Panic derails recent efforts at recovery
The banking crisis three years ago sparked a dramatic slump in world markets that saw the FTSE 100 drop 37% from 5,600 in September 2008 to 3,550 in March 2009. In all, shares fell nearly 50% from mid-2007.
But until the recent slump, the market had clawed back most of its losses in a bull run that has seen it rise to 6,100 – close to its previous peak.
The 2008 crash was triggered by the collapse of Lehman Brothers, which caused traders to fear that heavily indebted financial institutions around the world would fail.
As other big banks teetered on the brink, governments stepped in to bail them out and restore confidence to financial markets. But in the process, it landed them with enormous bills, which exacerbated the debt problems that have now come back to haunt them.
The banking crisis helped drag world economies into recession. But since 2009 markets have been in recovery mode, driven by growth in emerging nations such as China, India and Brazil.
The global economy has also been buoyed by record-low interest rates and stimulus measures by governments, which pumped liquidity into financial markets through quantitative easing.
Britain, for example, injected £200 billion into financial markets, in the hope that it would trickle down through the broader economy. This helped boost the prices of assets, including shares, and also lifted the price of commodities, such as oil, metals and food, although it has been argued that this also sowed the seeds of the current high inflation.
Strong corporate results helped boost confidence in financial markets, as companies began to benefit from earlier cost-cutting measures, which boosted their profits. The FTSE 100 also benefited from the rise in commodity prices because so many of its members are miners or oil companies.
However, the global recovery is now stalling and investors fear the US and countries in the eurozone will not be able to pay off their debts.
Hundreds of billions of euro have been wiped off the value of shares across the globe amid fears that the US could slide back into recession and Italy and Spain may need bailouts.
Investors have lost confidence that the US and several countries in the eurozone are capable of paying the interest on their huge debt piles as the global economic recovery slows.
Greece recently needed a second bailout, worth €110 billion, as it struggles under its debt mountain. Now investors are worried about Spain and Italy.
The US recently spooked markets by warning it could default on loan repayments until it pulled off a last-gasp agreement to raise its debt ceiling by $2.4 trillion (€1.68tn). But economists are still worried that the world’s biggest economy is weak and could slip back into recession.
Investors fear that the world economy could slip back into recession. It could also threaten the break-up of the eurozone if a large economy such as Italy is unable to pay its debts.
Ireland would suffer if the world economy slows down. Its main trading partners are in Europe and the US and a slowdown in the eurozone could hurt Irish exports at a time when the domestic economy is weak.
A stock market rout will spell trouble for pension funds and savers by diminishing the returns on investments.
That all depends on whether countries are able to convince money markets that they are successfully tackling their debt problems.
Last month’s bailout of Greece was supposed to assure markets that the eurozone could help prop up struggling economies by giving increased powers to the European Financial Stability Fund to reduce the risk of contagion in the eurozone. But investors are still fearful about Spain and Italy.
As Louise Cooper of BGC Capital Partners put it, countries are in a catch 22 situation: they need growth to help them pay off their debts but they cannot grow because they have so much debt.
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