You may ask yourself what, exactly, was the shortage or crisis that triggered the global financial crisis; war, pestilence, commodity crunch, natural disaster or the discovery that Elvis Presley is alive and well and working at a local chip shop? The answer is that an ephemeral, but essential commodity evaporated: markets lost confidence. Specifically, confidence was lost that sub-prime loans were sustainable (of course, they never were from their inception) and the spectre of bad debt.
Confidence has not really returned to the markets since the great financial storm struck. This explains why the recovery which followed the end of the global recession was such an anaemic affair. The markets lacked the confidence that the worst was truly over; the spectre of a doubly dip recession weighed on investor’s minds. Although the current slow-down is such that a double-dip recession may happen, most people have got over the fear of it. Today, the obvious elephant in the room is sovereign debt – in short, governments have been living well beyond their means (in our name) for decades. Whilst the world’s number one and number three economies have colossal debts, the market attention is fixed firmly on the problem in Europe and the fate of Greece. These worries have sent the Euro weaker against its major trading partners and wiped billions off the value of the markets.
Recently, the Euro has rallied and market sentiment has become more bullish in the belief that a credible solution to the woes of Greece and the wider sovereign debt crisis will be found. Optimism is rising that EU leaders will come up with a plan to resolve the debt crisis when they meet at the weekend. The meeting will take place on Sunday and the debt problem is the top item on the agenda. Perhaps, at last, leaders can be clear in their resolve to set national interests to one side and inject some much needed confidence back into the markets. The G20 will be in session early in November and finding a clear solution to the wider question of sovereign debt in terms of debt reduction, but not at the expense of modest economic expansion will surely top the agenda there too. As always, the devil is in the detail, but the importance of simple political resolve to work towards a solution is clearly enough to move the markets in the right direction.