Wednesday, May 26, 2010

The market panic needn't unnerve us

by Hamish McRae

May 26, 2010

We're not through this yet, are we? The main developed world economies, including our own, are inching forward and companies around the world are reporting a rise in demand. But the financial markets are back into panic mode, with share prices the lowest for nine months, banks becoming reluctant to lend to each other, and the weaker eurozone countries seeing their borrowing costs rising again. Is this a case of the markets doing one of their irrational blue funks? Or are they trying, in their incoherent way, to signal something more serious: that there will be another leg to the recession? Or is there something else?

There seem to be two immediate causes for the meltdown. One is a further knock-on effect from the crisis of confidence over Greece. The concerns over the national debts of the weaker European countries and the potential burden these place on the entire region have spilled over into the fear that more European banks will have to be rescued. Spanish banks in particular are under the cosh as they have lent so much to the country's property developers, but since so many European banks hold the sovereign debt of the weaker countries, the entire sector is under a cloud.


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