Sovereign Debt Has Globe at Crisis Point; If the Euro Collapses, the Global Financial Crisis Could Possibly Be Worse Than the Crash of 1929

Article excerpt

Byline: Jane Lee of AAP

THE Australian share market had its biggest fall in two weeks yesterday, following US and European stocks south.

Investors are afraid the world is headed for a second global recession just two years after the end of the global financial crisis.

Below is a guide from financial and economic experts on everything you need to know about the sovereign debt crisis and its impact on the local market.

What major news moved markets this week?

The heads of eurozone's largest economies, German Chancellor Angela Merkel and French President Nicolas Sarkozy met for emergency talks in Paris on Tuesday but didn't agree on any substantial solutions to Europe's growing debt crisis.

Emerging from the talks, they vowed to provide C[pounds sterling]true economic governmentC[yen] to the eurozone. But a real solution may only be revealed in September when their national parliaments go back into session.

This was the first European meeting since ratings agency Standard & Poor's downgraded the United States' top-notch AAA credit rating, sending global stock markets spiralling down on fears the US may not be able to pay off its $US13.81 trillion of government debt.

University of New South Wales finance professor Fariborz Moshirian said the Paris meeting set the stage for talks on radical solutions, such as setting fiscal policy together.

C[pounds sterling](Merkel and Sarkozy hoped) to restore confidence to the market and give a signal that they are serious about their earlier commitments,C[yen] Mr Moshshirian said.

RBS Morgans director of strategy Marcel Von Pfyffer said the meeting was C[pounds sterling]purely a nerve-calming exerciseC[yen].

Investment bank Morgan Stanley released a report on Thursday, warning that global growth was slowing, setting off fears that the world was headed for a double-dip recession.

The news sent US and European markets falling, with British bank Barclays and French bank Societe Generale losing 11.5% and 12% respectively.

The European Central Bank last week bought $30.56 billion worth of Spanish and Italian debt in an attempt to relieve pressure from markets. Has it worked?

The short answer is yes, but it is widely seen as a band-aid measure rather than a long-term way to pay off debt.

Professor Moshirian said the European Central Bank was acting as a de-facto eurozone government entering into fiscal policies.

C[pounds sterling]However, it cannot sustain such purchase over time,C[yen] he said.

RBS Morgans' Mr Von Pfyffer said no-one in financial markets was falling for it.

C[pounds sterling]Yields have come back from over 6% on 10 years for both countries to marginally above 5% for both,C[yen] Mr Von Pfyffer said.

C[pounds sterling]Sadly though, history tells us that central bank intervention in either currency or bond markets alleviate matters only on a temporary basis.C[yen]

What are Eurobonds and why did Germany refuse to discuss them with France at the summit?

Many critics see Eurobonds Co bonds issued by the ECB with AAA-rated credit, which is shared by both Germany and France Co as the only way to help struggling European nations pay off their debt. …


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