The need to get to grips with the current crisis of indebtedness

The turbulence that has gripped financial markets is a response to the perception that politicians in the Eurozone and the US have been slow to face up to issues of indebtedness.

If Interest rates in the UK and the Eurozone remain low for years to come, the pound and euro currencies would then be an unattractive place for investors to deposit their cash.

Contingency plans
The direct exposure of UK banks to Greece is fairly limited, but Bank of England Governor, Mervyn King, revealed in his response to MPs’ questions in June that the Bank was working with the Treasury to draw up contingency plans for a Greek default.

The European Central Bank together with the ‘eurosystem’ of 17 national central banks can create money that is used to buy government debts to stave off a sovereign default. There is therefore no theoretical limit to how much can be bought up.

The sooner Europe’s political and financial leaders get to grips with the current crisis, the sooner the markets can try and return to some sort of normality.

US sovereign debt
Across the pond, the recent downgrading of US sovereign debt by Standard and Poor’s (S&P) is an important symbolic moment in the shift of economic power from mature industrialised nations to emerging economies.

The US will only regain its AAA status once politicians have demonstrated that they can implement the necessary tax increases and/or spending cuts that will eventually get the ratio of outstanding debt to GDP onto a downward trajectory.

Private investors are likely to keep their investments as simple as possible via direct investment and collective vehicles such as funds and investment companies, while those with direct exposure to higher risk assets, which may fall in value in the short to medium term, at least have the capacity to grow again in the future.