Critically Analyse How the Government Debt Problems Initially Faced by a Few Relatively Small Economies Could Trigger Such a Wide Impact in Financial Markets

2394 WordsMar 9, 201310 Pages
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…show more content…
Graph 4 US Dollar against Selected Currencies [pic] Source: Bloomberg Oppositely, after fluctuational depreciating during the past few months, several emerging market currencies have appreciated since the beginning of 2012(Graph5). However, as the continuous concerns about spillover effects from the euro area debt crisis, emerging European currencies remained relatively weak nowadays. Graph5 Emerging Market Currencies [pic] Sources: Bloomberg; IMF; RBA Derivative Market In 2001, in order to enter European Union, Greece referred the U.S. Goldman Sachs to design the currency swaps, which facilitated Greece join the European union. Nevertheless after predicting the prospects of the Greek economy, Goldman bought German CDS credit default swap insurance and gambled that Greek could not afford such a large sum of payment of insurance that purchased the cheap CDS. When Greece debt broke out, distribute the bad news of the Greece's pay ability to increase the price of CDS and earn the price differences. With the emergence of European debt crisis, the credit rating of some countries like Greece, Portugal, Ireland and Spain had been downgraded in term of there sovereign

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