The Impact Of European Sovereign Debt Crises Finance Essay
The Greek government-debt crisis caused the European sovereign-debt crises. Because of the Greek Until the end of 2011, nearly three years after European sovereign debt crisis erupted. The speed of its contagion and promotion never stop. This crisis showed a dangerous signal 'contagion' which is also a very important theme. From Italy to Spain, and even France to Germany, two largest economy of the euro-zone is also difficult to protect themselves. And the performance of the "contagion" effect the world economies include rating agencies downgrade the credit rating of euro-zone countries; reduced liquidity of the banking industry; loss of market confidence. Moreover, as the European sovereign-debt crisis have affected the global economy, leading the IMF Director, Christine Lagarde, to warn in January 2012 that the world could be headed to a ''1930s moment II'' if the crisis cannot stop(Tim Christensen, 2012). The purpose of this essay is to discuss the impact of European sovereign debt crisis on the financial markets, especially in equity markets, bond markets and foreign exchange.
Investpedia indicates that Bond market is an environment in which the issuance and trading of debt securities occurs. The bond market including long - term Treasuries, corporate bonds, municipal bond, mortgage debt and federal agency debt. It is an indispensable part in the financial system for one country. A unified, mature bond market can be used as a financing tool for investors and raisers to provide low risk investment. Therefore, the bond market is also an important carrier of the central bank monetary policy. National Bank of Greece is the largest Bank in Greece. Before Greek debt crisis erupts, this bank's tier one capital adequacy can reach 11% (George Pagoulatos，Lucia Quaglia, 2010). Unfortunately, this Bank hold €18 billion Greek bonds. Once the Geek bonds restructuring, those bonds will be substantial depreciation and the Bank will suffer a great lost. Some large Greek abroad financial institutions also hold a large number of the Greek national bonds. For example, BNP Paribas Peregrine hold €5 billion and Commerzbank respectively hold €3 billion Greek bonds. Similarly, the situation of Royal bank of Scotland was worse than Greek in 2011. The bank hold €64 billions of Irish bonds, €12 billion bonds of them were already defaulted. This bank's total assets at the end of 2010 were expected to reach €58 billion. Although this bank already got the British government's bailout, if the Irish bond problem get worse, then the bank will face bankruptcy. It can be suggested that the European sovereign debt crisis will be of incalculable influence on the bond market.
Greek as one small economy of the euro-zone. If its bond write off, then the holders may have a great losses. On the other side, once the bond of some large economies (such as Italy, Spain) write-off, the global financial crisis would be caused again. Furthermore, the impact of European sovereign debt crisis on the bond market has been contagion to the peripheral euro-zone countries. For example, Austria and Hungary sovereign debt rose, central European countries' exchange rate fell. It could be argued that contagion is an important factor for the European sovereign debt crisis.
The European sovereign debt crisis would cause the whole euro-zone risk appetites fell, various funds will choose the low risk assets and steady income assets. As bonds invest have stable income, higher safety factor and also has strong liquidity. Bonds will certainly become an inevitable choice. Because the bank assets were less than the debt, it has no ability to pay off the debt. So the issue of bond interest rate will be higher. Just as the bank need money, so it willing to pay a high interest rates to borrow. In other words, according to demand exceeds supply theory, when the market is very short of money, then the interest rates become higher is inevitable. Don not think that high interest have to be good. When bank default, the investors cannot get back their money. This is also one cause of European sovereign debt crisis. Borrow too much, unable to pay. It can be suggested that the long-term bond market will be remain down if the European sovereign debt crisis still not solved. At the same time, investors' confidence would be hit.
Investpedia points out that Foreign exchange means the exchange of one currency for another, or the conversion of one currency into another currency. Increasing globalization has led to a massive increase in the number of foreign exchange transactions in recent decades. The global foreign exchange market is by far the largest financial market, with average daily volumes in the trillions of dollars(Yang Zheyu, 2012). Until the end of June 2011, China's national foreign exchange reserve was close to 3.2 trillion dollars, which were growth up to 30.3%. According to the analysis, about 60-70 percent of China reserves were dollar assets, 10-20 percent of that were euro assets. If euro assets accounted to 15%, which means the scale of the euro assets would be roughly $480 billion. China's euros reserves would be substantial reduced, if the euro assets dropping sharply. It can be argued that the foreign exchange reserves of China would be effected by the European sovereign debt crisis.
From the aspect of the global reserve currency, global foreign exchange reserves suggests that since the sub-prime crisis the proportion of dollars dropped from 65.3% to 61.5% during 2007-2011. Euros rose from 25.2% to 27.2% in the same period. Overall, it would be a slow process to adjust the global reserve currency. Fortunately, the euro can keep its second reserve status for the foreseeable future. It could be suggested that if the European sovereign debt crisis cannot be solved, leading to the fluctuations of the global foreign exchange market. It would also impact on the Euro-zone economy and the Euro itself. In the future, dollar and the yen will continue to be the popular hedge currency in the market. While the other major risk currencies such as euro, sterling and australian dollar, and so on will continue to be trapped in the down market. Besides, even more worrying is that the ECB does not play an important role in resolving the crisis. Benefit from the European sovereign debt crisis, dollars kept rising and the greenback was rising against the other big global currencies.
European sovereign debt crisis had the largest affect on the foreign exchange market. This crisis is the important factor to make the euro sold a lot. As the U.S. dollars gradually returning to a strong position, which will let the price of the international oil and silver go down. Significantly, if the problem of the European become complicated, the world's major economies would be dragged down. Such as the United States and China. It can be easy to find out that contagion is an important theme for European sovereign debt crisis. Then, lack of confidence for the future would effect on market sentiment. Therefore, no matter the foreign exchange market, the stock market, the bond market or the precious metals market will be all fluctuate and adjust widely.
Investpedia indicates that the Equity market means in which shares are issued and traded either through exchanges or over-the-counter markets. It is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. In 2011, European sovereign debt crisis continued to escalate. From comparing the public government debt to GDP ratio, the Europe has been reached 87% in general. Besides, the situation in America was worse than Europe (more than 100%). And Japan (reached 219%) was one of the most heavies indebted governments in the developed economies(Tyler Durden, 2011). In another word, the debt crisis would bring great influence in developed economies and even the worldwide.
Pengbo Agency(2011) states that global equity market has lost roughly 12.1% in 2011, approximately 6.3 trillion dollars disappeared and the market value decreased to 45.7 trillion dollars. Obviously the European countries became the worse zone of the world. The same year, Italy equity market dropped exceed 24%, France CAC40 index lost 17.66%, Germany DAX index fell 15.4%, and Greece share drop close to 52%. The Asia share closed down 18% at first time in three years. From the evidence explored so far it is clear that European sovereign debt crisis made the worldwide equity market going down. From the situation of global equity market 2011, it can be clear that before the third quarter the global equity market trend was all kept rise. But they all going down in march. Because of rising power is not enough, the stock trend of the second quarter was shock. The third quarter fell sharply to last year, even the year before last year level. At the fourth quarter, European and US equity markets went into shock. In contract, Asian equity markets still down.
Besides, European sovereign debt crisis influenced the equity market of China. Those influences can be divided into two main ways. The one way was to cause the export decline and then influenced enterprise's profit. Another one was to enhance the ability of financial market risk and then reduce the equity market value. So far the impact on exports has been quite obviously, corporate profits also have the big drops. As a result, the share price fell sharply. It can be argued that European sovereign debt crisis made the equity market of China decline.
Interestingly, the situation of global equity market in 2011 was good. Even the strong American equity market only barely flat at the beginning of the year. And the level of European equity market and the Asia-pacific equity markets are lower than early 2011. Besides, the downgrade of the U.S.'s triple-A credit rating made the whole year's stock down. The evidence explored so far indicates that European debt problem always affects the equity market, plus all kinds of natural disasters and major factors making global equity market weakness.
Overall, European sovereign debt crisis made the global equity market weakness. And also effect on the economy a lot. First, the debt crisis will plague the European economic growth for a long time, and restrictive the world economy; Second, if European sovereign debt crisis worsening, it will make the demand of European consumers' pay and trade ability down; Thirdly, as the Greek unable to pay lending made them face economy collapse. Also, if Spain, Portugal and other countries cannot succeed through this debt crisis, will certainly effect on the EU economy and even the world economy. Based on the great harm the economy got from the debt crisis, this would affect investors' confidence and passion. So the equity market must be weak.
From the evidence explored so far it is clear that European sovereign debt crisis cannot be solved in short term. From the recent development of European sovereign debt crisis, Greece is hard to get out of euro-zone. And Spain banking problem become the new risk issue of the European debt crisis. At the same time, Italian bond yields continued to rise. It can be predicted that the debt crisis is hard to improve in the short term. In the long term, to solve this crisis not only depends on external assistance, but also depends on the crisis countries' themselves. Previously, these crisis countries over-borrowing and over-pending was one of the reasons caused this debt crisis. Moreover, their government did not make the right policy to guide them. And even played a catalytic role in the wrong direction. Thus, the euro zone must be more cautious, strict and perfect on the aspect of institution building, rule-making and policy implementation. It could be suggested that the EU countries should join together to help each other. Especially to provide financial support for the debt-troubled countries. Beside, the debt-troubled countries should cut expenses and reduce the government budget deficit. And try to improve the economic environment for help themselves get out of the debt-trouble.
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