The European debt crisis refers to Europe’s inability to pay the debts it built up in recent decades. The European debt crisis grew out of the U.S. financial crisis of 2008-2009. A slowing global economy exposed the unsustainable financial policies of certain eurozone countries.
The eurozone is made up of 17 European countries that use the euro, including France, Germany, Spain, and Ireland. Several countries in the eurozone have borrowed and spent too much since the global recession began, causing them to lose control of their finances.
The European debt crisis can be traced back to October 2009, when Greece’s new government admitted the budget deficit would be double the previous government’s estimate, hitting 12% GDP. After years of uncontrolled spending and nonexistent fiscal reforms, Greece was one of the first countries to buckle under the economic strain.
It was also the first eurozone country to take a multi-billion pound bailout from other European countries (followed by Portugal and Ireland).
Fast-forward and Greece is still in a recession, more than a quarter of adults are unemployed, and the future looks bleak. Things don’t look any better in Spain, where the jobless rate is at 26%. The jobless rate in the eurozone as a whole is at 12%; the highest level since the euro was created in 1999.
If Greece fails to pay what it owes, the country will go bankrupt and most likely become the first country to leave the euro currency. Greece’s departure could open a floodgate with other countries following suit; thereby weakening Europe’s economic clout.
Today, the European debt crisis is on the brink of pulling the entire eurozone into a recession; dragging the global economy down with it. Ten European countries have already slipped into a recession and three more have needed to be bailed out in order to avoid going into default.
In March 2013, the government in Cyprus raided personal bank accounts to bail out the country’s financial system; setting a dangerous precedent. While politicians are saying this is a one-time event, one has to wonder if this tactic won’t be used again elsewhere. It’s not as if there isn’t just cause.
While Germany has been the economic engine for the eurozone, its slowing economy could join the rest of the region in recession. Thanks to the deep recessions in the other eurozone countries and austerity programs, Germany’s ability to carry the region is in serious jeopardy.
Germany’s central bank, the Deutsche Bundesbank, is predicting growth of just 0.4% in 2013; down from a June 2012 forecast of 1.6%. The Bundesbank also expects the jobless rate to hit 7.2% in 2013, up from 6.8% in 2012.
That said, there is more to the European debt crisis than just debt. Despite a shared currency, the eurozone is made up of different countries with vastly different cultures, histories, philosophies, and economies. And those differences illustrate just how difficult it is for disparate countries to work together with one unified voice.
In fact, the head of the Bank of England referred to the European debt crisis as “the most serious financial crisis at least since the 1930s, if not ever.”
The last two years have obviously been extremely difficult for bank stocks. The financial crisis that took hold of not only America but the rest of the world as well has caused extreme strain across the entire financial sector. However, since the financial crisis several years ago, American banks have substantially shifted their risk and investment strategy and are on a much more solid footing now.
While smart investors used the selloff in bank stocks as an opportunity to buy, this investment strategy has not worked for all firms. Not all bank stocks have recovered what they lost, even though they all went up massively this year. While some bank stocks like JPMorgan Chase & Co. (NYSE/JPM) are only down approximately five percent over the last five years, Citigroup is still down a massive amount. Recently, the CEO of Citigroup, Vikram Pandit, was ousted by the Board of Directors, mainly due to the fact that during his tenure, the stock has gone down over 85%.
While he did take over during a difficult time for bank stocks, his investment strategy is obviously flawed. The Board of Directors has decided to appoint Michael L. Corbat as the new CEO. When it comes to bank stocks, Corbat appears to be an interesting choice. First, he’s a long-time member of the Citigroup family. He’s also slightly lower-key than top CEOs like Jamie Dimon. Communicating confidence and leading is extremely important for a CEO. Obviously, considering the strong rebound in the share price and performance of JPMorgan, Dimon is the true standout amongst CEOs for bank stocks.
I see two reasons the board of … Read More
The U.S. national debt just surpassed the $16.0-trillion level and is accelerating with each passing minute. The problem is that with the U.S. economy slugging away and an unemployment rate of 8.3%, there are also less tax revenues to collect, which will ultimately impact the government’s balance of tax revenues and spending.
Ironically, while the U.S. is advising the eurozone countries to deal with their own European debt crisis (read “Global Economies Waving a Red Flag”), there is a growing and significant debt issue at home, but no one seems to want to discuss this.
I’m sure the pre-election talks will focus on the debt problem.
Spain has a national debt of around 712 billion euros, about US$892 billion or about US$19,391 per citizen. The European Central Bank’s (ECB) bond-purchasing program will help in the short term, but there needs to be a longer-term solution to deal with the financial crisis.
But while the economic situations in Spain, Italy, Greece, Portugal, and Ireland look bad, everyone seems to be somehow ignoring the massive $16.0 trillion of national debt in the U.S. That’s $50,921 per citizen, or more than double the debt of the Spaniards. The U.S. national debt is mounting and not going away anytime soon. Worst of all, it’s growing at an alarming rate every minute. The only plus here is the country’s low bond yields. If the U.S. had to pay out the high yields Spain does, the U.S. would be broke and facing a credit crisis.
This national debt will take decades to pay off or even get it to more manageable levels.
The reality is that … Read More
We are at the mid-point of the year, and so far it seems like a rollercoaster ride driven by heightened stock market risk. We had a stellar January, followed by some softness in February and March. April and May, followed by losses, but we saw some oversold buying in June. The key stock indices are still down from the end of the first quarter, and with many unknowns and stock market risk, it may likely be a rocky second half.
Taking a look at the mind of investors tells us the situation. Since May 15, there have only been five bullish investor sentiment days on the NYSE and seven on the NASDAQ. Compare this to the start of the year when each session in January and February saw bullish sentiment along with the majority of March. The second-quarter sentiment has been muted.
Not only do you have the European debt crisis dragging on in the eurozone, but China is stalling, and the U.S. economy, while growing, is relatively stagnant. Combined, it means high stock market risk.
Corporate America may struggle in the second-quarter earnings season to begin on Monday, which I discussed in “Don’t Expect Much from Second-quarter Earnings.”
There is also nearly $16.0 trillion in U.S. national debt and deficit levels, which adds to the stock market risk. California is nearly broke and many other states are trying to squeeze the coffers, looking for money. And while this is going on, you have about 13 million Americans looking for work and probably about 25 million Americans who are unemployed or underemployed.
We also have stock market risk associated with … Read More
Many people have tuned out the European debt crisis and believe simply that another emergency meeting will be held in which nothing will be decided, allowing the eurozone to simply continue surviving as it has.
The problem with this line of thinking is that the unemployment rate and the economic recession continue to worsen in the eurozone, therefore prompting leaders to resolve the European debt crisis and get their citizens back to work instead of having them protest on the streets.
It is critical that something done very soon or there will be ramifications here in the U.S. as well. The eurozone could experience a banking crisis that will be worse than the Lehman crisis in 2008 and will lead to the European debt crisis reaching heights no one could ever imagine.
The best way to describe the situation is to use Portugal as an example. The debt and unemployment situation in Portugal is such that the country will most assuredly require another bailout from the eurozone.
Yet throughout this European debt crisis in 2012, there has been very little mention of Portugal. If its situation is just as bad as Spain’s, if not worse, then why hasn’t Portugal been in the headlines as the European debt crisis deepens?
The answer is that although Portugal will most likely require another bailout from the eurozone, the country does not need to roll its debt over until the first quarter of 2013. This is a very important concept to grasp, dear reader. It isn’t only the size of the debt that a nation carries that is critically important; when that debt … Read More
Hope springs eternal; many believe consumer spending will resume in 2012 as the jobs market improves, preventing the U.S. economy from entering a recession. But the hard evidence shows otherwise.
As the U.S. Senate and Congress are split between democrats and republicans, there are at least 15 job bills that have not been passed or that are still stalled, as the jobs market continues to deteriorate. (Source: LA Times, June 22, 2012.)
This stalemate is unlikely to resolve with the upcoming election so close. As the stalemate continues, 19.1% of college graduates under the age of 25 are in lower-paying jobs for which they are overqualified, while the overall youth unemployment rate in this country is 16.4%. (Source: USA Today, June 6, 2012.) These are the same graduates who are saddled with debt before they even enter the jobs market.
We can all agree that the prime working ages at which people buy homes, pay for children’s education, save for retirement and spend the most range from their 30s to their 60s.
As of May, 2012, there were 3.5 million people in this country between the ages of 45 and 64 who were unemployed, with a full 39% of them unemployed for more than one year. (Source: Wall Street Journal, June 23, 2012.) For as long as jobs market records have been kept, this level of unemployment among this group has never been this high.
It has been four years since the financial crisis began. The extraordinary length of time that the jobs market has experienced such sluggish growth means that more and more people have been … Read More
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