International Credit

European Stock Exchanges Ravaged In 3rd Quarter

Image Group
AP photo
A pedestrian walks by the Athens Stock Exchange in Athens, Greece. Greece's stock market fell 45 percent in the 3rd quarter 2011.

Equity capital is fleeing the debt-ridden economies of Europe, particularly EU maket countries, in droves as evidenced by huge declines in their equity markets for the third quarter of this year.  One bright spot: Slovakia.

To no ones surprise, Greece's stock market, the Athens Stock Exchange, was battered in the third quarter of 2011 declining 45.3 percent from July to September, according to a quarterly performance ranking of the world's 65 major stock market indexes released earlier this month by the Wall Street Journal. But what may surprise some, however, is that the next nine worst performing stock exchanges are also European (see chart below).

The current developments in European markets are important to watch for both creditors and investors because the viability, health and integrity of a nation's stock market is often a key indicator of its economic and political strength.  Countries with well developed equity markets tend to embrace capitalism and free trade and thus carry less credit risk while countries with no or under-developed equity markets tend to obstruct capitalism and free trade and carry much greater credit risk.  Venezuela is a shining example of the latter.

Cyprus, a small Mediterranean nation that joined the European Union (EU) in 2004, posted the second largest Q3 stock market loss at 44.9 percent.  Although located just south of Turkey, Cyprus has a sizable Greek population and like Greece has adopted the Euro as its currency.

Greece and Cyprus are followed by fellow European nations Hungary, Poland, Austria, Italy, Germany, Romania, France and Russia (see chart).  Another European country, Finland, was ranked 11th with the worst performance.  These rankings are almost a repeat of July of last year when the 10 worst performing were, once again, all European and once again led by Greece and Cryprus.  United States markets made up of the the New York Stock Exchange and the NASDAQ declined only 11.5 percent.

But the significance, and danger, in this ranking is the fact that Europe's two largest economies, Germany and France, are not far behind their crisis-ridden neighbor Greece with stock market declines of 30.9 and 30 percent respectively for the third quarter 2011. 

As a result of the third quarter bloodbath, the German stock market is down 13.6 percent for the year, according to its main index the Frankfurt DAX, while the French stock market is down 16.6 percent, according to its main index the Paris CAC.  The New York Stock Exchange (NYSE), meanwhile, actually increased 2.9 percent over the same period, according to its main index the Dow Jones Industrial Average.  The Nasdaq rose 1.8 percent as measured by the Nasdaq Composite.

Overall, the Deutche-Borse has lost $161.6 billion or 11.3 percent of its total stock market capitalization for the year.  Similarly, the French section of the Euronext has lost an almost identical amount, $162.2 billion, which represents 14.3 percent of its total stock market capitalization, according to information obtained directly from the Euronext exchange by CreditPulse. The NYSE, the largest stock exchange in the world with a market capitalization of $13.33 trillion as of October 2011, has had its lumps too in 2011 but not nearly as bad as Europe shedding 8.1 percent of its total market cap.

Why are investors fleeing Europe?  Banks are one reason.  Most of Europe's largest banks are in a mess -- over-exposed to bad loans, highly leveraged and too dependent on government support.  In a discussion of European markets in its Oct. 10th issue, the investor weekly Barron's said "Market action suggests investors believe that the European banking system is too weak to handle even an organized and voluntary restructuring of Greece's debt."

One European country, however, that didn't fare nearly as bad as its euro zone counterparts is one of its newest members, Slovakia. The third quarter stock market performance for this central European country was down only 8.3 percent, mild compared to its much larger fellow euro zone members. 

As Europe's largest economies have moved virtually in concert to support, refinance and bailout ever expanding governments, Slovakia, led by a coalition of right-leaning political parties, has been doing just the opposite.  From 1998 to 2006, politicians from these conservative parties led a major privatization push in addtion to restructuring Slovakia's welfare and pension programs, the same type of restructuring that Greece desperately needs but keeps resisting.

The conservatives in Slovakia won re-election in June 2010 and are led by Prime Minister Iveta Radicova.  Radicova and her party have consistently opposed the EU proposed bailouts for Greece.