Weekly Market Wrap Up, November 7-11, 2011

Bigger than Greece

Embattled Greece suffered highs and lows last week with its debt crisis, referendums, and resignations. The leaders of Germany and France, Angel Merkel and Nicolas Sarkozy, struggle to lend assistance to Greece with a stimulus package containing about €130 billion ($179 billion). Leaders hope to prevent a Greek default before Christmas. A disaster could occur in the form of a collapse of the euro zone’s banking system, causing a liquidity crisis that could bring the world economy back into a recession. All within the same week, Greek Prime Minister George Papandreou proposed a referendum, recanted it, and resigned. Now Greece, without Papandreou, has formed the PASOK and the New Democracy Party. Greece will handle the crisis by approving the bailout and handle all government matters until the February election appoints a new Prime Minister.

While the dust settles in Greece, there is an uncertainty looming over another European country, which speculators argue is too large to default and/or save. European leaders struggle to keep Greece afloat while a larger cloud is humming over Italy. In response to the latest casualty of the European debt crisis, Premier Silvio Berluscone resigned on Monday, November 7th, causing Italian ten-year bond rates to soar 7.46 percent. The ten-year bond rates mirror other countries that were forced into accepting bailouts, such as Greece, Portugal, and Ireland. In efforts to suppress the soaring rates, the European Central Bank (ECB) has been buying Italian bonds, suppressing the yield to 7.19 percent.

To put things into perspective, Greece’s National debt amounts to €300 billion ($413.6 billion), while Italy’s debt is far too large for Europe to bail out, it is at approximately €1.9 trillion ($2.6 trillion), and higher bond rates are not likely to resolve the issue but just make it more expensive to pay back. The world markets were negatively affected by the uncertainly hovering over Italy’s debt-crisis: the Dow Jones industrial average fell 2.2 percent, Standard & Poor’s 500 index fell 2.4 percent, the euro also fell 1.8 percent, Milan stock index was down 3.6 percent, Germany’s DAX was down 2.6 percent, CAC-40 in France fell 2.7 percent, and British shares fell 2.2 percent. *

* Pylas, Pan. “Uncertainty over Italy’s Future Slams Markets – Yahoo! Finance.” Yahoo! Finance – Business Finance, Stock Market, Quotes, News. Associated Press, 9 Nov. 2011. Web. 09 Nov. 2011. <http://beta.finance.yahoo.com/news/uncertainty-over-italys-future-slams-105718047.html>. 


Article submitted by: Justin Garcia of the Capital Markets Lab (CML). To learn more about the Capital Markets Lab (CML) please visit https://business.fiu.edu/capital-markets-lab/.

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