Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

Return of the GFC

By Saul Eslake - posted Thursday, 27 May 2010

There’s been an unpleasant sense of déjà vu in financial markets over the past few weeks. Many of the symptoms of heightened investor risk aversion that characterised the global financial crisis of 2007-09 have re-emerged, including double-digit falls in many sharemarkets from their highs of earlier this year, substantially higher levels of volatility, falling commodity prices, declining bond yields, and a strengthening US dollar.

And even though Australia came through the crisis of 2007-09 in much better shape than most economies, Australian assets seem once again to have been harder hit - as they were in 2007-09 - with the Australian sharemarket among the worst-performing over the past few weeks, and more recently the Australian dollar experiencing an abrupt decline.

The renewed risk aversion of global investors appears to have been prompted by mounting concerns over two quite separate issues.


The first is the way in which European governments have responded to growing market concerns over sovereign debt.

There are some eerie parallels between the determination of contemporary European governments to avoid a Greek debt default, and to preserve the existing membership of the euro zone, with the efforts of their predecessors in the early 1930s to avoid defaulting on the debts incurred or imposed during and after World War I, and to remain on the gold standards. These efforts were not only ultimately futile, they actually made the Great Depression worse than it would otherwise have been.

The rhetorical and regulatory assaults by European governments on "speculators" in recent weeks also have striking parallels to that era.

Markets appear to believe that the most recent bailout package assembled by European governments, the European Central Bank and the International Monetary Fund have only deferred a Greek debt default, rather than averted it, and in so doing they have committed themselves to more contractionary economic policies than would have been required if the "inevitable" were allowed to happen sooner. This may eventually turn out to be wrong; but for the time being this view is driving investor behaviour.

Given the opprobrium that has been heaped on financial institutions, and markets more generally, for their role in bringing on the financial crisis of 2007-09, it's perhaps worth noting that the European debt crisis is almost entirely the making of governments.

It was a former Greek government that lied about the amount of debt it had incurred, and which entered into complex transactions designed to get around limits on borrowings by aspiring members of the euro zone. Other European governments (and the European Union) turned a blind eye to the fact that Greece (and other countries besides) had manifestly failed to meet the criteria for euro zone entry, and admitted them anyway.


And European governments failed to put their public finances in a sustainable condition during more propitious economic times. It's thus not entirely surprising, nor unwarranted, that European governments' pronouncements and actions in response to this crisis have been viewed so sceptically.

Although the focus of attention in recent weeks has been on members of the euro zone, other major economies also face an onerous task of restoring their public finances to a sustainable condition - including Britain, Japan and the US.

The possibility therefore exists that market attention will at some point turn to the credibility of any, or all, these countries' debt-reduction strategies, meaning the pressures now emanating from Europe could appear elsewhere.

  1. Pages:
  2. Page 1
  3. 2
  4. All

First published in The Age on May 25, 2010.

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

4 posts so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

Other articles by this Author

All articles by Saul Eslake

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Saul Eslake
Article Tools
Comment 4 comments
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy