Obviously, the financial markets responded accordingly sending bonds and gold up while stocks declined. I guess now is as good a time as any to pull out my favorite little chart again:
|Click to enlarge|
So, as we can see here, there is a much greater reason to fear European contagion than Chinese contagion, at least from a financial sector standpoint. Though I don't have data on this, the really worrying thing is the amount of exposure that British and German banks have to the highly stressed countries. Perhaps more concerning is that the iron core of the EU, Germany, is probably not politically able to embark on further interventions. Angela Merkel's government is quite unpopular now (though so is nearly every incumbent government save Brazil's) and likely would fracture under the weight of another intervention.
At this point, I think Jean Claude Trichet may want to reconsider his adherence to some fairly odd economic theories. He has placed far too much faith in what has been an anomalous economic performance out of Germany that has much more to do with little burps and belches of export demand than anything else. Domestic demand is flagging there as it is elsewhere in Europe.
When viewing these sorts of crises, it's always hard to judge whether you are looking at Brazil in 1998, which bent but didn't break, or, say, Argentina in 2002. The telltale sign is to look for political instability in the afflicted countries and there we are seeing some twinges. If there is a cascade of government collapses then the rolling series of defaults long feared would seem likely. So far, it looks like that is under control, but it bears watching.