Liam Dann: World trembles as Athens burns

The dark cloud of volcanic ash that billowed across the Continent last month now looks like a bad omen from the opening pages of an Ian McEwan novel. Europe hasn't been this interesting since the Berlin Wall fell.

Certainly it's been at least that long since Wall St was so interested in the old world. Yesterday morning's 9 per cent market shock was the biggest drop the Dow Jones has had since 1987.

Okay, it looks like a human error sparked a computerised sell-off which exaggerated the damage. But if anything, the bizarre events just serve to highlight how seriously the traders are taking the European debt crisis - and how jumpy everyone is.

There is plenty to worry about. Top of the list is Greece, where Athens is burning while the Government does what it must to get its bailout money and avoid default. The Greek Parliament actually passed its budget-slashing austerity bill yesterday. If markets were rational, that should have brought some calm.

But it didn't. There are big concerns about the debt problems of Portugal, Spain and the rest of Europe. Spain in particular - accounting for about 8 per cent of Europe's economy - is too big to fail but also too big to bail out.

The Spanish Government is dismissing suggestions its woes are anything like Greece's. Despite an unemployment rate above 20 per cent and a deficit running at 11 per cent of GDP, it has an investment-grade credit rating. In theory, it should be all right.

But, in theory, markets also had the Greece issue safely priced into their equations.

The problem with a debt crisis is that panic creates a self-fulfilling spiral of doom - as we saw in the 2008 credit crunch. The fear drives risk aversion, which blows out interest rates on bond markets. That increases the cost of debt, making the numbers for the indebted nation look worse, thus sparking more panic.

Across the channel, Britain has its own debt problems which will require decisive action from the incoming Government. Just to liven things up they've now elected a hung Parliament.

Strong links to US markets saw Britain hit harder than mainland Europe in 2008 - forced to print a lot more money and spend more on bailing out banks. Now, thanks to their EU status, the Brits face the depressing scenario of being at the front of the firing line for this crisis too.

Here in New Zealand we remain relatively buffered from the European situation. Our fortunes are more than ever tied up with China, Southeast Asia and Australia. But we shouldn't feel smug. To sit back admiring our unemployment stats and basking in Australia's rosy glow would be disastrous.

We should feel lucky that we have breathing space and we should use this precious time to right our own lopsided debt ledger.

Sovereign debt is a global problem but it needn't be such a dramatic affair. The big bad numbers are self-evident, markets ought to be pricing in the risk every day and Governments ought to be dealing with it in an orderly fashion.

What Greece shows is that when the crunch comes it will be painful.

It is Europe Day tomorrow - the 60th anniversary of a French declaration proposing the formation of a European union. It is a day that offers the chance for a pause and some reflection on the relative seriousness of the situation. In a historical context, this month's troubles don't rate among Europe's darkest days. The Acropolis has seen worse. It might help if someone told Wall St.

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