Continuing Sovereign Debt Doubts Hit Shares

By: Dr. Mike Campbell

Yesterday saw sharp falls on global stock exchanges as doubts and worries about ability of European banks to repay loans that are due shortly and on-going doubts about the strength of the global recovery. Losses for yesterday were between 3 and 4 percent, but the European markets have opened higher today. The general mood of pessimism was not helped by the fact that figures for the “recovery” in the USA and China had to be revised downwards. Chinese growth in may was trimmed from 1.7 to 0.3% and there has been a reversal in US consumer confidence coming off the back of three straight months of bullish sentiment.

The European Central Bank (ECB) had to offer exceptional 12 month loans to European banks, totalling €442 billion, during the global financial crisis last summer; usually, such funding would typically be of 3 to 6 month duration. The ECB has stated that it will not offer loans of such a duration again. The cost of provision of longer-term inter-bank lending has doubled, but it is still very cheap by historical standards. This has sparked concern in some quarters that European banks may suffer funding difficulties. Since the role of the ECB is to support business in Europe and help to maintain fiscal stability, this is about as likely the devil ice-skating to work. The ECB would be forced to provide continuing funding if commercial sources proved inadequate to the task. It seems that common sense is also in short supply.

However, on the back of this turmoil, the Euro has fallen to a fresh eight year low against the Yen (107.73) and a new 19 month low against Sterling (1£ buys €1.2311).