Markets rocked by sovereign-debt shockwaves

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The implementation of exit strategies, particularly through monetary policy, is high on the list of likely factors influencing the markets in 2010. By exposing, unexpectedly early, huge gaps in its public balance sheet, Athens has shown how little room for fiscal manoeuvre governments have after the financial crisis. Paradoxically, these fiscal constraints have reduced the uncertainties related to the end of quantitative easing; investors now expect that central banks will be forced to withdraw with extreme caution. In the short term, therefore, the main factor disrupting markets has been reversed.

From ‘contagion’ to ‘discrimination’
The second consequence of the Greek crisis is that the relationship between the dollar and risky assets has been undermined. Unlike 2008 and 2009, the sharp rise in the US dollar since November has not been associated with a surge in risk aversion and a withdrawal of global liquidity. Nor has the higher dollar been accompanied by a decline in commodity prices and risky assets. Markets have clearly experienced a regime change from a contagion mode to a discrimination mode. The fiscal profligates see their cost of capital increase, as on the European periphery, for example, while the frugal nations such as Switzerland, whose remarkable state of public finances has been celebrated by a strong appreciation in the Swiss franc, are basking in market approval.