If Sweden Worries About U.S. Recovery, We Should All Do So

If Sweden Worries About U.S. Recovery, We Should All Do So

by TERENCE ROTH

A tense week in world financial markets now rolls up to two scheduled events with the potential to turn the latest bout of risk aversion into a rout.

The first will be Friday's news of a possible revision of U.S. second-quarter output, with a cut in the preliminary reading of 2.4% growth seen by some as a very real possibility. Then Federal Reserve Chairman Ben Bernanke will speak at an economic symposium at Jackson Hole. In their sum, the outcomes likely will frame market analysis and policy debate for the weeks ahead.

On Aug. 10 the Fed decided the U.S. economy needed another nudge and moved to reinvest expiring mortgage-backed securities into U.S. Treasury bills, a sign that the Fed was concerned about a soft jobs market and low inflation. That eye-opener was followed in the interim by still more signs of a deteriorating recovery.

Does the state of the U.S. economic recovery still really matter that much for the rest of the world? Sweden's Riksbank thinks so. And if the central bank of the country enjoying a near 4% economic growth rate and Europe's soundest government finances is worried, so should be the rest of us.

Svante Oberg, a Riksbank deputy governor, noted in a speech after the Fed's August decision that the U.S. economy was weakening and highlighted the significance of the U.S. central bank's postponing its exit from monetary stimulus, a process that already has begun in parts of Europe. Mr. Oberg introduced slowing U.S. and Asian trends as a caveat to the Riksbank's own economic outlook.

News of a fall in the number of U.S. workers claiming jobless benefits last week was offset by another rise in the longer-term average. That explains falling home sales and slowing growth in purchases of durable goods. U.S. businesses remain retrenched on hiring.

After seesawing between hope and doomsday theories, markets animated mostly by foreboding will watch Washington and Jackson Hole for their next heading.

Stress in Athens

Greece's long-suffering treasury just isn't getting any relief; nor is speculation that the country will be forced to restructure its debt unless market sentiment turns around. The reason is that treasury officials in Athens hadn't reckoned on having to pay breathtaking interest on Greek government debt.

After the EU and IMF bailout for a Greek government faced with insolvency in May, the government agreed to painful cost-cutting plans and promised good behavior. Surely, they thought, the combined rescue and fiscal overhaul would be rewarded in capital markets with lower premiums demanded for its debt.

To a certain, but hardly celebrated, extent this did in fact happen. The interest that the Greek government has to pay on its 10-year government bonds over what the German has to pay for equivalent debt slipped from an asphyxiating nine percentage points near a high but endurable 4.6.

That was just about the level that Greek officials deemed affordable. Anything more was unsustainable over time and risked forcing the government to endure the unendurable and open talks to restructure its sovereign debt, an event that would shake Europe's banking system, the euro and even the integrity of the euro zone itself.

All those fears were revived again in the latest dose of global risk aversion. Greek news of a deepening recession and speculation of missed tax targets has brought it all back.

Greece's spreads by this week had blown back out to more than nine percentage points over their German counterparts, bringing the total yield on Greek bonds to 11.6%. The cost of insuring Greek debt against default also has shot up to crisis levels.

It's a bad time for Greek officials, who are frustrated that they haven't been able to secure market confidence in its determination to reform and regain solvency. As demanded by the IMF and the EU, fiscal cuts have dutifully hauled down its deficit enough to earn the second installment of its €110 billion ($140 billion) rescue package.

Yet the Greek government bond market is near-dead, with precious few buying in and those who have left staying out. The short-date treasury bills Greece is selling are small in volume and high in price to the public purse.

What's going to snap the spell? Greece would welcome suggestions, knowing the likely outcome of slipping deeper into a hole carrying unaffordable debt services costs. Greece's creditors see that too and worry how deeply a restructuring will carve into their holdings.

The European Commission's economics and monetary czar, Olli Rehn argued in a letter to this newspaper this week that Greece needs to press ahead with reforms that will open "huge potential" for economic growth in the future.

Down in the Greek treasury they'll be wondering if they can hold out that long.

Write to Terence Roth at terence.roth@dowjones.com