Why the stock indexes fall

1. Economic reports from USA and Europe points to slower growth or no growth in the economies. If the growth turn negative and stay so for two quarters there will be a recession.

2. Europe has a debt crisis. During many years Greece and Italy have borrowed money by selling bonds. Banks in Europe have bought many of these bonds. The bonds could be issued for 10 years for instance. That means that Greece or Italy has to pay the bond owners the money after 10 years. Usually Greece cannot pay that money so they issues new bonds on the same amount. This has worked perfectly for a very long time. Suddenly Greece says that its economy is in bad shape. At that moment the bank holding the country’s bonds gets nervous. The media tells the world how bad the economy is in Greece. Next time Greece has to pay back money because the bond is now ten years old the bank will not buy new bonds for the money in Greece. The country then starts an auction of bonds to pay the bank. Since Greece now has a bad reputation the yield on the bonds gets much higher. Soon the interest rate becomes 50 % and then no one will buy the bonds. Then Greece can default. If it does all the banks with billions of euros in Greece bonds will lose the money. The media tells the world how much money every bank has in Greece bonds. If it is too much other banks get worried that they can lose what they lent this bank and refuse to lend this bank any more money. Then the bank will be downgraded so no one wants to deposit money in the bank and in the end everyone wants to take out their deposits. Then the bank defaults. Many of the banks big customers among companies lose their money and then they can default. And so it gets on.

Number 1, the recession coming or not is now just a wait and see game. Governments cannot do anything this time because they have no money to stimulate the economy. Interest rates cannot be lowered because they are already in the bottom.

Number 2, the debt crisis. As long as Greece pays the bondholders they will not default so the banks are safe. If the bonds cannot be sold the ECB can buy them and they do but they do not have enough money for bonds especially if Italy cannot sell their bonds. The 17 euro countries are now trying to give ECB very much more money but here comes the sticking points. The parliaments have to agree. Many countries have a very slim majority and the members of parliament change their mind often. It is enough if one country says no, Germany for instance or Finland or Holland. Hopefully we will know in the end of September. The second problem is the downgraded banks which have difficulties to do business already. Will the customers accept to be nervous for many years to come or will someone big customer leave the bank and what happens then?