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Understanding the eurozone crisis and its various facets

The current crisis is multiple. Initially sovereign and financial, it then became a social and political crisis. These changes do not facilitate the assessment of the situation, let alone the implementation of solutions. Back on the various facets of the crisis.

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Following the previous two articles focused on financial investment during market turmoil (anticipation and risk management , allocation et alternative to financial markets investissements), we will focus this time on the multiple aspects of the eurozone crisis

A sovereign debt crisis

All started with a sovereign debt crisis involving Greece and its hidden indebtment, then closely followed by Ireland and its specific growth model. Other countries will be added to the never ending list. More than the length of the list, what worries mainly is the extent of difficulties faced by some states and the contagion effects perfectly illustrated by the case of France. What’s going on? We find some answers in a note from Philippe Waechter on Greece or that of Philippe de Vandière on Spain. Beyond the policies of each government, economists have even come to the questioning of the Western economic model.

A financial crisis

Of course, as a governments major partner , the financial sector is affected and weakened. The problem is not only related to sovereign debts but also to changes in regulations. Indicators turn red, All references are lost, numerous questions remain. Therefore, it leads (as always in absence of information) to the reign of rumor, suspicion and associated panic. Note that uncertainty is fed ,on the one hand, by the reassuring results of bank stress tests in contrast with a certain observed reality, and, on the other hand, by analysis and opinions of financial professionals that are as sensational as the words of Myron Scholes, «We need to burn or blow-up the OTC market in credit default swaps», regarding the previous crisis (in fact, according to some people, the current crisis would be just a “remake” of the past). Interested readers can check the following list of opinions :

A social crisis

As mentioned above, after states, the crisis destabilizes financial institutions in their operations. Given their weights in stock indexes, the pain spreads over investment portfolios and increases pressure on the quality of services. In turn, the labor market (of the sector) is therefore affected. Announcements (or suspicion) of massive job cuts of follow one another: Deutsche Bank, Crédit Suisse and BNP Paribas officially announced plans to cut largely while the doubt hangs over the institutions remained silent like Société Générale or Crédit Agricole. The only positive point: the traditional economic seems more resilient and help support the social environment. What about the year 2012?

A political crisis

The repercussions of the crisis on the political scene are significant. On a national scale, long before the recent hot news in Italy and in Greece, there were , to a lesser extent, the case of Spain. On a european scale, political involvement and the existence of true leadership is essential as many have imagined a breakdown of the eurozone even if this scenario is regarded as unsafe. Little glimmer of hope, according to a recent survey, European investors remain optimistic. Little dark cloud, even though the political, regulatory and monetary authorities are called to “Save Private Euro”, paradoxically, the solutions they suggested are generally discredited by the financial world and sometimes considered unefficient. Banks’ Recapitalization, Short Selling, Basel 3 and IFRS standards are some points of divergence. Consensus may not be tomorrow.

A crisis without consensual diagnosis

The misunderstanding between various players can probably be explained by the difference in diagnosis of the crisis. Finding the real causes is obviously not easy. Moreover, even the causes of the 2007 – 2008 financial crisis (including excessive leverage, subprime mortgages, exotic derivatives, reckless risk taking, and easy money that spawned a housing bubble) are not unanimously shared and prominent academic suggest realistic alternative scenarios. Can we then find a solution if we can not agree on the causes? In the meantime you can always simply monitor the evolution of the crisis with the help of many indicators.

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