Investors are keeping a watchful eye on the eurozone. Each day, something new seems to move markets dramatically up or down. The economy has become global and although we most frequently hear of the affects to countries like Germany, the United States and the United Kingdom, there are other countries that have finance ministers spending far more sleepless nights than they want to let on. (For more on the global economy, check out Can The IMF Solve Global Economic Problems?)
TUTORIAL: Economics Basics
China has been in the news after being wined and dined by eurozone officials in an attempt to get a piece of their $3.2 trillion that they hold in foreign reserves to help fund the eurozone bailout fund. The chances of that happening are slim according to Chinese officials, largely because of the country's citizens not wanting to help European countries who still have a higher standard of living than they do.
Still, China faces an inflation problem, which is largely a result of the eurozone contagion, and Chinese finance officials seem unsure of how to stem the ballooning prices on food and property. Europe is also China's largest export destination, so any slowing in the eurozone will affect Chinese exports.
Brazil is so worried about the eurozone contagion that it wants to increase its share in the International Monetary Fund, so it has more say in the decisions regarding the eurozone. Brazil is especially worried because Europe accounts for 20% of Brazil's imports and exports.
If a catastrophic event in Europe causes a severe downturn in the economy, commodity prices are sure to go lower having a severe impact on Brazil's economy. Some emerging markets analysts believe that even if the worst did occur, Brazil, with more than $300 billion in reserve, is in a strong financial position to handle the impact. (If you are interested in investing in Brazil, read Investing In Brazil 101.)
United Arab Emirates finance officials have repeatedly said that the eurozone events will have little or no impact on the health of the state, but others disagree. Ratings Agency Fitch believes that although the UAE has refused to get involved in the funding of the eurozone bailout, a banking crisis would certainly affect the UAE, which has $138 billion of its debt financed by European and U.K. banks.
In addition, tourism and business development largely comes from the eurozone, so any further slowdown will continue to negatively affect the revenue that comes from those two industries.
The eurozone crisis will affect Australia in three ways. First, demand for Australian raw materials largely comes from China, which, in turn, exports to Europe. If Europe slows down, so does the Chinese demand for Australian materials.
Second, during the financial crisis of 2008 and 2009, large scale projects based in Australia were curtailed or canceled because of lack of available funding. Third, tourism and direct exports could drop to levels unseen if a catastrophic event happens in the eurozone. (For more on Australia, see The Australian Dollar: What Every Forex Trader Needs To Know.)
The eurozone is South Africa's largest trading partner. Although South African officials downplay the potential impact, the country's currency has seen more than 20% drop against the dollar, as investors have grown more wary of investing in emerging markets due to their inability to absorb the potential European contagion.
South Africa officials say that although the eurozone is their largest trading partner, only 5% of their exports go to the countries directly affected by the crisis.
The Bottom Line
Although investors are prepared for the worst, as the situation continues to unfold, investors remain cautiously optimistic that world leaders will find a way to curtail catastrophe. (For more on how the eurozone affect you, see How eurozone Debt Benefits Americans.)
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