Euro Crisis



The Euro Crisis has reentered the picture, and was the focus of the market last week. The ongoing riots, unemployment and rising prices are damaging to the frail state of the Greek economy. An evidence of this lies in the 2-year government bond yields, which started out at 4.5% in 2009, doubled in 2010 to 9.73% and further spiked to 26.65% in July 2011. The sky high bond yield reflects the state of distrust and low confidence in the Greek economy. The Euro-zone is separated into 2, between those giving money and those receiving.

Any man on the street will know that the crisis is bad, but the extend and implication is less clear. Firstly, the economic growth in the Euro zone in general is expected to be weak, with the PIIGS going into negative growth. The huge amount of funds committed by other Euro zone members will render the own economies vulnerable as their ammo are lessened. The week economic outlook translate into investment funding outflow, causing projects to be abandoned, and jobs lost. The PIIGS members will be forced to cut public spending and raise taxes to finance the debts, a situation that hardly stimulates the economy. It will take a prolonged period of time to claw back to positive growth, assuming that the countries do not default.


Secondly, the Euro will likely take another plunge as the fundamental weakness in the region warrants less demand for the currency. Investor confidence will once again be shaken. The last dip in 2010 caused global indexes to retrace in sync and this time round it is likely to happen again. Gold has been on a mad run hitting an all time high of 1586, indicating how little confidence the public has on the currency and equity markets. At least within this year, i expect the crisis to be a recurrent theme and will not be resolved so easily.