Monday was a day of worry for investors. They are growing ever more worried by the debt crises in the eurozone and the US. Stock markets fell, as did the euro against both the Swiss franc and the yen. The borrowing costs of indebted countries rose with worries that, even with a bail-out, Greece in particular could eventually default on its debts.
This is important for us in Scotland for two reasons. First, there is trade. The European Union is a major trading partner and the weakness of the pound has helped our competitive position in Europe. Recent figures show that exports to the EU have risen to over £11bn, up on just under £10bn a year ago. The fears over sovereign debt mean that several countries have imposed stringent cuts to tackle their deficits and that is likely to have an impact on growth.
Then there is the question of how much of that debt, especially in Italy and Spain, is held by British banks. Clearly we are not alone and the exposure of banks across Europe to the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) prompted the European Banking Authority (EBA) to publish the results of what it called a financial healthcheck at the end of last week. Those results failed to ease nervous markets. No fewer than eight banks out of 90 failed a “stress test” on their finances, with another 16 near the danger zone.
The failing banks included one in Austria, two in Greece and five in Spain – and another seven Spanish banks were described as scraping through the test. One German bank, Helaba, withdrew from the process, effectively making it the ninth bank to fail. The EBA said that all banks would be under pressure to build their capital buffers, regardless of how they fared in the stress test.
However, Bank of Spain governor Miguel Ángel Fernández Ordóñez said there was no need to inject further capital into the banks as the sector was already undergoing a fundamental restructuring. The Bank of Portugal said two of the country's banks would immediately begin bolstering their finances and would strengthen their balance sheets within three months.
In the UK, the four main banks – the Royal Bank of Scotland, HSBC, Barclays and Lloyds Banking Group – all passed the test. According to a statement from the Financial Services Authority, “The results support our own stress tests and we are pleased that the major UK banks have capital above the minimum required in the test, reflecting the work we and the banks have undertaken to improve resilience since the crisis.”
That didn’t prevent them all from seeing their share values drop at the start of the week. And with financial shares falling sharply, the main stock market indices throughout Europe and the US fell – the FTSE 100 and the CAC 40 in France each lost 1 per cent, while Germany's DAX was 1.5 per cent down. In America (though they have additional problems there), Wall Street opened lower. The Dow Jones, S&P 500 and NASDAQ all dropped about 0.6 per cent in the opening few minutes.
If money was being taken out of stocks and the money markets, it was making a flight for safety. Gold is seen as a “haven” commodity. For the first time, its price has risen above $1,600 on the world market (more than £1,000 in the UK) as investors looked for alternatives. The price of silver, too, is rising sharply for the same reason. It is now at an 11-week high.
There is a sense of urgency throughout the EU. Later this week, eurozone leaders will attend a summit. They are being asked to put together a second bail-out package for Greece, but some analysts wonder if even this will help. They point to the arithmetic which they say just doesn’t add up. Although the Greek government has passed an austerity package, it doesn’t come near to helping produce a balanced budget.
According to one estimate (from Open Europe, a London-based research group), every eurozone household underwrites about 535 euros (£467) of Greek debt. It claims that none of these households wanted to contribute a single euro to the “profligate Greeks”. If they resist fresh capital calls from the EU, the money will run out and Greece will default.
The words coming from Europe’s leaders suggest that they want to avoid this, though not necessarily at all costs. The German chancellor, Angela Merkel, said she wanted clear commitments from private investors that they would contribute to the bail-out, adding at the weekend that the summit was "urgently necessary" and that she wanted "a result".
That message was reinforced by the head of the European Central Bank (ECB). Jean-Claude Trichet called on governments to speak with one voice, saying they can overcome the debt crisis if they stick together. But even he admitted that the ECB would not accept Greek bonds as collateral for loans if the country eventually defaults on its debts.
If eurozone leaders cannot speak with one voice, then neither can the Americans. Investors have been increasingly concerned by the Obama regime’s failure to agree a debt-ceiling deal. The US risks defaulting on its debts unless Congress can agree new rules that will allow Washington to borrow more money.
Last week, one of the organisations which awards ratings to government bonds, Moody’s, warned that it might have to downgrade the USA from its current AAA rating. Political leaders have until 2 August to raise America’s debt ceiling, currently approaching an eye-watering $14 trillion.
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