Eurozone Debt Hurts Stock Markets

Tani Coyote

Son of Huehuecoyotl
Joined
May 28, 2007
Messages
15,191
http://news.bbc.co.uk/2/hi/business/10151772.stm

Global stock markets have fallen heavily on Tuesday over continued fears about eurozone debt problems.

In the US, the Dow Jones was down by 2.24%, the broader S&P 500 index 2.296% lower, and Nasdaq 2.74% lower.

In Europe, the FTSE 100 in London was down by 2.89%, Germany's Dax index was 2.97% lower, while in France the Cac 40 index had dropped 3.81%.

The FTSE fell as low as 4,939.6 points at one point, its lowest level for eight months.

Asian markets also saw sharp falls. Stocks in South Korea and Japan had been affected as North Korea reportedly went on to military alert.

In London, the FTSE 100 has fallen by more than 10% in little more than a month after hitting a 22-month high in April.

'Toxic cocktail'

The concerns about eurozone debt follow Monday's strongly-worded comments from the International Monetary Fund that the Spanish economy needs comprehensive and far-reaching reform.

That added to investors' worries over the weekend rescue of Spanish bank Cajasur by the Bank of Spain, only the second time the central bank has saved a regional lender.

Amid concerns over solvency in the sector, and in the wake of the Cajasur rescue, four Spanish savings banks then announced plans to merge.

Cajastur, Caja de Ahorros del Mediterraneo, Caja Extremadura and Caja Cantabria said they had reached agreement to form a group that would "strengthen solvency and assets of the participating banks".

"There's never been any mystery about the excessive exposure of Spain's banks to a bloated property market," said BBC business editor Robert Peston.

"The mystery has been how its banks avoided crippling losses on this exposure - although that increasingly looks like pain postponed rather than avoided.

"Or, at least, that's what today's retreat in share prices across Europe is saying, with bank shares falling especially sharply," he added.

Weak euro

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said: "The toxic cocktail worsens. Continuing fears over the European debt situation stalling the global economic recovery has been exacerbated by the potential of military tensions in Korea."

And he said there was a shortage of buyers prepared to commit to the market at the present time.

The continued weakness of the euro is a concern, with investors dumping the currency amid fears that debts will cause defaults by weaker countries in the European Union.

In Tuesday trading the euro stood at $1.2237, after earlier falling as low as $1.2218.

And the euro stood at £0.8564 against the pound, compared to £0.8587 at close on Monday.

"The euro problems are very deep-rooted as eurozone members share a common currency but fiscal policies are left to each country," Japanese Finance Minister Naoto Kan told reporters.

"I hope financial markets will calm down gradually."

'Sluggish recovery'

On Tuesday, the European Union Economy Commissioner, Olli Rehn, warned that governments needed to make major reforms to boost growth.

"The big risk is that once the recovery gets more robust, we sit idly in self-complacency and forget the structural reforms.

"That would lead us to a sluggish recovery - or even a lost decade," he said in a speech at the Brussels Economic Forum.

He said the reforms needed for each European country varied, but he called for the opening up of national markets.

Countries such as Greece, at the centre of fears about the eurozone economy, have regularly ignored EU calls to liberalise markets.

Another nation which has ignored calls to open its markets is Italy, which is set to reveal an austerity budget later on Tuesday.

Regional tensions

Earlier in Asia, Japanese stocks fell by 3.1%, and shares in South Korea fell by 2.7%.

Australian shares fell by 3%, Taiwanese stocks dropped 3.23% and the wider MSCI measure of Asia-Pacific shares outside of Japan fell by 3.6%.

Shares in Hong Kong, Singapore, Indonesia, China, India, Thailand and Malaysia all fell.

There were reports in South Korea that North Korea had told its military to prepare for war, but only if the South attacked it first.

Tensions in the region have been growing since international investigators blamed the North for torpedoing and sinking a South Korean warship in March, killing 46 sailors.

The falls in Asia come after major markets in the US closed lower overnight, with the Dow Jones shedding 1.2% and the S&P 500 dropping 1.3%.

This reinforces my belief that we Americans must liberate Europe and finally create the Eurodollar for all time.

Seriously, this isn't too good... I fear any potential economic recoveries will be canceled out if Europe doesn't solve its issues. (Even if I would like bragging rights about Europe dragging down the world since they were all too eager to blame us for the recession before)

Never mind the whole issue over Korea just making things worse.

What do you think will come out of this? Nothing? Will the Eurozone restructure and seriously change its qualifications?

Interestingly, earlier today I was stock-hunting because I want to form a portfolio... this came at the right time. My wish for lower prices came true! :lol:
 
Seems like the dramatic falls are back, in the last two weeks anyhow... Isn't US debt pretty astronomical too?
 
Seems like the dramatic falls are back, in the last two weeks anyhow... Isn't US debt pretty astronomical too?

I know US debt is fairly high in absolute value, but I know a common defense is that many countries have higher debts in terms of percent of GDP.

Our debt is about 8-10 trillion from what I remember, and our economic output about 14-15 trillion.

http://www.usdebtclock.org/ According to this it is almost 13 trillion and increasing by tens of thousands each second.

I know some other nations have debts over 100% of GDP.

Our debt probably just makes the news due to being the largest in absolute numbers or some such; we are also the current top economic(excluding the EU) and military power, so of course we get more attention.
 
Does anyone know how much of this crisis is the fault of the speculators? I know the continental European countries have blaimed the more liberal anglosaxon economic "practices"(I don't know the details, I hope you guys know what I'm talking about) for much of this, and the germans therefore hope that stricter regulation will help. Does anyone know exactly what differences there are between the continental and anglosaxon economies?
 
I doubt if anyone's going to go bankrupt (Greek debt is denominated in Euros, right? What's the ECB gonna do, run out of paper?) but things look shaky for the Eurozone. We're either going to come out of this with an overhaul of the national fiscal practices or with no euro at all; the former is far more likely than the latter.

On the international side, I'm no expert at reading the tea leaves but my guess would be that the stock market's reaction is more in response to the Fed and ECB than to the Greek crisis per se. How exposed are US assets to Greece? Probably not that much. What's rattling markets is uncertainty over how far the Fed and ECB will intervene in Greece - the Fed by keeping international swap lines open, the ECB by more direct action, as well as uncertainty over how far this will spill over into areas that American assets are highly exposed to.
 
The German government knows that speculators are not the problem; they threw that legislative bone at the electorate in a bid to win NRW (which they failed to do anyway). Indeed, the German legislation is so weak and so local that it will do nothing - which is almost what the German government wants, since clamping down on "speculation" may actually make it more expensive for governments to borrow, since "speculators" provide an effective market for insurance on government debt (I can explain this in more detail since it's not obvious why).

To be clear, "speculators" are not the problem -- Greek profligacy is the problem. Speculators (i.e. investors) are merely the messengers. The cost of Greek debt is rising not because speculators are pushing up the price, but because Greece has for years spent and borrowed more than it was capable of repaying (even ignoring the fiddling of accounts that went on). The cuts made by the Greek PM combined with the IMF/Eurozone loans are only barely enough for Greece to avoid defaulting on their loans, and given how bloody nasty the cuts already proposed are, and the riots already happening, it's very difficult to see how Greece will make it through this. The enormous risk involved in lending to Greece right now is why Greece is having to pay through the teeth for its debt (which, of course, only makes default more likely!). German banks, incidentally, are on the hook more than any other country's banks; Germany's exports to Greece since they joined in monetary union have massively outstripped Greek exports to Germany, and it was all funded by loans from German banks to Greek consumers.

However, the massive bailout fund of nearly $1tn announced by the EU/Eurozone/IMF/ECB will help tremendously. It will mean not only that Greece's debt is practically as risk-free as Germany's debt, but also that "contagion", i.e. the likelihood that default in Greece will result in default in Spain, Portugal and Italy, will be contained.

But that brings its own problems. Such a massive package is going to be a massive drain on Eurozone government's finances for years to come. Which means higher taxes, and lower public spending. It may mean populist measures such as increased tariffs, too. And all this means lower growth in the Eurozone. On top of that, Germany has made it painfully clear that the route out of this is not a rebalancing of its own economy towards domestic demand, but rather that every country should be like Germany -- export driven and fiscally tight-pursed. That's a terrible thing for anyone counting on Europe being a driver for global economic growth. And it's particularly bad for Britain, who was hoping that the Eurozone would the export market it so desperately needs to kickstart its recovery.

So global markets are plummeting, because it is now obvious that Europe is in for a long period of fiscal belt-tightening, and won't be a source of new growth. Unless Germany and the Netherlands stop playing the role of China (the serial exporters who recycle current account surpluses into loans to boost demand in consumer countries), and Spain, Portugal and Greece stop playing the role of the US (the serial borrowers who spend more than they can afford), Europe may well be in for an extended period of hardship. Sadly, there seems to be little political will for the necessary structural changes within each country to rebalance the Eurozone in the right way. Instead, German, French and Greek finance ministers chastise "speculators", while the Spanish PM reluctantly makes half-hearted cuts and labour market reforms. Oh well...
 
But that brings its own problems. Such a massive package is going to be a massive drain on Eurozone government's finances for years to come. Which means higher taxes, and lower public spending. It may mean populist measures such as increased tariffs, too. And all this means lower growth in the Eurozone. On top of that, Germany has made it painfully clear that the route out of this is not a rebalancing of its own economy towards domestic demand, but rather that every country should be like Germany -- export driven and fiscally tight-pursed. That's a terrible thing for anyone counting on Europe being a driver for global economic growth. And it's particularly bad for Britain, who was hoping that the Eurozone would the export market it so desperately needs to kickstart its recovery.

So in you're opinion, one solution to the crisis, is for Europe to import even more, because that will fuel foreign economies, and in turn fuel Europe?

Anyway, is there anything wrong about forcing the Greece and Spain to be more export-oriented(not considering if it's possible). To even out the export/import gap seems like a good plan to me, even though other countries might suffer.

The entire idea that some countries will always be importers and others will always be exporters sounds kind of unstable to me.
 
So in you're opinion, one solution to the crisis, is for Europe to import even more, because that will fuel foreign economies, and in turn fuel Europe?

Anyway, is there anything wrong about forcing the Greece and Spain to be more export-oriented(not considering if it's possible). To even out the export/import gap seems like a good plan to me, even though other countries might suffer.
No, you misunderstand. Greece and Spain need to export more. Germany needs to import more. Solution? Germany enacts fiscal stimulus aimed at stoking domestic demand; Greece and Spain enact labour reforms and spending cuts that encourage exports. However, Germany doesn't want to stoke domestic demand, but rather to continue its export-driven model, meaning that all EU countries end up having to export more, and finding more and more export markets abroad.

Additionally, the imbalances within the Eurozone mirror imbalances across the world. Globally, Germany and China need to import more and the US (and Britain) needs to export more. However, if the Eurozone as a whole exports more, it means there is less opportunity for the US to export more, which makes it difficult to address the imbalances globally.

The entire idea that some countries will always be importers and others will always be exporters sounds kind of unstable to me.
This is exactly right. Surplus countries like Germany can't continue to export and export and export some more while the US (and "peripheral" Eurozone countries like Greece, Spain, Italy) continue to buy buy buy. That's precisely the imbalance I'm talking about, and precisely what isn't being addressed by any of these proposals.
 
Don't remind me. My stocks have been hammered of late.
 
Don't remind me. My stocks have been hammered of late.

This is why you always carry liquid cash in your stock account. A fair amount as well.

That way, when the market crashes, you can invest 1-2,000 dollars into new stocks at discount prices. It may seem a bit immoral to profit from the suffering of the economy, but hey, since when has money been gained without making someone else suffer in some way? :p
 
Other than a few very minor details on trade, excellent post Mise. :)
 
As the days pass it seems more clear that Europe is not going anywhere back to healthy economic growth. Will Europe (and maybe even the US?) be another Japan? With persistent high debt and anemic growth?
 
This is why you always carry liquid cash in your stock account. A fair amount as well.

That way, when the market crashes, you can invest 1-2,000 dollars into new stocks at discount prices. It may seem a bit immoral to profit from the suffering of the economy, but hey, since when has money been gained without making someone else suffer in some way? :p

Have you ever used a stock broker?
 
That is what happens when you form an economic union and allow one country (Germany) to essentially dominate it, as they see fit.
 
Have you ever used a stock broker?

Why yes, yes I have. I was operating my Dad's money however. And unfortunately, we got into the market JUST before the recession hit...

Why do you ask? :confused:

That is what happens when you form an economic union and allow one country (Germany) to essentially dominate it, as they see fit.

At least it's Germany lording all over Europe. It is merely pursuing its place in the natural order. Their dislike for their failed attempts in both World Wars and their apparent lack of patriotism are merely an elaborate facade.

Somebody had to say it.
 
That is what happens when you form an economic union and allow one country (Greece) to essentially blackmail it, as they see fit.
Fixed that for you. :rolleyes:
 
As the days pass it seems more clear that Europe is not going anywhere back to healthy economic growth. Will Europe (and maybe even the US?) be another Japan? With persistent high debt and anemic growth?

Well.... Only to a point. The US and Europe are coming back, but oh so slowly. So I don't see long term stagnation. But the transition back to normal will likely be slow enough so that it will feel that way.
 
At least it's Germany lording all over Europe. It is merely pursuing its place in the natural order. Their dislike for their failed attempts in both World Wars and their apparent lack of patriotism are merely an elaborate facade.

Somebody had to say it.

I do not think that this is too far from the truth.
 
Top Bottom