Euro-vision still looking grim

DON'T look now but we're in October, which is the sharemarket's traditional month of fasting. Still, for all October's bad press - having hosted the eight worst one-day falls, which is a bit spooky really since nobody has yet come up with the explanation for it - it's September that's more predictably bad.

Again, who'd know why?

At least October can boast the five best single days compared with September's one. Anyway, September has done it again. The sharemarket has slunk into a bear pit, having fallen more than 20 per cent in six months.

There goes the super again. At least this time the share slump has nothing to do with the month or the stars. No, to quote a phrase: it's the economy, stupid.

The economies of Europe, the US and China are all slowing. What's really freaking the markets is that Europe, a major customer for both the US and China, is hurtling towards a full-blown recession.

The more Euro-zone ministers insist the Greek debt tragedy is under control, the less the market believes them, with good reason.

There are endless flaws in the most recent solution to prevent a Greek default, which is to write off half its debt and re-finance the other half with new loans from capital mostly provided by Germany.

Top of the list is that Germany can't afford it - and what better example of throwing good money after bad than dismantling the economic powerhouse of Europe for the sake of a basket case? And I don't mean Greece - well, not entirely - but the European banks which bought worthless bonds from it.

As it is, Germany has a debt problem of its own, something, touch wood, the markets have overlooked.

Spain, in the firing line after Greece and Portugal, has a debt-to-GDP ratio of 64 per cent, well below Germany's 80 per cent. I won't say anything if you don't.

Oops, could be too late.

The cost of insuring German bonds, a measure of money market nervousness, has soared to Lehman Brothers levels.

Countries do default but this would be the first time one could take the banking system of a continent down with it.

You'd think Russia's default in 1998 should make Greece's a piece of baklava but those victims were Russian households with bonds and the huge American hedge fund Long-Term Capital Management, which collapsed.

With Greece, some of the biggest banks in Europe would be hit hard and would have to raise large slabs of capital to survive.

They wouldn't be able to lend and, indeed, would have to call in several loans to shore up their books if panic set in.

With no lending, Europe would slump into a prolonged recession. No wonder the potential impact of this on commodity prices has the market hyperventilating.

Until the European banks are re-capitalised, all the European Union is doing is postponing the inevitable for no benefit but great cost, which can't help confidence when its taxpayers know they'll have to pick up the tab.

Although our Reserve Bank must be watching Europe with disbelief, don't expect a rate cut at Tuesday's board meeting.

Rather than make a piddling cut that won't achieve anything, it'll hold its ammunition for when it's really needed.