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Euro Crisis and its Impact

The Switzerland based Bank for International Settlements has taken the view that the European debt crisis is similar in scale to the US subprime crisis and has the potential to spread to the other parts of the world just like the US subprime crisis. As per the Bank, the uncertain swings in the global stock markets in the past three months are a result of the Euro zone debt crisis leading to a loss in investor sentiment. As per the bank, the makings of the Euro debt crisis were closer to the US subprime crisis than to the Lehman collapse.

The Euro crisis made the European banks more risk prone and access to US dollars and global funds became more difficult for them. As per the Bank for International Settlements, investor confidence was weakened leading to a pull out of investments and movement of capital into safe haven assets. The resulting risk aversion profile led to a fall in stock markets even when the economic news was positive. US stock markets fell nearly 1.5% after the announcement of good employment figures, suggestive of the fact that the Euro crisis had dampened investor sentiment.

While the Bank for International Settlements believes that the Euro zone crisis can be potentially more damaging than appears, the Reserve Bank of Australia (NYSE:RBA) is of the opinion that the Euro zone crisis is unlikely to impact the Australian commodities led growth. The Australian central bank’s comment comes at a time when it was contemplating on an interest rate hike on the back of a build up of inflationary pressures. While, holding back an interest rate hike at this point of time, the RBA has delinked its decision from the Euro crisis, and suggested that it is taking a wait and watch approach. Thus, while the RBA believes that the Australian economy is ready for an interest rate hike, the eventualities in Europe have made it take a cautious approach and it has postponed the rate hike for now such that the Australian economy hedges itself from any eventuality arising out of the Euro zone crisis.

Similar claims that the US economy is also fairly well isolated from the US crisis have been made by the US Federal Deposit Insurance Corporation. The agency is of the view that the exposure of the US banks to the Euro crisis is limited and thus its impact in the US would also be limited. At the same time, the Europeans are getting the situation under control and the situation should pass by, without impacting the US economy.

US banks had an exposure of about $ 17 billion to the Greek crisis, while that of French and German banks was a whopping $ 120 billion, suggesting that the US exposure was much lower. However, the US Federal Reserve also does not seem to want to take any chances and is not expected to raise interest rates until next year so that it can keep the wheels of the economy greased until the European crisis has blown over. Other factors which are influencing the interest rate decisions include a slight slowdown in the US growth rate and the stubbornly persistent unemployment numbers.

Thus, it appears that while the impact of the European crisis may be contained, other major economies are not taking any chances and are taking the precautionary step of postponing their interest rate hikes.