d) Discuss the impact of the Euro crisis on investments, capital raising and exchange rates of the major currencies.
According to the announcement of the regulators in European, it is a must for many biggest banks such as the Deutsche Bank, Commerzbank and so on to continue their capital raising or else the euro crisis may become worse. For example, the original estimation about 106 billion Euros was less than the actual requirements, which make these big banks in this region raise more capital to meet the euro challenges. In another word, these worse influenced countries such as Greece, Italy, and Spain have no choice but to strengthen their banks reserves. (Radowitz 2011)
Although it is seemed if the banks can work effective to raising sufficient capital to assist the alleviation of the debt crisis, the big pressure for capital rising may arouse many problems.
At first, Peng (2011) pointed out faced with the trouble to raise new capital, banks may resort to many measures which may have negative influence on them. Just as many big banks including Deutsche Bank, Commerzbank, BNP Paribas and so on claimed that they were forced to cut their lending to both business players and customers, which is so likely to depress the entire economy in the future of this region. As figure 1.0 and 2.0 shows, both the business confidence and consumer confidence during the debt crisis period has changed dramatically , which may lead to many uncertain and unstable issues occur in this business region and further decrease the healthy function of the business circle.
Figure 1.0 Business confidence in Euro area (2010 to 2011)
Figure 2.0 Consumer confidence in Euro area (2010 to 2011)
Source: Trading economics
Secondly, referring to Radowitz (2011), besides these negative effects on the business confidence, the requirements on raising more capital by banks to meet the debt crisis may be seemed to exceed the actual capacity of these banks even these big giants in the banking area. As the president of euro central bank pointed out that these tough requirements for banks to raise capital even lead most of them to stop loans making, causing a squeeze on credit and so on. And although in the short term, the recapitalize plan may be worked as the means to put out fire in the urgent time, this kind of plan may not only affect the healthy development of the banking system and even make them more inflexibility but also make the entire financial institution in the European region so exhausted to meet the new challenges from the fierce competition of other countries especially the challenges from the emerging market. Moreover, these impacts on the capital rising problems for many EU member may also result in a structure model changing to meet the new environmental requirements in the near future.
By and large, the capital raising issues due to the debt crisis in Europe may not only contribute a great pressure for this region’s banking system but also be detrimental for the future development and the economy recover of the euro region, which may only work as a short term measure and needs badly other long term control measures to assist.
ii) Impacts on investments
On the one hand, as the bad effects of the euro crisis have generated much side influence on the euro market and its currency, there is a retreat trend of many foreign investors from the European market to other safer regions. The sluggish euro stock market, for example, the market value even dropped to 1995.01 points in September this year and a weak rebound trend in the near future, which largely decrease confidence of investors in the stock market. (Yu 2010)
Figure 3.0 Stock market in Euro area
Source: Trading economics
On the other hand, as the continuing influences of the euro crisis on the confidence of so many business players, it is seemed that a large sum of capital flows into the USA, Germany, UK and other relatively steady countries to avoid the impacts of this crisis. Many countries possess the idea that they prefer to hold the America debt tightly although there is also a influence from the euro crisis on America. (Yu 2010)
From the EU aspect, Garcia (2011) pointed out although this crisis did lead to many investors avoid the direct or indirect investment on this region. But the depreciation of its Euro wasn’t merely bad news for EU countries, which may have positive influence on the export trade of these countries, which for America may be not a good thing. So if the EU can well manage the trade balance between the import and export industry to maintain the increasing rate of its export trade and promote the stability of domestic trade as well, once the crisis is near the end, the entire European market may also be a good investment region for both domestic investors and foreign investors to run their capital and business there.
But to act wise enough, it is really seemed not so proper for other countries to continue their investment on the European debt at the crisis time. Let’s take China for example, according to the data from the national bureau of statistics of China, it holds about $ 3,200 billion of foreign exchange reserve, 30% of which is the Euro capital. Under this situation, if China continues to invest in Euro which is experiencing depreciation, it will cause China too much. This is also the reason why many capitals of the foreign governments avoid continuing to invest on euro at this period. (Garcia 2011; Griffin & Pustay 2010)
Generally speaking, during the crisis time, the direct influence on the investment is the large sum of capital retreat from this market and other business player hold a wait-and –see attitude on this market. In a word, the investment situation in this market is sluggish.
iii) Impacts on exchanges rates
Since the beginning of the euro debt crisis, the euro has experienced a depreciation trend which has depreciated nearly 10% or so. As the deprecation of the euro is aimed to save EU members from the debt crisis, which has a series of influences on other major currencies in the world (Hui and Chung 2011).
At first, according to Hui and Chung (2011) the depreciation of euro has both positive and negative effects on the economy situation of this region. The deprecation of the currency namely the decrease of the exchange rate of euro has promoted the export industries of EU members, which because the deprecation result in a cheaper purchasing price in the international trade to buy products from EU. Meanwhile, the decreasing of euro exchange rate may also reduce the imports industry as the domestic products are cheaper than the imported ones, which may also push up the domestic price when the demand exceed supply in the domestic market resulting in decreasing the purchasing power of consumers in this region.
Secondly, euro debt crisis has also become one of the determinants for the passive appreciation of Chinese currency namely Renminbi (RMB). Because the weak situation of euro and the poorer performance of USD compared to RMB, massive capital has flown into China to appreciate RMB. Figure 4.0 shows us the appreciation trend of RMB in recent. In the first place, the appreciation of RMB has speeded up the internationalization of Chinese currency and may contribute it to be a reserve currency. And these massive capital inflowing into China may also boost its trade to a large extent. In the next place, the appreciation of Chinese currency may also have bad influence on its export industry. As a fast developing country, China depends on its export trade to a large par and the appreciation on the Chinese currency will decrease its export industry as well. (Yu 2010)
Figure 4.0 USDCNY exchange rate
Source: Trading economics
Thirdly, the deprecation of euro and the earthquake has increased the demand of Japanese Yen to a large amount. And compared the weak USD and euro, Japanese Yen has owned a strong origin and a developing potential, that why there is a appreciation of this currency as figure 5.0 shows. (Hui & Chung 2011)
Figure 5.0 USDJPY exchange rate
Source: Trading economics
Moreover, with reference to Hui and Chung (2011) in the USD, it still enjoys a dominant status as the most favorable currency in the world. Although the euro debt crisis and deprecation of euro has made the major trader partner of EU faced with embarrassing situation, the active practices implemented by the American government to maintain the relative low exchange rate of USD so as to maintain the performance of its export industry, a much safer haven status enjoyed by USD compared with other countries, the unresolved side effects of euro crisis leading to the weak performance of euro, and other relative positive situation for USD all result in the dominant status of this currency and a expected exchange rate in accordance with of the US government’s expectation.