Critically Analyse How the Government Debt Problems Initially Faced by a Few Relatively Small Economies Could Trigger Such a Wide Impact in Financial Markets
Critically analyse how the government debt problems initially faced by a few relatively small economies could trigger such a wide impact in financial markets
Introduction
Since the Greece's debt crisis happened, the Euro zone has to confront with a huge sovereign debt crisis, like governments' debt increased, bond yield spreads widened, Euro exchange rate fell as well, which caused that the whole international financial markets gradually lost the confidence. The purpose of this essay is to discuss the impact of this crisis both on foreign exchange and derivative markets. And the rest words is to analyse several possible reasons why this small economy could trigger such a wide impact on global financial markets, in which contagion can be considered as the fundamental and identifiable cause during the whole spread of crisis.
The Impacts of European sovereign debt crisis
Foreign exchange
Foreign exchange market, as the largest and the most liquid financial market, with an average daily trading volume of nearly $1.5 trillion changing hands where statistically it is superior to all US equity and Treasure markets combined (Michelle Chan, 2011), was expectedly deteriorated as well as fluctuated by the ongoing European debt sovereign crisis since 2008.
On one hand, the foreign exchange market reflected considerable stress under the lingering European debt crisis. On the basis of the Financial markets Stability Map(Graph1), apparently, financial markets, particularly the foreign exchange market continued to be weaker and experienced the heightened volatility. This weakness is shown in the graph1 that risks successively increase as the movement gradually moves away from the map center. Dissimilarly, risks in the rest of three components of the financial markets stability map, banking sector funding, debt and equity markets remained largely stable as well as unchanged, compared with the foreign exchange market. Generally to say, as indicated by the trends in
Introduction
Since the Greece's debt crisis happened, the Euro zone has to confront with a huge sovereign debt crisis, like governments' debt increased, bond yield spreads widened, Euro exchange rate fell as well, which caused that the whole international financial markets gradually lost the confidence. The purpose of this essay is to discuss the impact of this crisis both on foreign exchange and derivative markets. And the rest words is to analyse several possible reasons why this small economy could trigger such a wide impact on global financial markets, in which contagion can be considered as the fundamental and identifiable cause during the whole spread of crisis.
The Impacts of European sovereign debt crisis
Foreign exchange
Foreign exchange market, as the largest and the most liquid financial market, with an average daily trading volume of nearly $1.5 trillion changing hands where statistically it is superior to all US equity and Treasure markets combined (Michelle Chan, 2011), was expectedly deteriorated as well as fluctuated by the ongoing European debt sovereign crisis since 2008.
On one hand, the foreign exchange market reflected considerable stress under the lingering European debt crisis. On the basis of the Financial markets Stability Map(Graph1), apparently, financial markets, particularly the foreign exchange market continued to be weaker and experienced the heightened volatility. This weakness is shown in the graph1 that risks successively increase as the movement gradually moves away from the map center. Dissimilarly, risks in the rest of three components of the financial markets stability map, banking sector funding, debt and equity markets remained largely stable as well as unchanged, compared with the foreign exchange market. Generally to say, as indicated by the trends in