U.S. Investors Concerned Europe Debt Crisis Will Worsen

Concern is growing in the United States regarding Europe's ability to solve its debt crisis and there is chatter regarding a Greek default -- triggered less by Greece's fiscal situation, but more by contagion driving a debt-death spiral.

On Tuesday, German Chancellor Angela Merkel sought to calm market fears that Greece is heading for a chaotic default, The Associated Press reported.

I think we will do Greece the greatest favor by not speculating much, but instead encouraging Greece to implement the commitments it has made, Merkel said on rbb-Inforadio.

Merkel's comments occur a day after her deputy raised the possibility of a default, and come ahead of another telephone discussion between Greece's finance minister and his German counterpart.

U.S. Markets Mixed on Greek News

At least initially, U.S. markets were not moved by the latest developments regarding Greece, with the Dow Jones Industrial Average down 10 points to 11054 and the Nasdaq up 3 points to 2499. Europe's markets were about 0.75 percent higher at mid-day.

Earlier, Merkel said Europe was doing everything in its power to prevent Greece from defaulting on its debt and cautioned that an exit from the eurozone would unleash domino effects and should be avoided at all costs, Reuters reported Tuesday.

Other sources in Germany say Greek default is now highly likely and Austrian Economy Minister Reinhold Mitterlehner said all possible scenarios that could solve Greece's debt woes must be considered.

Steen Jakobsen, chief economist at Saxo Bank, told marketwatch.com Tuesday many in the market believe Germany will come through in the end to try and resolve the European debt crisis, amid concerns that Greece is on the verge of bankruptcy.

The mob will always look for a way out, but markets will continue to trade heavy with a downward trend, said Jakobsen. He said markets are also looking ahead to Friday's informal meeting of the euro-zone Ecofin council on Sept. 16 in Poland, which U.S. Treasury Secretary Timothy Geithner will attend.

Also, U.S. President Barack Obama demanded decisive action from eurozone leaders, saying Greece is the immediate concern but the biggest fear is that Spain and Italy succumb.

Further, Italian officials met Chinese counterparts last week. Reports say they asked Beijing to buy Italy's bonds. Analysts are skeptical. Similar talk has swirled before with reference to the bonds of Greece, Portugal and Spain with little end result.

Germany Maintains Status-Quo, For Now

Merkel did not commit to more-substantive German intervention Tuesday, but the head of Europe's richest nation and largest economy did warn of the perils of an uncontrolled Greek bankruptcy.

I have said 'if the euro fails, Europe fails' -- that that applies here and therefore everyone should very carefully weigh their words, she said. What we don't need is unrest in the finance markets -- the uncertainties are already big enough.

Merkel suggested that even an orderly default could not come any time soon, noting there was not even a mechanism currently in place for a eurozone nation to default. The future permanent European Stability Mechanism -- the eurozone's planned bailout fund -- will come into force in 2013, Reuters reported Tuesday.

Political/Economic Analysis: Some may argue Merkel offered a mixed message, but the view from here argues, Merkel took the appropriate stance -- a prudent two-step.

The reason? Merkel has to make clear that a Greece-based solution to Greece's debt burden is the first choice, and must keep the focus on Greek belt-tightening, while at the same time marshal domestic political and related support for a broader European intervention.

On the one hand, Merkel can not let Greece's debt situation spiral into a full-fledged banking sector / bond market crisis -- it would be self-defeating for Germany and all of Europe, and would impact the U.S. On the other hand, Merkel must proceed at a deliberate pace, or German investors and others in Germany will be in an uproar -- arguing that Merkel is making Germany foot most of the bill for Greece's problem.

The bottom line on the latest Greek debt chapter? Merkel is signaling that Germany is prepared to act, but it's not going to foot the entire bill.