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ECONOMY: Problems in Europe

There are 5 economies in Europe at are on the verge of causing the rest of the world a massive headache. Greece, Italy, Ireland, Portugal and Spain have big problems. The problem is not really that they owe trillions of dollars of debt between them to other countries, it is that they have no direction or plan of how they are going to pay it back.

The issue is starting to bite world markets including Australia.  As of the 8th of May 2010, the Australian ASX200 has fallen from over 5,000 points to 4,480 points in about 2 weeks. Other markets are also suffering. Global stocks have slid erasing 2010 gains for US benchmark gauges, and the bonds of debt- laden nations tumbled after Europe’s debt crisis spurred an equity rout that undermined confidence in trading systems. Stock markets will rise and fall and some commentators like to take short term views on these topics. Unfortunately, this time round, many of those commentators are right.

”The market is manic,” said Philip Orlando, the New York- based chief equity market strategist at Federated Investors, which manages about $US400 billion. ”The ECB needs to step in here and do something. If that really becomes true, we start to rally and focus on the terrific jobs report we had this morning. They could have solved this six months ago. There’s still a lot of concern about contagion. Investors are scared to death.”

There have been rescue packages announced, but it would appear that many are unconvinced that this will solve the problem. And they would be correct. There is plenty of concern European leaders won’t do enough to keep the most indebted nations from defaulting after a 110 billion-euro ($158 billion) rescue package for Greece failed to halt a rise in government borrowing costs.

There are tough decisions and reform that needs to be implemented before the problem even looks like it might heal.Greece has announced it would make some changes in it’s country that would effect pretty much everyone. An what have the people done. Gone to the streets to riot. Last week, 2 people died when rioters burned down a bank with employees inside.

The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc. in 2008. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers soared as much as 40 basis points to 223, according to JPMorgan Chase & Co. The index closed at 212 on March 9, 2009. Swaps on Greece, Portugal, Spain and Italy rose to or near all-time high levels.

The bond and stock market turmoil is spilling over into money markets. Overnight deposits at the European Central Bank rose to a 10-month high as the sovereign debt crisis made commercial banks reluctant to lend to each other. Banks yesterday (08 May)  lodged 290 billion euros in the central bank’s ECB’s overnight facility at 0.25 per cent, up from 288 billion euros the previous day. That’s the most since July 3 2009. Deposits have exceeded 200 billion euros for the past 10 days.

So, what does it all mean. Stay out of the stock market for a while, stay out of the European market for a longer while. This will be a volatile so if you’re looking for long term growth, move into something else.

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