Skip to main content


Main content Home Compare deals Finance news Managing money Investing Home & property Credit & loans Life stages Tools & guides Small business Home > Feature two > How Europe’s making the market a nervous wreck Print

How Europe’s making the market a nervous wreck | Updated: 8:30:14 AM, Friday August 09, 2013
By Robert Gottliebsen
First published 25 June in Business Spectator How Europe

The global stock market is on the edge of its seat for fear European banks have lost even more money. To the extent some central banks are invested in bonds, it’s not just big trading banks that will be under pressure.
Image: Foodbytes BigStock Photo

Behind the latest fall in global stock markets is a deep-seated fear that the big European banks have lost big sums and once again their solvency will be threatened.

The fact that this is happening at the same time as China’s central bank is signalling that it will not take additional steps to increase liquidity and the US is adjusting to a looming end to quantitative easing adds to the stock market’s nervousness.

At the end of last week you could see nervousness building in European bond and stock markets (A Fed shadow over the real market monsters).

In simple terms many European banks had suspect balance sheets until the European Central Bank president Mario Draghi last year declared he would do “whatever it takes” to keep the euro from disintegrating.

That boosted Spanish, Italian and German bond prices particularly when the waves of money coming from US quantitative easing flowed into Europe.

Many European bankers, flush with cash, did not have industrial and domestic borrowers to absorb the money so bought bonds. That lowered bond interest rates and took the pressure off governments. Now those bonds are falling rapidly in price and sending up yields. That will put the pressure back on governments.

Spain’s 10-year bond yields jumped to 5.07 per cent last night and Italy’s 10 year yield rose to 4.79 per cent – both up about a percentage point since early May. Greece’s 10-year bond yield managed a low of 8.04 per cent on May 22 but is now 11.31 per cent. In the US the 10-year treasury yield has risen above 2.6 per cent from a low of 2.10 per cent a week ago.

Prior to the 2007 financial crisis, too many bankers gambled with bank money to gain personal bonuses, leaving their banks in danger of requiring a bailout. There are grave fears they have done it again, particularly in Europe.

European share markets are being punished more severely than the US.

Australia is hit with about four forces – China’s lower growth, overseas market weakness and declining commodities, plus our domestic political morass.

But it is not just trading banks that have assembled huge stores of bonds – the Swiss based Bank for International Settlements last night highlighted massive growth of central banks’ balance sheets.

The value of assets held by the world’s central banks have doubled over the past six years to about $US20 trillion, the equivalent of about 30 per cent of global gross domestic product. Asia has been a major grower although that growth has been matched by economic growth. Central banks in Asian countries have mainly grown their balance sheets by accumulating foreign exchange reserves.

In the case of Switzerland the central bank is involved in a massive currency stabilisation play which carries high risk.

To the extent that these central bank assets are invested in bonds that are now falling in value it will not be just the big trading banks that will be under pressure.

Below is a graph from the Bank of International Settlements that shows central bank assets as a proportion of countries’ GDP:

Like BigPond Money on Facebook For regular updates, Like BigPond Money on Facebook.

Related links:

Share this article |


Leave a comment

Follow this conversation Name: E-mail: Your URL: Comments: Follow any further comments to this article. All comments are moderated. Enter security code:  Security code

Follow this conversation

Leave a comment Your e-mail: You will be emailed when any additional comments are approved by the moderator. You are only subscribing
to comments made to this article. You may unsubscribe via the link provided on notification emails.

Compare deals

Today’s Money Deals

UBank discount

Refinance from 4.62% + special 0.25% discount.

Bonus Velocity

Amex Velocity Platinum offer. Apply by Dec 31

Low rate Loans

Compare super cheap home loans + save $000’s

Best Savings

Earn 4.51% + pay no fees with RAMS Saver

$0 Annual Fee

HSBC no annual fee + 0% bal transfer 6 months

Compare great credit card rates

No Annual Fee

HSBC no annual fee + 0% bal transfer 6 months

NAB Low Rate

13.99% purchase rate + balance transfer offer

0% Bal Transfer

Get 0% on balance transfers for 6 months

Bonus Velocity

Amex Velocity Platinum offer. Apply by Dec 31.

Quick Rewards

Amex Qantas Discovery – Earn QFF points fast

Compare great home loan rates

Low rate Loans

Compare super cheap home loans + save $000’s

Lock It In

Lock in a great rate. Fixed loans from 4.39%

Fix from 4.39%

4.39% 1 yr fixed, 5.38% comparison rate

Cheap Loans

Home loans from 4.62%. Compare & switch now

UBank Discount

Refinance from 4.62% + special 0.25% discount

Compare great term deposit rates

Top Rates

Compare top term deposits, earn up to 4.00%

Lock It In

Secure a great rate for 1, 3, 6, 12 months

ING Direct

Lock in 4.00% for 1 year with ING Direct

12 Months

Compare top 12 month term deposit rates

Stash It Up

Earn 4.00% for 1 year with ING Direct

Compare great savings accounts rates

Top Rates

Get top rates from top banks. Earn up to 4.51%

Special Rates

Compare today’s top promotional rate offers

Savings Maximiser

Earn 4.51% + pay no fees with ING Direct

Online Savings

Access your money 24/7, absolutely no fees

Term Deposits

Lock in a term deposit before rates fall again

Related guides and tools

Plan well ahead when investing to rent Plan well ahead when investing to rent

Rental guarantees are often used to sell new apartments, but you might pay in the end.

The monthly save, how much is enough? The monthly save, how much is enough?

People throw that term around, save money, as if it speaks for itself. But how much? For …

A Fed shadow over the real market monsters A Fed shadow over the real market monsters

To blame the current downturn in global financial markets solely on the US Federal …

Forgetting to save is your enemy Forgetting to save is your enemy

Set up some simple personal helpers to assist in saving. You will be surprised at what …

Why small business owners need a book keeper Why Shorten needs Labor to ‘lose well’ The recession we want to have? Consumption’s the cure to Australia’s mining malady BUDGET 2013: Fast facts How to thrift shop Families dictate trend for high-rise living

Compare deals

Find a better home loan home plans Compare home loans Unsure about life insurance? life insurance Compare life insurance Stash your cash term deposits Compare term deposits Go  

Sign up to receive the latest finance news. Email: Subscribe
Connect with us on: Connect with FacebookFacebook Connect with TwitterTwitter Connect with LinkedInLinkedIn Connect with Google PlusGoogle+

BigPond on Facebook

Mozo powered rates widget

Tools & calculators

Currency converter &raquo

Convert: From: To:
Convert Amount: Data supplied by Morningstar, based on a 30min delay.
  BigPond Sport, Movies, Music and Games downloads, video streams and editorial content are unmetered for most BigPond Broadband members. Sitemap | FAQ | Contact Us Terms of Use & Disclaimer – Please read