Impact felt far and wide as sovereign debt woes spread

The sovereign debt crisis that began with a spark in Dubai and a fire in Greece, fanning out to a wildfire in southern Europe, is spreading again. And its impact is being felt far and wide.

Fitch Ratings today warned Britain’s new Prime Minister David Cameron to quickly get his fiscal house in order, saying its challenges are “formidable” and require faster cuts to the budget deficit. “The scale of the United Kingdom’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy – including a faster pace of deficit reduction than set out in the April 20 budget, Fitch said. The impact of the debt troubles have now also spread far beyond the initial impact on the euro, the currency shared by 16 European countries. It has roiled markets for weeks now, as investors react to every twist and turn and downgrade, and today the People’s Bank of China warned that its economic growth, too, will be affected as governments cut their stimulus spending. Separately, nervous investors pushed the price of gold to a record above $1,250 (U.S.) an ounce as the turmoil played out. “It is mainly the fear of another slide into recession which is seeing demand for gold as a safe haven,” Commerzbank analyst Daniel Briesemann told Reuters. “Gold is currently rising in dollars and in euros. There is a lack of confidence, given the uncoordinated measures against the sovereign debt crisis, which is obviously (affecting) both currencies.” And, noted Scotia Capital currency strategist Sacha Tihanyi: “The now more than month-long bout of risk aversion and risk asset weakness, driven by the sovereign risk tremors in the European economies, has persisted to such a degree that we are now seeing the impact radiate further than just typical financial assets, to those that have a high degree of correlation with global growth prospects. Take copper for example, the ‘only commodity with a PhD in economics.’ Copper is in the midst of recording its seventh consecutive day of losses which has seen the metal lose nearly 12 per cent of its value … This provides an excellent summary of the degree to which sovereign risk issues have impacted the global growth outlook. Crude oil is showing similar weakness, though remains above key support at $65 a barrel (a level briefly violated in May however). ”