Are We About to Witness Another Euro Debt Crisis?

Sparked in 2009, the European debt crisis began when several Eurozone members (including Greece, Portugal, Ireland, Spain and Cyprus) were unable to repay or refinance their government debts without assistance. As a result, since 2010, Greece has been loaned almost €320 billion by European authorities and private investors.

In 2018, after imposing years of austerity in return for significant financial support, Greece finally exited the three-year bailout program it had entered in 2015. However, rather than creating market stability, political turmoil elsewhere (in Italy) led to significant instability in the foreign exchange market, with the euro vs dollar rate tumbling from over 1.2 dollar to the euro to under 1.15. This is significant because the EURUSD currency pair reflects the most important economies in the world, with Euro to USD trades commanding almost 23% of all forex transactions.

This tumble in the EUR/USD forecast is worrying for investors and traders, as further research by DailyFX shows that recent market developments look similar to those we saw in 2009. Although no two crises are the same, signs are pointing to new economic difficulties. At the close of 2018, the European Union threatened to levy penalties against Italy via the Excessive Debt Procedure (EDP) after rejecting its budget proposals twice. In addition, the European Central Bank has ended its €2.5 trillion net asset-purchase program, while investors are looking to move to ‘safe haven’ assets such as the Swiss franc, the Japanese yen and gold, as the euro continues to fall against the dollar.

However, it can be hard to judge whether the next debt crisis is imminent, particularly as relations between Italy and Europe are beginning to warm slightly. Since its birth, the euro has been resilient and with the US taking a hard line on international trade, we’re also seeing an appetite among investors to diversify their portfolios. In terms of currency, this means that many investors are looking towards the euro due to its liquidity.

What Role Will the Property Market Play?

As rumours of another debt crisis swirl, many are looking to the housing market for signs of trouble. In Spain during the last debt crisis, credit of as much as 40% of GDP per year fuelled a housing bubble, driving private debt to 260% of GDP (Spain’s private debt remains at 200% of GDP).

European Central Bank supervisor Daniele Nouy believes that because interest rates are at record lows, real estate prices have soared. As a direct result of this, some policymakers are warning that loose monetary policies risk inflating asset bubbles.

This means that, rather than merely being affected by the next financial crisis, property and real estate may actually cause the next financial crisis, as some banks have not been successful enough in mobilising collateral and acquiring additional liquidity in the market.

Looking to the future, nearly half of UK consumers predict we will see a financial crash worse than the one witnessed in 2009, with a third saying they expect to see a housing market crash in 2019. With worrying economic signs of a looming debt crisis and consumer sentiments negative, 2019 appears set to be a challenging year for investors and the housing market.