The Eurozone Crisis and Singapore

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This article is contributed by Bullion Vault.


The Eurozone crisis may be several thousand miles away in geographical terms, but when we account for the globalised financial markets this is vast distance may not be enough to shield us from the problems in Europe. The size of the economies of the Eurozone, the importance of trade to Singapore and the scale and nature of the problem in Europe all contribute to the impending doom.

Firstly, although the USA might be the world economic giant at the moment, with a gross domestic product of $10,882 bn (according to World Bank figures from 2003), the richest 12 European countries have a domestic product of $8,175 bn. Let us compare this to Japan at $4,326 bn (with a far lower population however) and China $1,410 bn. So, to misquote the popular phrase from the UK ‘When Europe sneezes, the rest of the world catches a cold’ (the original phrase was ‘when America sneezes, the UK catches a cold).

When many investors are wondering how much we should invest in gold, it is relevant that a report the Asian Development Bank (ADB) noted that Singapore and Hong Kong are the ‘most sensitive’ of any Asian region to any financial downturn in Europe. This is ‘because of their exposure in both the real and financial sectors’ according to the head of the ADB’s Office of Regional Economic Integration, Iwan Aziz. This will mean that growth is likely to fall from the high of 9.4 % in 2010 to 7.5 % 2011 and a mere 7.2 % in 2012. Singapore exports more to the eurozone than any other European nation, with Hong Kong shortly behind at 14.5%.

If you were wondering how the financial crisis in the Eurozone is moving, according to Chinese economist Andy Xie, it has changed from being primarily a financial crisis to a political crisis. Speaking at the TradeTech Asia in Singapore in December, Mr Xie put it like this: the European lifestyle is not sustainable, they need to work more and spend less.

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The EuroZone Debt Crisis: It’s Rippling Effect Throughout the World

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Guest Writer: Michael Trinkle

In the spring of 2009 life looked good for global economies.  The biggest financial disaster since the Great Depression had been subverted due to the unified action of Central Banks around the world in the early fall of 2008.  When the Crisis first exploded with the failure of Lehman Brothers, Freddie and Fannie, and Bear Stearns in September 2008, it looked as though the entire financial system could collapse, but then just 6 months later in March of 2009, the recession bottomed out and growth slowly returned to developed nations, and intelligent investors began buying once again.

Then from March to November of 2009, the global economy grew.  The EuroZone stormed ahead of other developed nations and talks began circulating in the financial media that the Euro could make a run at the U.S. Dollar as the world reserve currency.  Then, Greece happened.  And it got really ugly really fast.  In November of 2009, it became evident that Greece and several EuroZone countries were in danger of sovereign default.  When it became apparent that the threat was more than just a rumor, the Euro began a precipitous decline against the U.S. Dollar in the forex market.

Eventually, after months of speculation and uncertainty, the European Central Bank and International Monetary Fund stepped up to the plate and put up funds to back Greece and any other EuroZone countries in danger of default.  This action reassured market participants that there would not be a sovereign default in the EuroZone in the near-term, and the Euro was finally able to find support at $1.1875.  Once the Euro formed its bottom at $1.1875, it began a violent climb back up during the months of June and July.  The reason is because as price fell from above $1.5000 all the way down to $1.1875, the market was pricing in a potential default and possible departure of several EuroZone countries.  When it became apparent that this was not going to happen, then the market had to revalue the Euro appropriately.  Currency movements can be learned on a forex demo account.

Current State of EuroZone Crisis

Currently, the EuroZone Debt Crisis is under control.  In order to receive the bailout funds they need, Greece, Portugal, Spain, Ireland, and Italy have had to adopt very strict fiscal austerity measures.  The market has responded very favorably to these countries reigning in public spending and slashing deficits.  In fact, Greece, Portugal, and Spain have had very successful capital market bond auctions in the month of July, with each country issuing all of the bonds it had for sale and at interest rates that were quite favorable.  Greece was able to auction off 6-month notes at an interest rate that was actually lower than what they would have to pay the ECB, so that is a good sign that the market has confidence in the EuroZone at the moment.

Also, the European Bank Stress Tests results showed that the EuroZone banking sector is in relatively good health.  Although there were initial concerns regarding the toughness of the tests, the market has responded favorably to the results.  This positive investor sentiment has spilled over into global equity markets as well.  The months of June and July saw a strong increase in U.S. and global equity markets as investors have a more favorable outlook toward economic recovery.  Although there are still underlying concerns in the long-term, currently the economic recovery seems to be moving forward.

Effect of EuroZone Crisis on China

In our current age of globalization, a crisis in one country will undoubtedly spill over into other countries.  In fact, this was one of the topics brought up with the initial concerns of default in Greece.  How could a sovereign default in one little EuroZone country have a widespread negative effect on the world economy?  Well, the answer is because globalization has brought an inter-connectedness to the global economy that is quite staggering.

The EuroZone Debt Crisis has affected China and any further downside risks in the EuroZone would have a very negative effect on China.  China’s economy is heavily dependent on its exports and one of the largest consumers of Chinese goods and services is the EuroZone.  Many economists are concerned that the austerity measures being introduced in Europe currently could weigh heavily on the economic recovery.  For example, as countries reign in public spending, that means there will be less demand for goods and services, and this decreased demand will trickle down through the economy and cause decreased consumer demand.  This decreased public and private demand will eventually be felt outside the borders of these countries as trading partners such as China are faced with debilitating demand.  China is already slowing at the moment due to economic stimulus being removed from the economy.  A further slow-down in Europe will only serve to exacerbate the slow-down in China.




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