending deficits and a rising debt to GDP ratio. Portugal increased income tax between 1% and 1.5% and VAT will be increased by 1% to 21%. On Wednesday, Spain announce major cuts in public spending and civil service pay will be cut by 5% this year and frozen in 2011 as well as pensions being frozen. The Spanish government is planning to reduce the deficit to 9.3% of GDP this year and to 6.5% in 2011, down from 11.2% in 2009.

The new UK Conserative/Liberal Democrat government is expected to announce an emergency budget in June with rumours already circulating of an increase in VAT from the current 17.5% or a widening of its scope to items such as children's clothes or food.

Appetite for Eurozone bail out fades

Markets across Europe and Dow Futures are all down today after yesterday's euphoria about the IMF/EU $1 trillion bail out faded.  Concerns are being voiced that the deal will help countries like Greece and Portugal but deal only with symptoms not the cause of the problem. For example, systemic under payment of taxes is an ongoing problem in Greece which has only been marginally addressed. There still may be trouble ahead to ratify the deal since French and German voters are reluctant to help these weaker economies when they are seen to have caused their own problems with social security systems they can ill afford. The question is whether throwing hundred's of millions of euro's at these weak economies will ultimately postpone the inevitable defaults on their unsustainable debt.