Europe facing credit crunch, stocks rally

Reuters reports that EU officials are warning about a credit crunch threat.

European finance ministers have been warned confidentially of the danger of a renewed credit crunch as a "systemic" crisis in euro zone sovereign debt spills over to banks, according to documents obtained by Reuters on Wednesday.

In a report prepared for ministers meeting in Poland on Friday and Saturday, senior EU officials said the 17-nation currency area faces a "risk of a vicious circle between sovereign debt, bank funding and negative growth."

This comes on a day in which Moody's Investors Service downgraded two French banks -- Societe Generale and Credit Agricole -- and two unidentified banks were reported to have tapped the European Central Bank for US dollar funding.

For all the gloomy talk about Europe's debt problems, however, markets have been having a good run. Bloomberg reports:

Stocks rallied, sending the Standard & Poor’s 500 Index higher for a third day, and the euro extended gains as German and French leaders expressed support for Greece to remain in the euro monetary union and speculation grew that China may help Europe’s most-indebted nations.

The S&P 500 rose 1.4 percent while the Stoxx Europe 600 Index gained 1.5 percent. The euro rose 0.6 percent to $1.3755.

One positive report that came out of the euro area on Wednesday was of a rebound in industrial production, which rose 1.0 percent in July after falling 0.8 percent in June.

In the US, though, retail sales stagnated in August. However, so did producer prices, so at least the inflation threat is receding in the US.

Inflation remains a threat in India, though. The inflation rate there accelerated to 9.78 percent in August from 9.22 percent in July.