It can be easy to develop a sort of tunnel vision, only being concerned with the state of the local or national economy. However, the economy and its subsequent growth or sluggishness, is a global issue. Thus, instability in one country can significantly impact the stock market and financial wellbeing the world over. So whether your focus is buying stock, selling stock or merely researching stock market trends, there is no way to avoid the economic issues throughout the world.
Currently, there is substantial volatility in Greece’s economy, resulting in erratic changes in the stock market, inflation, consumer spending, employment, and basically every other factor that contributes to the overall global economy. Still, there is much perplexity surrounding the debt crisis. Many individuals have no idea exactly how this cataclysm began and how it could have escalated to this point.
A decade ago, Greece had one of the strongest economies in the world. Its purchasing power, tourism, and the stock market were all doing exceptionally well. Unfortunately, its government used these factors to amass a huge deficit. When the global recession began in the latter part of the 2000s, Greece suffered substantially since travel and tourism along with the shipping industry, which constitute much of its commerce, drastically diminished. With less capital at its disposal, the country’s already sizeable debt quickly mount. This escalation peaked in 2010, when an emergency bailout was suggested.
Formally requested by the Greek government April 23, 2010, the initial loan package was $61 billion. Payment of the first installment enabled billions of Greek bonds to be compensated. However, this bailout was not enough to meet all obligations, so another bailout package, of nearly two-and-a-half times the first, was granted to be paid over the course of three years. Consequently, these financial woes resulted in a downgraded credit rating for Greece. Even with the previous bailouts, Greece’s finances are insufficient. Therefore they are currently in talks to secure another eurozone rescue package. However, neither side has reached an agreement as of yet.
Greece has grown accustomed to a certain lifestyle. Its citizens enjoy a lavish lifestyle and do not want their way of life challenged. But the years of buy now and pay later mentality have caught up with them and taxation and budget cuts are virtually unavoidable at this juncture. Still, as with most problems, there are deeper issues responsible for the deterioration of this powerful economy.
In addition to its high standard of living, Greece is also confronted with considerable struggles, which include a horrendous Corruption Perceptions Index, second in the European Union (EU) only to Bulgaria, outrageous unemployment estimated around 18.8 percent in September 2011, tax evasion, ineffective government leadership, and severely depressed rankings in both the Index of Economic Freedom and the Global Competitiveness Index. All of these challenges combined with the current state of the global economy and stock markets, Greece’s economy is buckling under the pressure and threatening to collapse if swift action is not taken.
Still, many individuals do not see the debt crisis in Greece as an immediate threat to themselves or their stocks and other investments. This naive perspective leaves investors vulnerable to significant losses if the stock market continues to be impacted. The strength of the stock market, as a whole, relies heavily on the prospect of profitability. Ergo, when investors feel that they will lose money, they tend to buy less stock and sell more. This knee jerk reaction serves to create panic in the stock market, accordingly sending stocks plummeting. This is bad news for the economy because the stock market is such a primary factor in its recovery. The stock market is a significant gauge of the economic forecast. In a country with rising stocks, economic growth and development are almost certain. However, a country with a less promising stock market will likely see economic slow-downs and possibly face recession.
In the midst of this severe economic decline, investors are understandably apprehensive about their stock portfolios. During the recession, people lost virtually all wealth and assets that had taken years of hard work to secure. Retirement plans, pensions, stocks, bonds; essentially all liquid assets were suddenly worth less. Stocks that were once extremely profitable became worthless. This unfortunate circumstance forced individuals to reassess the way they invested altogether.
While the economy has begun to recover, it will take years for people to regain their original net worth, if they can at all. Now, many individuals are avoiding stock purchases until it is assured that another downturn is not on the horizon. As such, the stock market is a lot like a delicate house of cards at the moment: with the first sign of trouble, it could all come crashing down.
This volatility means that the stock market could be up 250 points on Monday and by the same time on Tuesday, it could have dropped by 400. The Greek debt crisis has only exacerbated the instability of the stock market because economists and investors share the fear that the worst is inevitable. The prospect of Greece defaulting on its obligations impacts other countries and banks in Greece and Europe that hold Greek bonds. This domino effect or contagion would likely spread to other countries with similar financial difficulties, threatening the value of currency and crashing global stock market indices. If Greece is forced to default, it could mean catastrophic scenarios for countless countries’ stock markets.
So if the Greek debt crisis is so dire, why then have stocks recently surged and how long will stocks continue to rise?
The main reason the stock market has seen such positive numbers lately is because the talks over resolving the debt crisis have been extremely promising. Greece and European leaders seem close to a deal that both sides can accept. If a deal is reached, stocks will likely continue in this manner. It’s no secret that investors feel more confident when the economy is stable. Even if things are not completely resolved, some sort of deal is a step in the right direction. And the stock market will reflect this progress.
Stock prices are often contingent on fear. More troubling than actual events that could upset stocks is the uncertainty of what could be. While there is never a guarantee in the stock market, there are factors that can suggest probability of how stocks will behave. Stock brokers and independent investors study market trends and follow current events to predict which stocks to invest in and which ones should be avoided or sold. Speculation is necessary to companies and shareholders.
Still, speculation can be a dangerous factor in the stock market. It can be difficult to determine if information about the stock market and the economy is accurate or if someone is attempting to shift stock prices in a certain way. Many entities can benefit from panic in the stock market. If it seems that a commodity, such as oil, will be in short supply, the demand for said commodity will likely increase and the manufacturer or producer of the item, along with his stock holders, stands to make a substantial profit. Although profiting from consumer fear is unethical, many organizations, when faced with the choice of people or profit, will be more loyal to their bottom line and so consumers must research in order to protect themselves and their finances.