Trouble Ahead in European Markets
Stock markets across Europe have plunged as much as 6% amid worries that a financial crisis might be just around the corner with the result that the Euro is now at $1.37. a seven-month low against the US dollar. The dollar’s bounce hurt the prices of commodities traded globally in terms of the U.S. currency.
Like the United States, Europe has been suffering from a recession. France and Germany, the largest of the 16 countries using the euro as their currency, have taken important steps toward economic stability. Certain other countries—including Greece, Portugal, Spain and Ireland (all expat havens, by the way)—are having difficulty paying for years of debt-driven expansion. The debts are now coming due and in a worst case scenario, defaults could ensue, with a ripple effect across Europe.
In the credit markets on Thursday, February 4, the cost of insuring the debt of the countries with large budget deficits against default rose. This came on the heels of several items of grim news. One was that the European Commission had put Greece under more pressure to cut its deficit. Another was that the Portuguese government had sold only €300 million ($417 million) of treasury bills at an auction, compared with an offer of €500 million. and finally,that the Spanish government had raised its budget deficit forecasts for 2010 through 2012.
The European Central Bank is leaving the key lending rate for the 16-nation euro zone unchanged at 1%, and the Bank of England is keeping its interest rate 0.5%.for the time being, the Bank of England has halted the central bank’s 200 billion pound ($319 billion) series of bond purchases, opting to weigh the impact of so-called quantitative easing on the British economy.
The Chicago Board Options Exchange’s Volatility Index or the VIX, which measures investors’ nervousness about upcoming market swings, soared 20.9% on Thursday. The index is trackable (and tradeable) as VXX.