Tag: ECB

The European Crisis Can Worsen Further Into a Global Phenomenon

The European Crisis Can Worsen Further Into a Global Phenomenon

There have been innumerable debates on the effectiveness of QE or rather the lack of effectiveness. What is QE? Quantitative easing (QE) is a type of monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. However, these debates have not brought about any decisions that can be said to be better, especially in the European region. A glance at the stock market is more than enough to understand the economic crisis that has got all investors scared.

One national leader from Europe had recently made a proposal, which seems a bit unique at first glance, to deal with the debt bubble and the financial crisis. On the surface, the proposal does seem to be sound even though it looks rather unorthodox. The problems begin to appear when you dig a little deeper. Once you do so, you will realize that the proposal will end up doing the exact opposite of what it wants to do.

Developed economies need to consider the actual economic state of Iceland as an example of recovery before a bigger catastrophe strikes the market and the future becomes black with debt.

Iceland has a total population of less than 320,000. The economy of this country is by no means diverse. The dominant economic sectors are energy, fishing and aluminum. Iceland is also home to the oldest functioning legislative assembly in the world called the Alþingi which was founded in the year of 930. Unfortunately, their experience was not enough to save the economy of Iceland. Instead, Iceland has ended up becoming another Greece. The parallels are too similar to ignore.

In the last 7 years, Greek households have lost around $215 billion as per estimates. Even today, the unemployment percentage in the country is 27%. 44% of the incomes fall below the poverty line. The current debt of Greece to GDP is 175% which is the highest in the European Union and the annual deficit is 12.7%. The International Monetary Fund and the European Union have already given $332 billion as loans to rescue the economy of Greece. This has caused the national debt of Greece to rise to $470 billion. This is unimaginable for a country whose economy is only 1.4% of the entire European Union.  Majority of this money has gone as payments to French and German banks which had high investments in the debt of Greece. In just six years, the output of Greece has decreased by 25%.

What Happened to Iceland?

In Iceland, the situation was almost a reversal of the scenario in Greece. Overextended Icelandic banks began to collapse due to their mortgage assets which had inflated greatly. In just a short period of time, the financial sector decreased by four-fifths of its size. Iceland let the banks fail and began to impose capital controls instead. Bank debt held by foreigners was sacrificed. Iceland could do what it wanted as it was not a part of the European Union. It could default and devalue to restore its problem as it had its own currency – the krona.

This scenario had been used by Greece in the past. However, it is no longer an option.

Dollar Improves and Euro Stocks Regain Lost Footing

Picture of dollar and euro currencies
Dollar Improves and Euro Stocks Regain Lost Footing

On Monday, 21 September 2015, European and U.S. stocks have recovered some of the losses that they incurred the previous week thanks to inaction on the part of the Federal Reserve. At the same time, the dollar made an improvement along with a rebound from oil prices.

There was a moderate risk-on mood on the government bonds in Europe as well as USA. Gold, on the other hand, ended its three day run of gains.

The Conditions in the Various Stock Markets

In New York, there was a rise of 0.5% in the S&P 500 equity index culminating in 1967 that brings it near to 1995, the mark at which the preceding Wednesday’s market closed. The following day, the Federal Reserve scared the global markets with its cautious comments on the global economy health.

There was a decrease by 75 in the CBOE volatility index in late trade. However, it has still somehow managed to hold on to the long-term average of 20. This level is currently being viewed as a signal of the increased pressure on Wall Street.

The Condition in Europe

In Europe, an increase of 1% was noticed in FTSE Eurofirst after it had seen a decrease of 1.9% on Friday, 18 September 2015. On the other hand, in Franfurt, the Xetra Dax fell behind with only a 0.3% increase. However, this has been primarily due to the 18% fall for Volkswagen shares. The dip came after the carmaker had admitted that the company had emissions tests rigged in the US.

The mood in Europe was improved somewhat after the Shanghai Composite index made a late rally. The Shanghai Composite index closed 1.9% higher which was the second consecutive gain for the index.

The news in Greece was not very good as stocks fell by 0.6%. This came after the Syriza Party, led by Alexis Tsipras, won an emphatic victory in the Greek general election. The performance of the bond market was better as the yield on Greek debt fell 50 basis points and reached 10.31% as per reports from Bloomberg. The Greek debt is due in July 2017.

However, analysts have mentioned that the election result is most likely not going to have a significant impact on the euro. This is due to the resilience of the euro to the uncertainty that hung over Greece this summer. Morover, it was Alexis Syriza who had helped Greece with the most recent bailout program.

According to Chris Turner, the head of foreign exchange strategy of ING, the euro is more likely to be influenced by the different speakers of European Central Bank. This comment was amply backed up by the chief economist of the ECB, Peter Praet who stated that the bank was ready to change its quantitative easing program if economic turbulence brought about the need for fresh action.

The Currency

The prospect of an increased policy divergence between the US and the eurozone was responsible for a decrease of 1% of euro against the dollar which was brought down to $1.1194. That, in turn, improved the dollar index by 1.1% to 95.86.