What’s really going on in the markets: Q&A?
Published 08/08/2011 | 12:07
Why haven’t stock markets responded favourably to the ECB’s moves to help Italy and Spain?
There are many factors contributing to the recent slumps. While European debt fears are one concern, signs of growing political instability in the US are another issue as is the recent downgrade of its debt.
While the US still has one of the best ratings in the world, and only one agency has downgraded its status from AAA, it adds to investor fears of a double dip recession.
The downgrade was widely touted but it is still an additional headache for already freaked investors.
However, the pressure has come off bond markets and the cost of borrowing for these two countries has dropped today.
Are Italy and Spain’s problems like ours?
Italy’s problems stem from years-and-years of growing sovereign/government debt and no Government taking responsibility for it.
Ireland and Spain have more in common because, while we do have a considerable amount of Government debt, our problems stem from the property bubble and in turn a credit problem.
The result of this is that Irish consumers are now afraid to spend which means it will take longer for our economy to recover.
Will the situation in Europe sort itself out?
Only if politicians begin to realise how serious the situation is. Most leaders are on holidays and the legislation to expand the scope of the EFSF hasn’t even been finalised.
However, there’s a growing feeling that there is no one in charge in Europe, especially by investors who are currently selling off stocks and moving their money into so-called safe havens like gold.
Even extending the terms of the EFSF under the current plans will not be enough.
What would a double-dip recession mean for us?
It would be a disaster. Ireland’s recovery is one dimensional as it is export-led so if there was a worldwide recession other countries would have less money to spend. As a result there would be less of a market for our export products.
Also, exports are being driven largely by US multinationals operating here partly because of our low 12.5pc corporation tax rate.
A new recession would probably mean less of them locating here while those already in place would spend less money and could have to lay off staff.
What about all this talk about a two-tier Europe?
Well we would be lumped in with the weaker European countries the so-called PIIGS which excluding us are Portugal, Italy, Spain and Greece. Apart from the fact that they are all Southern European countries, there are other differences. We have a good chance of recovering quicker than any of these bigger economies because we are smaller and more open.
But only if there is not a new global recession.
This would not be a good outcome for us and would not solve the crisis long-term anyway.
What happens next?
That is the burning question. It might sound trite but it’s all about investor confidence. Any new shock could spook investors further and force higher borrowing costs for European countries. And that would make a spiral into another full-blown crisis more likely. And another US downgrade would not be good.
What about my pension?
Do you have to ask? It’s not good. Falling markets are the last thing you want to see. Pension funds with their money in shares are being hit just like any other investors. Company plans could go further into deficit putting the onus on workers to contribute more to them.