This week's thought-provokers for investors

This week markets were mainly driven by developments in Europe. European equity markets corrected, while US, UK and emerging markets recovered. In the bond market investors' fears were apparent: US and German bonds had a positive week, whereas spreads in Italy, Spain, and Portugal widened. The EUR is back at 1.21 against the Swiss franc and gold is trading at around USD1530/oz.

Implementation risks related to a new programme for Greece are still huge. The parliamentary votes of the last few weeks have paved the way for Greece to receive the fi fth tranche of support in the original bailout package. This will keep the country going until September this year, when it is scheduled to receive the sixth tranche (EUR5.8 billion from the rest of the euro area and EUR2.2 billion from the IMF). By then a new bailout package must have been agreed. According to the statement the Eurogroup fi nance ministers released last weekend, the only thing standing in the way of a new package is a decision on the "modalities for voluntary private sector involvement with a view to achieving a substantial reduction in Greece's year-byyear fi nancing needs, while avoiding selective default".

Statements from rating agencies this week raise serious questions about whether it is possible to achieve a substantial private sector involvement without triggering a rating agency downgrade to selective default, something that would have a severe domino eff ect on the fi nancial markets.

Moody's downgraded Portugal's credit rating to junk level, slashing it four levels from Baa1 to Ba2 with a negative outlook. Portugal is now the second eurozone country with a non-investment grade rating from Moody's (after Greece) despite the EUR78bn aid package the country received just two months ago. According to Moody's, the plan for voluntary private sector involvement in Greece makes it more likely that the EU will require creditors to contribute to a potential Portuguese aid package.

The deterioration in credit quality of Portugal's debt had been anticipated by the markets for some time and a downgrade was inevitable. Ireland may be next in line. But in the end, what is really weighing on sentiment and markets are contagion fears and the great uncertainty about feasible ways out of this negative spiral.

The European Central Bank is discussing new rules on using Greek debt as collateral for lending. This comes just days after S&P indicated that it might declare a default related to the bailout plan for Greece. So far, the ECB had promised that it wouldn't take debt from defaulted nations as collateral. The new rule may enable the ECB to take on Greek debt unless all major rating agencies declare Greece to be in default. This would mean that if just one of the ratings agencies chooses not to call the restructuring plan a default, reporting Greek debt would still be okay. The ECB must have the freedom to set the rules for its lending by itself. This includes the right to ignore rating agencies' ratings altogether if necessary.

German factory orders rose 1.8% month-on-month in May. This number is lower than the revised 2.9% rise in April, but signifi cantly beats economists' expectations of a 0.5% fall. The adjusted annual data shows a 12.2% increase in May, well above the revised 10.6% annual growth in April and the 9.5% forecast. The German (export) industry continues to enjoy a sweet spot thanks to the weak currency and still very low interest rates.

The European Central Bank lifted the benchmark interest rate by 25 basis points to 1.5%, in line with expectations. The hike comes after eurozone infl ation rose to 2.7%, a level well above the ECB's 2% target. In its eff ort to keep infl ation low, the ECB is obviously focussing on core countries like Germany that are growing quite strongly. Helping the weaker economies with weak growth but large debt problems requires other measures anyway.

China raised benchmark interest rates by 25 basis points, lifting the one-year deposit rate from 3.25% to 3.5% and the one-year lending rate from 6.31% to 6.56%. This is the nation's third rate hike this year amid eff orts to fi ght the fast-growing economy's accelerating infl ation, which is likely to climb above 6% in June, signifi cantly above the infl ation target of 4%. This is a clear signal that the People's Bank of China is not worried about a "hard landing" in China and expects the economy to maintain its good momentum.