In the space of six months we have seen the world's focus shift from the debt problems in the United States to the debt crisis in Europe. Both, however, remain largely unresolved.
These past two weeks have seen extraordinary developments in the euro zone. Resignations from both the Greek prime minister and Italian president were indicative how serious the financial problems have become in the region.
George Papandreou's position became untenable after he announced plans for a referendum on the European Union bailout. The sheer amount of turmoil that decision created in financial markets left his credibility in tatters. Italy's Silvio Berlusconi also lost favour when his country's debt position (and cost of debt) reached crisis point. Yields on 10 year government debt exceeded 7 per cent at one point - higher levels than that of Ireland and Portugal when they were forced to seek assistance from the authorities.
The focus is now on the world's third largest debt market (Italy) and the progress being made to pass the new bailout through parliament and source a new president. The faster it can do that the smoother the ride for financial markets.
We are also waiting for some progress to be made on the fine detail of the European Financial Stability Facility designed to inject much needed funds into the whole region.
The European sovereign debt crisis remains a fluid situation and financial markets are extremely sensitive to on-going political developments. It's simply too early to say that it won't get worse before it gets better. There are too many political and social hurdles to overcome before the goal of fiscal maturity in the euro periphery countries can be achieved.
In Australia, on the other hand, we had a surprise reading on unemployment this week. It actually dropped to 5.2 per cent (after September's read was revised upward to 5.3 per cent). Most of the jobs created came from the reconstruction efforts (and mining boom) in Queensland. The real test for Australia's jobs market and consumer confidence will be how the country responds to a potentially worsening debt crisis in Europe.
China, too, remains very much the focus of our attention given its trade ties to Europe and our ever-growing economic reliance on the region. There's a lot to keep us engaged.
David Taylor
