Unexpected is one word that comes to mind when one considers the recent shock seen in the world markets. The borrowing by the debt ridden countries and the costs they have to incur is unexpected and high compared to fundamentals that it should have had been charged. People are skeptical. Land that has not been appraised frequently or has had a bad history associated with it will not have a lot of takers. The same seems to be the case here where many were not willing to take Spanish debt even at a low cost. Hence, the inflated yield rate and the aftershocks are being felt all around the world…
The interest rate rise led to a dip in the oil market dropping from $91 per barrel to $88 per barrel on Monday. The same effect has been seen in gold as well where the metal saw roller coaster movement with investors not sure on what to do next.
Equity markets also took the brunt of the impact with bears seen in US, Europe and Asia. The German and Spanish finance ministers have already said that the borrowing costs prevailing in the market are not a fair reflection on the strength of the economy. They both agreed that the economic indicators of the market were stronger. An urgency was also shown towards the implementation of the bailout plan that has been proposed and there are more discussions underway regarding how that is going to be put into place soon.
Doubts have been raised after the new yields were seen becoming tentative with Luxembourg’s Finance Minister Luc Frieden questioning any such plan altogether. The announcement has been complimented by Moody’s looking to give a negative outlook to Germany, Netherlands and Luxembourg which are the strongest economies of the region.
The impact of this downgrade would have deeper consequences for Europe itself and then a cascading effect on US and Asia as well. The jury is still out on what the best solution is. Certain countries want acquiring of the national debt on the international market which can ease the market mechanism and give confidence to the investors. Others see this as slow and ineffective and want the European Central Bank to rather take on the debt of the troubled banks directly and to give liquidity to the market which is lacking. The tight debt situation has choked any progress and a bailout of the banks specifically will give a much needed support to the system and the financial markets.
Spain faced the problem when the government itself was not able to take responsibility for the banks and so they needed financial backing to be able to bear the weight of the private sector. The EU experiment of the 1990s has been an interesting one to see and the unveiling of the euro debt crisis is the biggest test the system has faced till now. The interdependency of the European countries within themselves based on social and political fault lines is unique in itself. The creation of a united army under NATO and other social structures has shown that countries can come together under a common agenda.
The economic network created by the euro also shows how countries can develop each other due to the mutual benefits that are enjoyed by the whole region. Now we are seeing how the system also has its flaws where one country can be a burden on the whole system and can lead to a contagion. That is expected to a certain extent. You shall reap what you sow. However, in today’s world, there is also a deeper and more profound effect on world economy simultaneously and so the experiment is also showing how an economic bloc has an impact in a broader context.