After The Downgrade, Eyes Turn To Monday's Markets

Europe is reacting to Friday's downgrade of U.S. credit by Standard & Poor's. NPR's Tom Gjelten reports from Madrid as markets prepare to open around the world.

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JOHN YDSTIE, Host:

And now for the view from Europe. NPR's Tom Gjelten is in Madrid, where debt troubles have been plaguing the government there for many months.

Hi, Tom.

TOM GJELTEN: Hi, John.

YDSTIE: Tom, Spain lost its AAA rating back in 2009. So is there some sympathy there in Madrid for what we're going through here this weekend?

GJELTEN: Well, John, sure. There is sympathy. People here know firsthand what a downgrading of a bond rating can actually mean for country, in terms of higher borrowing costs for the government, greater difficulty financing the government's debt, and a real drag on the economy. It just makes it all the harder to get out of a deep rut. So, of course, there's sympathy although, you know, it may be more in the sense of now you know what we've been dealing with, 'cause misery loves company.

YDSTIE: This could provoke a tsunami in the form of a Black Monday in the world markets.

YDSTIE: So that's really what people are expecting.

GJELTEN: I think that's the worry. And it's that fear of a market collapse that has really driven the official reaction, both here in Spain and across Europe to this debt downgrade. We had European leaders yesterday reiterating their faith in the U.S. economy, much like leaders in Japan and South Korea were doing. People are really nervous about what might happen. And there's going to be a lot of attention paid to the markets in Asia overnight to see the reaction there.

We'll have this rolling wave of market openings. And as I'm sure you know, John, markets in the Middle East operate from Sunday through Thursday - so they've already open. And, in fact, we have seen big declines there, about five percent down in Saudi Arabia and Dubai. And markets really down sharply in Israel, as well. So there is real concern about a worldwide collapse in the markets tomorrow.

YDSTIE: People will remember that Europe, last week, was already handling a major debt crisis of its own, and the leaders there were debating what to do. How do you think this debt downgrade in the U.S. is going to complicate matters for the Europeans?

GJELTEN: Well, you're right, John. The Europeans were really poised for action already. In fact, they actually canceled their vacations, which you know how seriously Europeans take their August vacations. So that's a good indication of how much concern there was here already. There were plans for finance ministers from the Group of Seven to call a meeting to discuss the debt problems in Europe and in the United States. And then after this debt downgrade, there were frantic phone calls among the leaders here.

And we now hear that there will be a conference call tomorrow morning among the finance ministers of these Group of Seven industrial countries, trying to sort of get on the same page before the markets open. So there is more urgency now to all these discussions in Europe about how to deal with the European debt crisis. But the problem here, John, is there is real disagreement among European leaders about what to do - some squabbling and really open disagreements.

YDSTIE: How much of a connection is there between the debt crisis in Europe and this debt crisis that we have in the USA?

GJELTEN: Well, it's a little different because the United States is not going to have a problem financing its debt the way that Greece and Portugal and Ireland, and now Spain and Italy do. For them the higher cost of their debt has really basically doubled what they have to pay for bonds. So that's different. It won't have that effect in the United States. But in both cases, it means that there's going to be less money to spend on economic stimulus. That could be bad.

One other thing in common, John, between the United States and Europeans, as they experience this debt crisis, is there is a strong political component to this crisis. You know, S&P talked about the political paralysis in the United States, there's also political paralysis in Europe. So this is a on both sides of the Atlantic - as much of a political crisis as it is a financial crisis.

YDSTIE: NPR's Tom Gjelten speaking with us from Madrid, Spain. Tom, thanks a lot.

GJELTEN: Thank you John.

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