EUROPEAN FINANCIAL CRISIS AND FINANCIAL MARKETS Essay

EUROPEAN FINANCIAL CRISIS AND FINANCIAL MARKETS - Essay Example Acharya (2013) observes that a combination of factors led to the emergence of the European Union Financial Crises of 2010-2013. These factors include availability of easy credit conditions which occurred during the periods 2002-2008, and they led to high risk borrowing and lending practices. Patomaki (2013) believes that other factors include globalization of finance, imbalances in international trade, poor governmental fiscal policies, the economic recession of 2008-2012, and ineffective methods used by these nations to bail out troubled financial institutions. Acharya (2013) observes that the European financial crises had began unfolding late in 2009, when the government of Greece gave a revelation that previous governments did not give accurate reports of their budget deficits. In fact, they were under-reporting the financial position of the country. The revelation of this under-reporting occurred during the first quarter of the year 2010. During this year, the government of Greece gave a revelation that the 2009 budget deficit was 12.7%, and not 5%, as reported by the previous government (Patomäki, 2013). Roth (2013) denote that the Maastricht treaty made a provision which required parties to the treaty to maintain a budget deficit which is lower than 3% of the country’s GDP. Greece had a debt of around 400 billion pounds, and the French government owned 10% of this debt (Roth, 2013). This debt crisis spread to other smaller countries such as Portugal, Ireland, and Spain. Tyrie and London (2012) denotes that this crisis led to economic imbalances within Euro zone countries. In 2010, the European Union bailed out Greece by giving them a loan of 110 billion Euros, and another 130 billion Euros after two years (Tyrie and London, 2012). This paper analyzes the impact of the Euro zone debt crises on the financial markets. This paper analyzes the impact of this crisis on the equity market, and the bond market. This paper seeks to answer the question; What was the impact of the European Financial Crises on the bond and the equity market? In seeking an answer to this question, this paper borrows heavily from the elements of the portfolio theory and the asset pricing. Matousek (2012) observes that the portfolio theory is a theory of finance that aims at maximizing the expected return of a particular portfolio risk, or effectively minimizing the risks associated with a particular portfolio. It aims to achieve this objective by careful consideration of various investments options or portfolios. The portfolio theory is an aspect of diversification in investments, and it aims at selecting a variety of investments options which presents a lower risk, as opposed to other investments options (Matousek, 2012). This theory was developed on the basis that different investments assets, normally constantly change in value. Diversification therefore lowers the risk an investor might face. The asset pricing theory on the other hand concerns itself with explaining the relationship between expected returns, and the risk undertaken (Marco, 2013). It was developed on the premise that diversification alone cannot reduce the risks associated with investing in a volatile stock market. Marco (2013) further denotes that an investor has to be compensated in two ways, namely; the risk undertaken, and the value of his money, which is also considered in terms of time. This theory identifies a formula to use in calculating the expected returns of an investment (Marco, 2013). Equity Markets and the Euro zone Financial Crises: Farlow (2013) denotes that another term used to refer to the equity market is the stock market. This refers to a market where there is an issue of shares, and subsequent trading of those shares. These shares can ei ther be traded over the counter, or through various exchanges. Equity markets are a very volatile segment of an economy, and companies can use this type of a market to raise capital for their expansion and growth. The European Financ