Forex Trading – European Debt Crisis

The European Debt Crisis

For the best part of 3 years, forex traders around the world have been cautiously watching the biggest continental economy in the world dice with catastrophy. To begin with, scares were challenged with actions by the European Central Bank, who put efforts in to ‘stem contagion,’ but all they are really doing is trying to prevent the infection from spreading.The economy of Spain continues to increase the rate at thier downward spiral is sliding. Efforts to ‘stem contagion' have clearly failed.

The map below will show each economy in the Euro-zone with their relevant debt ratings. Countries whose bonds are considered ‘junk’ are in red, countries carrying a rating of A or higher in a various shade of purple. Lighter shades of purple indicate weaker bond ratings, the majority of which result of downgrades brought by exposure to the European Debt Crisis.

european debt crisisCountries in ‘amber’ carry a BBB+ rating, which is one only one level before they are also considered trash. The worrying thing is that 2 of the world’s top 12 largest economies ‘Spain and Italy' have the BBB+ rating. Interestingly, Switzerland has the rating of AAA, although they do not use the Euro as their currency.

Although they do not use the Euro, the Swiss National Bank has a ‘floor' set for the EURCHF currency pair at 1.20, which means their fate really is tied to the European Union.

 

Greece and France were shouting loudly in the beginning of May, who elected officials that promised a new turn on the debt situation; however a long term fix continues to remain illusive. We will now attempt to answer some very important questions:

  • The problem is getting worse, why?
  • Economic policy makers could fix the problems, how and where do they begin?
  • Most importantly for us. How can we investors and traders protect ourselves during these uncertain times.

So Why is the European Debt Crisis getting worse?

Introducing ‘Fragmentation'. This is where a number of economies that are part of the Euro-zone are so diversly different, that it is very difficult to come up with a common application of monetary policy without creating a wrath of problems.