Investment Newsletter February 2012
Riots, Fear & Greed The European debt crisis continues to rumble on, with the Greek parliament finally agreeing more spending cuts, despite riots on the streets. Implementing these cuts will be difficult given the weight of public opinion. In addition, with elections likely later in the year, this is not over yet. However, as we keep reiterating, Greece isn’t really the problem. The main cause for concern has been the effect the sovereign debt crisis has had on the banking system. In the second half of last year, we saw credit crunch-like conditions in European banks. They virtually stopped lending to each other, becoming wary of what other banks were holding on their balance sheets. This was reflected in the “Euribor” rate – the interest rate that banks charge each other for lending. A higher rate indicates a reluctance to lend. The chart below shows how this changed last year:
%
Month
As you can see, the rate at which banks can borrow from each other rose during the first part of 2011, before coming down sharply in the past few months. The European Central Bank has restored confidence to the system by effectively committing to lending banks virtually as much money as they like for up to three years. This has “unfrozen” the banking system and vastly reduced the likelihood of a major bank going bust in the next couple of years. This restoration of confidence in the banking system is what has allowed equity markets to move higher, despite the ongoing uncertainty in Europe.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission