Over the past few months, financial markets have been rocked by news about the turmoil in the Middle East and the damage caused by the earthquake in Japan. During this period, the European debt crisis, which started over a year ago in Greece, went largely unnoticed. However, given that Japan and the Middle East have slowly started to get a grip on the various economic disruptions in their respective regions, the crisis in Europe has once again become a major cause of concern for global markets. The magnitude of the crisis has been reflected in the currency, commodity, and equity markets.
Despite rising nearly 5% against the dollar this year amid chaos in other parts of the world, the Euro has slowly started to lose its upward momentum since worries about Portugal and Ireland have reemerged. In Portugal, there has been growing concern about investors given the withdrawal of support for austerity measures. This has put the minority government of the nation in serious jeopardy, and recent measures (which include raising taxes and reducinggovernment spending) have not been well received by the population. This has caused investors to believe that Portugal may be the next nation that will need financial support (like Ireland and Greece). One temporary reprieve for the Euro may be the expectation of a hike in rates by the European Central Bank (ECB). The resulting high demand for bonds could drive up the price of the Euro vis-à-vis other currencies.
Among commodities, precious metals like gold and silver have experienced rising prices, largely because of high “safe-haven” demand amid the uncertainty of the debt crisis. A combination of falling investor confidence and declining demand (especially from Japan) caused the prices of base metals, especially copper, to go down. A similar scenario has been recently seen in the declining prices of crude, which investors also feel will face falling demand in Europe. However, rising food prices are one of the major causes for concern in the region. This has been reflected by the fact that the ECB has decided to raise interest rates, despite debt troubles across the continent.
Among equity markets, European stocks, which started to recover from the turmoil in Japan and the Middle East, lost ground on renewed fears of European debt. Key determinants of financial performance in the near future include the change in leadership in Portugal, the response to the renegotiation of Ireland’s rescue package, and the possible restructuring of Greek debt. Recent data from Portugal shows a higher than targeted budget deficit, and news that Irish banks may need an additional $24 billion for sour real-estate loans suggests that the banks are moving closer to being nationalized. However, Europe has increased the size of its rescue fund, and thus, can cover Portugal’s financing. Also, Spain appears to be solving its problems without any external help. Therefore, these factors may help diminish some losses in equity markets, should the financial situations of these nations worsen.
