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Euro zone crisis: a global problem?
Snowballing effect
Signals emanating from the financial markets indicate that the crisis — now more aptly called the European sovereign debt crisis — shows signs of snowballing. Interest on two year sovereign bonds has soared to 20 per cent, a rate that indicates investors' perception of an imminent default. Rating agencies have downgraded the debts of Spain and Portugal in addition to that of Greece.
Stocks in Europe fell, followed by declines in stock markets across the world. The euro hit a 14-month low in relation to the dollar. Even emerging markets such as India that had withstood the previous crisis better than most other countries and is now in the forefront of a global recovery is feeling the heat. The Sensex, which touched 18000 a month ago, has fallen back below 17000.
FIIs turn cautious
There is only one explanation: risk averse investors are pulling out of emerging markets and seeking the sanctuary of the advanced countries. It has not yet become a stampede but the FIIs' action is reminiscent of their action last time. Indian stock indices had then declined by as much as two-thirds.
Looming default threat
Greece accounts for just 2.6 per cent of the euro-zone's GDP. Yet from its travails some messages relevant to other countries can be gleamed. Its problems are primarily due to its perilous economy.
It has a budget deficit of 13.6 per cent and debt equal to 115 per cent of GDP. At this stage it can neither loosen its fiscal policy nor spend its way out of trouble or export.
Tough austerity programmes recently imposed are hugely and expectedly unpopular. There is near unanimity that larger sums will be required to bail out Greece.
The immediate task is to forestall a default that seems imminent to many leading economists.
The danger to the global financial system and indeed to the global economy can arise out of failures to contain the Greek crisis.
The contagion can spread through a run on Greek banks. Credit has already become expensive for borrowers in other European countries perceived to be weak. Sovereign default will hit banks holding government paper and will most certainly have a cascading effect.
The Greek crisis has cast doubts on the future of the euro in a way no previous crisis has.
There is an urgent need for co-ordinating the political mechanism with the economic apparatus created while ushering in the common currency.
Until recently the euro was hailed as a model for economic co-operation.
Political leaders in Germany, France and other countries with stronger economies must show that they have the political will to sustain the unique economic experiment.
Snowballing effect
Signals emanating from the financial markets indicate that the crisis — now more aptly called the European sovereign debt crisis — shows signs of snowballing. Interest on two year sovereign bonds has soared to 20 per cent, a rate that indicates investors' perception of an imminent default. Rating agencies have downgraded the debts of Spain and Portugal in addition to that of Greece.
Stocks in Europe fell, followed by declines in stock markets across the world. The euro hit a 14-month low in relation to the dollar. Even emerging markets such as India that had withstood the previous crisis better than most other countries and is now in the forefront of a global recovery is feeling the heat. The Sensex, which touched 18000 a month ago, has fallen back below 17000.
FIIs turn cautious
There is only one explanation: risk averse investors are pulling out of emerging markets and seeking the sanctuary of the advanced countries. It has not yet become a stampede but the FIIs' action is reminiscent of their action last time. Indian stock indices had then declined by as much as two-thirds.
Looming default threat
Greece accounts for just 2.6 per cent of the euro-zone's GDP. Yet from its travails some messages relevant to other countries can be gleamed. Its problems are primarily due to its perilous economy.
It has a budget deficit of 13.6 per cent and debt equal to 115 per cent of GDP. At this stage it can neither loosen its fiscal policy nor spend its way out of trouble or export.
Tough austerity programmes recently imposed are hugely and expectedly unpopular. There is near unanimity that larger sums will be required to bail out Greece.
The immediate task is to forestall a default that seems imminent to many leading economists.
The danger to the global financial system and indeed to the global economy can arise out of failures to contain the Greek crisis.
The contagion can spread through a run on Greek banks. Credit has already become expensive for borrowers in other European countries perceived to be weak. Sovereign default will hit banks holding government paper and will most certainly have a cascading effect.
The Greek crisis has cast doubts on the future of the euro in a way no previous crisis has.
There is an urgent need for co-ordinating the political mechanism with the economic apparatus created while ushering in the common currency.
Until recently the euro was hailed as a model for economic co-operation.
Political leaders in Germany, France and other countries with stronger economies must show that they have the political will to sustain the unique economic experiment.
