During the last 18 months, the European bond market has shown extraordinary rising bond yields. The rise has been mainly attributed to non-competitiveness across the euro zone and embarrassing government debt positions in major economic countries, like Spain, Greece and Italy. According to Bloomberg, the bond yield in Italy has increased from about 4.95 in March to about 6.2 in June to reflect the increasing risk. Whereas the bond yields of the 10-year government bonds in Spain have increased from 4.9 in March to about 6.3 in June, their Greek counterparts have risen from 18.45 in March to 26.6 in June.
As for the stock market performance in Europe, the picture is not bright. Over just the last year, the Euro STOXX 50 index has declined by 21.25 percent to reach 2264.72. Indeed, the major losers have been the Italian FTSE MIB and the Spanish IBEX 35 with declines in their respective indices equal to 30.43 percent and 32.31 percent. On the contrary, the Saudi stock exchange market index has increased in the past 12 months by 2.69 percent, according to Bloomberg estimates.
Asked whether the Saudi economy will catch the cold from Europe and suffer from the current debt crisis, Habibullah Turkistani, professor of international marketing at King Abdulaziz University, said: "The Saudi economy will definitely be affected from the current economic mess in Europe, especially that such a mess is taking place at the same time with huge political transformations in the Middle East which may have multiplying effects. However, the approval on fiscal ESM treaty by the German Parliament will result in enhancing investor's psychological status, yet with no significant impact on the overall economy in Saudi Arabia."
Habibullah said: "The Saudi economy has vast stock of metals which may further shield the Saudi economy from wind coming from Europe."
Quite similarly, Thomas Chevrie, deputy head of treasury unit at the Banque Saudi Fransi, said: "The Saudi economy will not be affected strongly by the economic imbalances in Europe given the huge investments in development projects and building of new industrial cities. These development projects will enhance economic growth and makes it less vulnerable to international economic crises. Moreover, since international investors are not significantly investing in the Saudi stock exchange, this will further protect the Saudi economy and particularly the stock exchange from losing market confidence due to this economic crisis."
As regards whether the Saudi oil will play a role in multiplying the effect of such crisis or in protecting the Saudi economy, Ziyad Omar, co-founder and CIO of Gulf One Investment Bank, said: “Today, Asia’s economies are more relevant to the Saudi economy than the European counterparts. The Middle East, North African countries that have significant trade with Europe may feel the impact of the European crisis more than the GCC. However, in today’s connected global economy, no zone is completely immune to a crisis of this proportion. The best course of action for the GCC is to focus on growing its home turf by expanding infrastructure and industrial capacity. This will create jobs and build more resilience into the regional economy”.
Mohammed Salisu, chief economist at Gulf One Investment Bank, added: "I think the global economic crisis will not affect the Saudi economy significantly. It relies heavily on oil exports and enjoys substantial savings in reserves, about $400 billion to $600 billion, that act as a shield from this crisis.”
However, he said: “I expect demand on the Chinese exports to be reduced by the Europeans, slowing economic growth in China, and reducing demand on oil. This may cause a slight negative impact on Saudi economy.
Is there any way to get out of here?
Similar to its predecessors, the current global economic crisis teaches us that what the euro zone needs is not a pain-relief aspirin in the form of monetary bailouts. If financial bailouts were effective remedy for such economic imbalances in Europe, then it should have become sufficient by now to recover. Instead, the euro zone needs a unified fiscal policy and more political maturity. For instance, way back in May 2010 when Europe's finance ministers approved a 750 billion-euro rescue package to ensure financial stability across Europe through the European Financial Stability Facility (EFSF). Similarly, in October 2011, euro zone leaders agreed to introduce a generous package that eases the debt's pressure on countries on the verge of exiting the EU. This included a proposal to write off a 50 percent of Greek debt owed to private creditors. Yet, things have not improved, but in many respects have deteriorated as has been signaled by the declining stock market indices and rising bond yields.
On the other hand, some argue that senior European officials have given some concessions in last week's summit by agreeing on financial, economic and political union to be moving in parallel. However, the mechanism through which such union will be brought has not been uncovered, leaving such a step to too much skepticism and uncertainty. As if things have not been bad enough, the time lag between approving the bailout and putting it into force may also hinder achieving a better economic balance across the euro zone.
It is also believed that the worst is yet to come in countries like Spain, Italy and Greece. Indeed, German Chancellor Angela Merkel has emphasized the fact that no bailouts will be granted unless tough conditions are satisfied. This means that the worst is yet to be felt by the people of these economically plagued countries because of contradictory fiscal policies waiting for them so that Merkel's hard conditions are satisfied. In return, this may create an unrealistic economic pressure, rising public wrath and a dramatic shift in the midway with further economic repercussions, declines in the share prices and increases in bond yields. In the worst scenario, unless serious financial integration is introduced, this instability may kill the "European Dream" in the future.
All in all, the euro zone is living a turning point moment either to have the European finance ministers agree on unified fiscal policies or to prepare a grave to bury the European dream in. In all cases, the Saudi economy will not be seriously affected in a negative way as it enjoys a solid economic foundation and is having relatively not very strong trade relations with countries currently suffering, like Greece, Spain and Italy.
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