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Financial Markets Respond To U.S. Credit Downgrade


This is MORNING EDITION from NPR News. I'm Renee Montagne.


Hi, Tom.


INSKEEP: So I've been looking at some of the news from the European markets. Could be worse.

GJELTEN: Yes, Steve. It seems like we're seeing a little bit of a relief rally or we saw a relief rally to opening the trading here, especially in those stocks that fell the most last week. But the question is how long is this going to last. There's clearly lots of anxiety in the markets, Steve. They were down hard in Asia and people are buying gold, selling U.S. dollars, buying Swiss francs.

INSKEEP: And let's make sure we understand what the problems are here. People have heard a lot over the weekend over the S&P downgrade of U.S. debt. But Europeans have their own, perhaps even larger concerns having to do with debts, including debts to the country where you are now.

GJELTEN: Yeah, that's right, Steve. You know, interesting, the yield on U.S. treasuries around the world has actually declined this morning - that's the opposite of what some analysts had predicted. Clearly, investors still want to buy U.S. debt, even if it's downgraded. But right, as far as Europe is concerned, the action here this morning clearly has to do with what's going on in Europe. People here are really focused on their own problems. We're deep into this eurozone crisis. The countries that use the euro - Greece, Italy, Spain, as well as Germany and France - can't print money or devalue their currencies. They're dependent on borrowing money in the financial markets to finance their debts, and that's just proving to be enormously challenging. I think this little relief rally, however, in the European stock market this morning show that people here think European leaders may actually be trying to do something to address these problems.

INSKEEP: Now, in this situation that you just laid out, Tom Gjelten, given that there is still a great deal of concern around the world, what can governments do to intervene?

GJELTEN: But here in Europe, the biggest conversations, the most important conversations over the weekend involve the governors of the European Central Bank. They've decided to spend hundreds of billions of dollars to buy bonds, not just Greek and Portuguese bonds, but more importantly, Italy and Spain's bonds. And that, I think, is what is having the effect. The interest rates those governments are paying are actually a little lower this morning as a result of that particular intervention.

INSKEEP: Well, let me ask about that. That's a little bit of relief if you're the Italian government or the Spanish government, and yet those governments still have, even if the interest rates improve a little bit, massive, massive debts. Is this intervention by the European Central Bank a long-term solution to the crisis?

GJELTEN: Boy, that is the real question, because the truth is, you're right. By some estimates, Italy and Spain, for example, have to finance trillions of dollars. That's not something the European Central Bank can do on its own. In the end you have to rely on private investors to do it. They have to be encouraged by this action to get involved in the markets to take the risk of buying those bonds. It's very hard to manipulate investor behavior. Markets are unpredictable. Investors don't really know if the European Central Bank is willing to go all the way, and they may test them, so that's the big question.

INSKEEP: And in a few seconds, Tom, would some kind of collapse in Europe have serious implications for the United States?

GJELTEN: Of course it would, because we see the U.S. and the European economies very tightly linked. Europe is an important market for the United States and the United States is an important market for Europe. The growth in these two regions are dependent on each other. Yes, we're totally linked.

INSKEEP: Okay. Thanks very much. Tom, thanks.

GJELTEN: You bet, Steve.

INSKEEP: NPR's Tom Gjelten in Madrid. Transcript provided by NPR, Copyright NPR.

Steve Inskeep is a host of NPR's Morning Edition, as well as NPR's morning news podcast Up First.
Tom Gjelten reports on religion, faith, and belief for NPR News, a beat that encompasses such areas as the changing religious landscape in America, the formation of personal identity, the role of religion in politics, and conflict arising from religious differences. His reporting draws on his many years covering national and international news from posts in Washington and around the world.