Connectivity in the financial system is highlighted when comments from one gentleman can shatter investor confidence in markets all over the world. Not that the world has never seen this before, but Bank of England governors comment last week on the peril of sovereign debt carried its weight.
Mervin King is known for being tight lipped about policy issues. However, in his press briefing on the inflation report, King laid bare the urgency with which governments around the world, and in the euro zone in particular, need to grip the problem of sovereign debt before it spreads to the wider environment.
And if that wasn enough to shake investors, he went on to say that USA faces the same fiscal problems as Greece.
IMF also sang the same tune, when it issued its first fiscal monitoring report on May 14. It noted that recovery was weaker than expected and reforms were slower than needed to resolve the crisis.
Trading on sentiments, markets around the world ended Friday in the red. Asian stocks were lower on Monday with Asian stocks falling drastically. Chinas Shanghai Composite was the worst hit, dropping 5.1 percent amid lingering worries that Beijing would tighten its policies to cool property and consumer prices.
This is the second round of bailouts since the banking crisis of 2008. At that time, governments worked to contain the disaster by pumping hundreds of billions into the system, hoping against hope that the crisis would figure itself out in time.
This time around, not only is the problem larger, it is a crude realization that the system is rotten to the core and a paradigm shift may be required to keep the world economy from imploding.
"You have the great problem of a potential disintegration of the euro," former Federal Reserve Chairman Paul Volcker, said in a speech in London on May 13, according to an international wire service. "The essential element of discipline in economic policy and in fiscal policy that was hoped for" has "so far not been rewarded in some countries."
Following that, the euro fell sharply in currency markets, trading as low as $1.23, the lowest since the fall of Lehman Brothers in 2008.
With the falling euro, exports from Pakistan to Europe - one of its major trading partners - are going to earn less foreign exchange.
Likewise, crude oil prices have also fallen to lows of $70/bbl and are expected to remain volatile and subject to shocks in international economy. Low oil prices may help reduce the import burden on the Pakistani economy, but a rapid rise could have tremendous effects on the economy.
Much of KSEs recent growth can be attributed to inflows from foreign investors. Money flowing in has slowed in recent weeks. The KSE-100 index nosedived 239 points on Monday. If the trend continues, sell orders will keep the brokers busy in the coming days.
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Advanced Economies Gross Financing Needs 2010
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(in % of GDP)
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Gross Gross Average
Maturing Deficit Financing Debt 2009 Maturity
Debt needs (Year)
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Australia 2.0 -5.0 7.0 15.5 4.8
Belgium 20.8 -5.1 25.9 97.3 5.4
Canada 15.9 -5.3 21.2 82.5 5.6
France 16.9 -8.2 25.1 77.4 6.5
Germany 10.2 -5.7 15.9 72.5 6.0
Greece 13.4 -8.1 21.5 115.1 7.4
Ireland 7.7 -12.2 19.9 64.5 6.7
Italy 21.2 -5.2 26.4 115.8 6.7
Japan 54.2 -8.8 64.0 217.7 5.2
Portugal 13.0 -8.8 21.8 77.1 6.2
Spain 10.3 -10.4 20.7 55.5 6.7
Sweden 6.8 -3.3 10.1 40.9 6.0
UK 8.6 -11.4 20.0 68.2 12.8
USA 21.2 -11.0 32.2 83.2 4.4
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Source: Bloomberg, IMF