Tuesday, February 9, 2010

Candle in the Wind? The European Credit Crisis

Candle in the Wind? The European Credit Crisis
China Times editorial (Taipei, Taiwan, ROC)
A Translation
February 9, 2010

An economic recovery was in sight. The financial markets were on the rise. But a European credit crisis destroyed all optimism and hope. A second recession has renewed concerns about the financial crisis. We are not that pessimistic about future developments. But this incident shows that financial markets and economies around the world remain fragile, and each nation's financial stability remains important.

The Greek, Spanish, and Portuguese debt crises have revealed how precarious the situation is. All three are Eurozone Member States. This raises concerns that the entire Eurozone's economic and financial situation may be at risk. Recently, the European and the American stock markets tumbled in response. Asian stocks were also affected. During last week's "Black Friday" global stock markets tumbled.

On Monday the global financial situation gradually stabilized. On Saturday selling pressure on the Taiwan stock market eased because it was the only market open in the world. On Monday it rose slightly, up three points at closing. Asian stocks continued to fall in response to negative reports. But the decline was not as steep. Last Thursday the British, French, and German markets continued their downward spiral. After negative reports and a sell-off, the markets rose on Monday morning. The financial situation has gradually stabilized.

Globally speaking the European credit crisis is more serious than the Dubai credit crisis. No matter how prominent Dubai might be, it was after all, merely media attention. Based on the size of its economy, Dubai's impact on global financial markets is limited. The impact of Dubai's financial crisis on international markets lasted only one or two days. The European credit crisis is different. First, these three countries' economies are much larger than Dubai's. Their impact is naturally going to be greater. Secondly, these three countries are members of the Eurozone. Those most worried about the market, are not worried about individual countries such as Greece. They are worried about the negative impact on the entire Eurozone. The impact does not compare to that of the U.S. subprime mortgage crisis and the financial tsunami. But it is definitely greater than Dubai's, and merits our attention.

Financial markets have stabilized. But Europe's debt crisis is not over. The market is still waiting to see how the Eurozone countries deal with the aftermath. More bad news and the market will once again tumble. The financial tsunami taught the nations of the world a lesson. They will not allow the crisis to fester. The only issue is approach and timing. Just how far must the market fall before it bottoms out?

Lest we forget, the global financial tsunami struck in early August, 2007. The sub-prime mortgage crisis had already struck. For two days in a row, the European Central Bank injected a total of 200 billion USD into the market. The U.S. Federal Reserve followed up with capital injections amounting to 33 billion USD. But after the storm subsided, a chain reaction occurred. Citigroup, AIG and other financial giants, announced huge losses. By the first quarter of 2008 the storm had expanded. By the second half it had swept the world. Therefore the European credit crisis must not be taken lightly. Financial markets have stabilized over the past few days. But that does not mean the crisis has ended.

The European credit crisis shows that the global economy is recovering. Financial markets are growing and have stabilized. But they remain candles in the wind. Without special attention, their flames can easily be extinguished. This is particularly true during a financial tsunami. Governments and central banks spread money around in attempts to rescue the market and save their economies. But after they have stabilized the market, these governments are weakened. They are far less financially solvent than before. Two more tests will follow. One. The government will gradually withdraw its market supports. Normal, private sector market forces will assert themselves. Two. Even more importantly, the ability of governments to support themselves will be put to the test.

After they spread money around to save the economy, governments' financial positions deteriorate. They become heavily indebted. This is not limited to the four nations analysts have mocked as the "ou zhu si guo," or "four Euro-piggy nations." Germany remains strong. But the United States, Japan, Britain and France are in very poor condition. Their deficits are at record highs. They are under immense debt pressure. None of this is news. Fortunately these economies are large enough. They have large enough economic bases. Therefore they may be able to hold out.

The Republic of China's economy has already been integrated into the global financial system. But it is a small economy. It is unable to influence and change the global financial system. It can only passively accept and cope. The Dubai and European credit crises underscore the importance of government financial stability. When the financial tsunami struck, the nations of the world threw money at the problem. Onlookers may be reluctant to criticize the government's finances. But the tsunami has subsided. For the sake of long term economic development, the government must return to normal. It must seek financial stability. Otherwise there is no guarantee that the credit crisis will not appear on Taiwan.

中時電子報 新聞
中國時報  2010.02.09
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