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Europe has been muddling through its sovereign debt crisis since the spring of 2010. The brinkmanship of US politicians over a technical default may have been deeply unimpressive but the logic for a sovereign downgrade was well established long before Standard & Poor’s delivered it. This was all being factored in before the S&P500 and the FTSE fell by just short of 18% between early July and early August and the German Dax proceeded to lose 28% of its value. What is new is the fear of a double-dip recession that has gripped market participants recently. An informal sounding in August of many of the leading economists that Euromoney regularly speaks to had them putting a 30% to 40% likelihood on a double dip in the developed economies in the next year. This was an outcome they had attached only a 10% or less probability to at the start of 2011.
Formal reductions in sell-side firms’ growth forecasts came thick and fast in August. Morgan Stanley had previously been predicting growth across the G10 economies of the US, euro area, UK and Japan averaging 1.9%
