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.