The European Financial Crisis

The issue behind the decline in the various stock markets last week may well have been
the parlous state of Greece and its finances, but there was another, even more important
issue that the world was anxious to see in action. The issue is whether and how the
European Union and its member states would be able to take actions commensurate with
the crisis to bring stability back to world markets. The EU, a confederation of states has
never had to take actions with the speed nor the size necessary to address the current
status of investor confidence. However, with actions taken today, the EU, the member
States, with the participation of the IMF, and even the US Government have come up
with a package that has given the markers short-term euphoria, and may be even
medium-term stability.

The package announced provides € 750 billion in funds available to maintain market
liquidity, and assist with the financing of markets in financial difficulty. € 60 billion will
be provided by the European Union, and a further € 440 billion from the member states. €
250 billion have been committed by the International Monetary Fund.

The participation of the government of the USA, in addition to President Obama

pressuring President Sarkozy and Chancellor Merkel over the weekend, was to re-open
the emergency liquidity provisions that had been made available to European Central
Banks by the Federal Reserve Bank until recently, but had been closed three months ago
on the understanding that the worst aspects of the crisis had passed.

It had become clear late last week that banks were no longer providing short term credit
to one another due to concerns about the levels of Greek and other risky sovereign debt
that were being held by potential counterparts. Therefore a need for the injection of
liquidity was required.

The other issues surrounding the approval and provision of a rescue package were the
losses suffered by German Chancellor Merkel`s Party in regional elections over the
weekend. On of the primary issues was the concern of German voters at the financial
support being given by their Government to situations such as that of Greece. The
situation in the United Kingdom, not a member of the euro-zone, but a member of the
EU, which held an election on Thursday of last week, but as of today we have no idea
who will be the new Prime minister, and what will be the composition of political parties
forming the Government. Nonetheless, The Government of the UK increased its
commitment to the reserve package from € 7 billion to € 15 billion.

It is also clear that packages of reserves are a temporary measure to help countries and
markets with emergency conditions and are no panacea for righting the imbalances of
overly indebted countries, which is more of a long term goal, but which needs to show
signs of improvement soon.

The graph below represents information concerning the indices of six stock markets
customarily followed by the Brazil News Blog (100% represents the index at the close of
business on May 1st, 2010). The stock markets chosen are the Dow Jones Industrial
Average (“DJI”), and the Standard and Poors 500 (“S&P 500”), both of the USA, the
Financial Times and London Stock Exchange 100 Index (“FTSE 100”) of the United
Kingdom, The Cotation Assistee en Continu 40 (“CAC 40”) of France, China`s Hang
Seng Index (“HSI”), and Brazil`s Indice da Bolsa de Valores de Sao Paulo (“Ibovespa”).
The information for May 10th was taken at 12. 35 PM, Brazil time, and reflects the fall in
the respective indices between 12%, by the CAC 40 and 4%, the HIS between the
beginning of May, and close of business on Friday, May 6th.

The recuperation of the markets on Monday, May 10th gives pause for comfort, but it is
worth noting that at the time of writing, no market had reached its May 1st level, and all
but the HIS (only 2% down) were grouped in a range of 3.5% to 3.8% down for the
month. An improvement, but no excuse for more than temporary euphoria.

Stock Market In Crisis, May 1 - 10

102.0%
100.0%
98.0%
96.0%
94.0%
92.0%
90.0%
88.0%
86.0%
84.0%
82.0%
5/3/2010 5/4/2010 5/5/2010 5/6/2010 5/7/2010 5/8/2010 5/9/2010 5/10/2010

DJI FTSE CAC 40 HSI Ibovespa S&P