A Worrying Observation
The financial crisis we are experiencing in Europe began in 2008 and was directly exported from the subprime crisis in the United States. Subsequently, the awareness of the abyssal evolution of sovereign debts in Europe has significantly contributed to tarnishing a financial activity flirting for months with recession.
A consequence quickly emerged: the financial health of banks deteriorated and credit activity as well, with the corollary of a much less generous loan and credit granting policy.
The Causes of the Financial Crisis
The severe and lasting crisis that is raging and undermining the financial health of Europe has essentially three origins:
- The export of the subprime crisis from the United States.
In short, US banks granted mortgage loans to indebted households and speculated in return on the upward evolution of the market value of real estate. Unfortunately, this disarmingly naive scheme collapsed like a house of cards as soon as the real estate market turned, producing the opposite of the desired effect; - The financial speculation of European banks buying sovereign debt from heavily indebted Southern European countries.
Banks contributed to burdening Southern states by granting them significant loans. The flip side, some countries like Greece, Ireland, Portugal made partial defaults and Europe had to agree to debt write-downs with the corollary of bank bankruptcies; - The endemic misgovernance of both European and transatlantic states, and even Asian ones – Japan in the lead.
States spend far more than they collect in tax revenue. The well-established welfare state model in Europe is faltering on its foundations and social benefits need to be reduced.
Your Money and the Stock Market
Between 2008 and 2011, the health of global stock markets was catastrophic. Returns on investment were largely negative. Both stocks and corporate bonds took a severe hit. A golden rule for small investors: only invest what you don’t need.
And Now What Will I Do?
It seems that the sovereign debt crisis in Europe is now under control. Banking activity is slowly resuming and stock assets are slowly but surely trending upwards. It’s time to invest for the more daring.
Bank stocks, long shunned, are gradually regaining their color. Credit activity will likely still be very precarious in 2013, but 2014 should present itself as the new dawn of credit activity.