Markets in crisis as eurozone endgame approaches

If you thought yesterday was bad, brace yourselves for today: shares have plunged, the eurozone is in turmoil, and RBS isn't doing brilliantly, either. At least it's Friday.

by Emma Haslett
Last Updated: 06 Nov 2012
By all accounts, Barack Obama’s 50th birthday yesterday could have been happier: with markets seeing their worst day since late 2008, we’d imagine his focus wasn’t necessarily on blowing out candles. The bad news is that the turmoil continued into this morning, with the FTSE 100 dropping by over 3% and the Nasdaq falling by more than 5% (The Times had a quote from one dejected-sounding trader who just said: ‘it’s carnage out there’. Aah). It’s off the back of various bits of bad news, including the eurozone debt crisis, as well as a weak US economy and (over in Blighty) a week of disappointing figures from banks. So is this sharemaggedon?

Part of the reason for the panic in the markets is that the predicament in the eurozone is coming to a head, after European Commission president Jose Manuel Barroso warned that sovereign debt crises may be imminent in Spain and Italy. As a result, the gap between the yield on German bonds (Europe’s least risky) and Spain and Italy’s hasn’t been wider since the euro was first introduced, back in 1999.

What’s to be done about it? Well the BBC’s Robert Peston has talked about the need for a ‘circuit breaker in the transmission mechanism of fear’ (nice imagery, Robert). This would take the form of even more substantially enlarged European bail out funds – rather alarming, since it’s barely a fortnight since they were last revised upwards.

Speculation as to the sum which might eventually be required is now rising almost daily. Having started at a mere 1tn Euros, the skinny is now suggesting that the latest figure might be closer to 4tn Euros. To put that in context, that’s a staggering 40% of Eurozone total GDP. Gulp. The only economy with a balance sheet strong enough to bankroll that kind of dosh is Germany, and so the Germans now have to decide which of the two available options – to pay or not to pay – will have the least worst consequences. That’s the kind of epoch-making decision which politicians only rarely have the chance to take. Good luck with that, Angela...

So much for Europe, though. All eyes are expected to be on the US later today, as it releases crucial unemployment data – a key indicator of how strong its economy is. Having come dangerously close to losing its AAA debt rating last week (not to mention the almost-default as its politicians battled it out over exactly how high the debt ceiling should be), there are concerns that the recovery of the world’s largest economy is beginning to falter – which could lead to a lot more misery across the globe. The word ‘double-dip’ might even creep in.

Back across the pond, things are also looking decidedly shaky. RBS has just finished the week of banking results on a gloomy note, having made losses of £1.4bn for the six months to June 30. That’s largely thanks to a £733m write-off it made on Greek government bonds, as well as the £850m it’s allocated to cover compensation for customers who were mis-sold Payment Protection Insurance. Still: the £678m it lost in the second quarter is still less than the £1.17bn it lost during the same period a year ago. Which is practically a silver lining…

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