Wednesday, September 7, 2011

Sovereign Debt Issues Fueling New Financial Panic?

Not all market crashes happen in the Fall, but it does seem to be a historically popular time for them.  Europe's sovereign debt situation looks awful.  This presents difficult situations for the nations that are involved because it is dramatically more expensive for them to access the credit markets.  Most coverage has focused on austerity measures that governments are taking and the European Central Bank's (ECB) purchasing bonds from these countries, effectively holding rates down lower than they would be naturally.  Because of this, the ECB has been trying to hold government's feet to the fire about austerity, and that has been controversial because of sovereignty issues.

The European Central Bank (photo: Margit Myers)

This situation presents a much worse situation for firms and individuals holding the debt, especially firms holding large amounts of sovereign debt.  Because of this situation, there may be a new financial crisis brewing in Europe.  The New York Times is reporting that European financial stocks have been especially hit hard, and that some of these firms may fall into that "too big to fail" category.  The one that has persistently been dogged with rumors is Société Générale, whose stock price is below half what it was at the beginning of summer.

Despite its moral hazard, bailing out the banks played an enormous role in limiting contagion in the global financial panic of 2007.  The United States, United Kingdom, Ireland, and several other countries literally propped up bankrupt financial institutions to avoid a collapse of the house of cards known as international finance.  The ECB has spent billions bailing out European nations; will it have the ammo or the will to bail out any banks?  If it doesn't, how far will the contagion spread?

Here is a series of charts showing the last five years for several major market indexes.  The first one in Paris shows that the Parisian market is almost down to the lows it had during the recession.

CAC 40 (Paris)

DAX (Frankfurt)

FTSE (London)

DJIA (New York)

Hang Seng (Hong Kong)

One thing that is easy to observe is the similar look of them.  There is an especially sharp decline in the late September and early October 2008.  All of these charts declined:

CAC 40: ~ -22%
DAX: ~ -35%
FTSE: ~ -20%
DJIA: ~ -25%
Hang Seng: ~ -32%

Since July they have all had similar declines:

CAC 40: ~ -25%
DAX: ~ -29%
FTSE: ~ -13%
DJIA: ~ -13%
Hang Seng: ~ -13%

(all figures are very approximated)

If we do have another global recession coming our way, it does seem that Europe will be leading our way down rather than the United States.  This is quickly becoming another Fall of distrust and specifically of limiting exposure to European sovereign debt.  It looks like "it" might finally be hitting the fan in Europe.  How far that spreads to the rest of the world might rest upon the decisions of the ECB.

No comments:

Post a Comment