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Cracks Appearing In EU Unity?

|Includes:BSE, EU, Western Asset Inflation Management Fund (IMF)

On May 10 when the European Union and the IMF stitched together a $1 trillion rescue package for Greece, the world felt relieved. Stock markets gave a big thumbs-up to it. The Indian BSE Sensex zoomed by 560 points. However, by the weekend Europe was back in turmoil. President Sarkozy of France threatened to pull out of the euro if Germany backed out of the bailout. Adding fuel to the fire, Deutsche Bank chief executive Josef Ackermann said in an interview that Greece might not ever pay back its debts. This sent alarm bells ringing beyond Europe. Asian stock markets were shaken.

What began as a sub-prime crisis in the US in 2008, resulting in bank defaults and the collapse of Lehman Brothers, has reached a stage where heavily indebted countries are crying for bailouts. The trouble is not just limited to Greece. Portugal, Ireland, Italy and Spain too face the heat. In anger, they blaming “a wolf pack of currency speculators” who have brought down the euro. Equally hated are the credit rating agencies, which are re-rating national debts to junk levels and drying up borrowing sources and raising costs of capital. Even the fate of the EU as a single political and economic entity is threatened. Bickering is out in the open. No one wants to pay for another nation’s follies.

The eurozone citizens will have to bear the burden of their leaders’ blunders. The global recovery stands jeopardised. India’s exports to Europe, particularly by IT companies, will be hit. Global capital is shifting to safer havens like India and other emerging markets. In the turbulent times gold stands out as a safe investment. Hence, a steep rise in its prices. Europe will have to stand as one in this hour of crisis and help the European Central Bank and the IMF to sort outs its debt issues. This will take time and require patience and cooperation of the EU members.

Disclosure: No Positions

Stocks: IMF, EU, BSE