Panic in the global financial markets affects everyone

Financial markets, including in Thailand, are being impacted by a big global rush out of risky assets.
The backdrop has been a slew of bad news since early August, from the major global economies.
In Europe, Greece has been in the headlines, with an ongoing drama on whether it is doing enough to reduce debt. However, there is a wider and more important issue – whether or not the euro zone can cope with potential financial problems in larger economies such as Italy and Spain.
Resolving that crisis of confidence will take a lot of tough steps… but so far, little progress has been made.
Some of the options discussed include drastically increasing the size of the euro zone’s rescue fund (to several trillion euros), issuing common euro-zone bonds (and hence joint responsibility for the debt), or using public funds to inject (lots of) capital into euro-zone banks.
These options imply increased political union within the euro zone, and a more clearly defined system where stronger countries help out weaker ones. In tough economic times, a political solution is very difficult to achieve. The alternative, though, would be prolonged financial turmoil and perhaps recession.
European finance ministers are meeting this week, and officials from the Group-of-20 major economies will be meeting in the middle of the month. However, there appears to be little optimism that any major developments would be unveiled.
While the focus has been on Europe, sentiment has also been negatively impacted by news from the US.
Over the past month, key employment and consumer data from the United States have been very weak, raising fears of another downturn.
The Federal Reserve (the US central bank) has implemented another round of monetary stimulus measures (the so-called Operation Twist of buying long-term bonds). But monetary measures are having limited impact – you can keep interest rates low, but you cannot force businesses or households to borrow and invest.
The US government has also announced new measures to create jobs. But remember – just a couple of months ago, it was caught up in a major crisis about raising its legal debt limit. The ability for US government spending to boost the economy is very limited.
“Decoupling” is the trend, whereby emerging market nations have a declining dependence on the developed world. This may be true in a long-term economic sense, but financially, the world has become more linked over the past decade.
This is particularly true during times of panic, when markets around the world are caught up in the same mood and go in the same direction. Thai financial markets, too, have been caught up in the global circumstances.
We are not alone in suffering a weakening currency, a falling stock market and volatile swap rates. These are issues affecting the whole of emerging Asia, and Thailand’s performance has been in line with everyone else’s.
Unfortunately, there are not yet many signs that the major markets will get over this panic soon.

Parson Singha is chief markets strategist in the Global Markets Department of HSBC Thailand.