A Greek writedown chain reaction?

Global equity markets have enjoyed the best start to the year since 1994, but their euphoric mood is about to be sorely tested.

The first hurdle is finalising the deal between the Greek government and its private sector creditors, which is meant to wipe about €100 billion off Greece's mountain of debt.

In recent weeks, both sides have been keen to reassure everyone that a deal is imminent. Overnight, however, Jean-Claude Juncker, who heads the eurozone finance ministers group, offered a much more pessimistic view. He conceded that the negotiations were actually turning out to be "ultra difficult”.

The trouble is that even though private sector bankers have reluctantly agreed to accept writedowns of 70 per cent or more in their loans to Greece, this still won't be enough to put the country on a sound footing.

According to the International Monetary Fund, there are two solutions. The first is for European countries, such as Germany and France, to agree to lift the size of Greece's second bailout beyond the €130 billion they've already agreed to. The other alternative is for the European Central Bank to agree to write down the estimated €50 billion of Greek bonds it has bought over the past two years in an attempt to push Greek borrowing costs lower.

But neither option is easy. Germany is staunchly opposed to increasing the size of Greece's second bailout. Instead, it wants Greece to implement even more savage budget cuts that will deal an even harsher blow to the battered Greek economy.

Meanwhile, the Frankfurt-based ECB is so far refusing to agree to any writedowns on its debts, because it is worried that other debt-laden countries, such as Portugal and Ireland, will turn around and demand a similar deal.

Meanwhile, time is fast running out for Greece. The country has to repay €14.5 billion in debt that matures in late March. Unless Greece can get its new bailout in place within the next few weeks, the country could be forced into default.

Meanwhile, investors are becoming increasingly nervous that Portugal may decide to emulate the Greek example and force private sector lenders – such as banks, insurance companies and pension funds – to write off part of their debt. As a result, they're dumping the country's bonds, which is pushing Portuguese interest rates sharply higher.

Earlier this week, yields on 10-year Portuguese bonds climbed to 17.2 per cent, while two-year bond yields hit an astronomic 20.9 per cent. Interest rates edged lower after the ECB started buying Portuguese bonds, with Portuguese 10-year bond yields trading overnight at around 15 per cent. Even so, Portuguese interest rates are still well above the 7 per cent level which is seen as sustainable.

But Europe isn't the only threat to market ebullience. Overnight, Ben Bernanke, head of the powerful US central bank, warned that interest rates were not a "panacea” for solving the economy's woes.

The Federal Reserve is deeply frustrated that US economic growth rates remain feeble, and has indicated that it intends to keep interest rates close to zero until late 2014. The problem is that ultra-low interest rates are not providing the boost to growth that they did in the past.

US companies are sitting on mountains of cash, but they remain reluctant to invest. Meanwhile, US governments – local, state and federal – are under pressure to cut spending to reduce their swollen deficits. This means that US consumers are the only possible growth engine.

But consumers are being squeezed because their incomes aren't growing. In recent times, they've dipped into their savings to support their spending habits, but now their savings levels have fallen to extremely low levels. What's more, consumers are either unwilling, or unable, to increase their borrowings.

The outlook for subdued consumer spending is bad news for US companies, many of which will struggle to meet optimistic earnings forecasts at a time when their sales are stagnant and their costs are edging higher.