Greg Secker on the euro debt crisis: The markets are not human

By Greg Secker

One of the more interesting if unpredictable traits of the Euro debt crisis has been how the markets have behaved. A steady slide as the Euro falls into further obscurity has been peppered with mini spikes at every shred of positive news. Two of the more peculiar jumps though have been following the resignations of the Greek and Italian Prime Ministers with both market reactions well worthy of analysis.

It begs the question, how much control can a single person have over the financial markets? Obviously no one can control the markets in such a way by pressing an on/off button for when they want growth or stability. But watching the euro debt crisis unravel across Italy over the past fortnight has shown the markets sometimes have a mind of their own.

The markets do unquestionably react to individuals, or to put it more accurately, announcements made by or about individuals. When George Papandreou, the Greek Prime Minister at the time, said he was standing down with immediate effect the markets rallied, indicating support for the move and a glimmer of hope.

The positive news of a new leader but more importantly a new strategy and unity government gave the markets cause to rise. The growth itself may not have been significant but the revelation of new strategies to tackle the Greek debt was enough to move the markets.

At Silvio Berlusconi’s resignation a few days later the markets reacted again. However their movements on this occasion tell us more about the person than the plans. When the embattled Italian PM announced his withdrawal the markets jumped, almost in joy, only to slump again when it became clear he would cling on to power a little while longer.

There’s no financial reason why Berlusconi’s announcement should have caused the markets to move. Unlike Papandreou’s statement, there was no immediate mention of a new strategy or plans to mend the crisis. The announcement was purely about one man. And yet the markets reacted in a way to suggest Berlusconi was a cause of Italy’s debt and in his absence the corner would be turned.

Calls for Berlusconi to go have circulated for a long time, long before the full scale of Italy’s debt problem had been revealed, and there was a general wondering if he would ever step down of his own accord. The movements could be described as simply displaying the general feeling of relief felt by Italy and the economic world. But the markets are not human; they shouldn’t be reacting to news with feelings and emotions, as this example indicates happened.

It shows how human the markets can be and with that comes fragility. It’s seen regularly in the stock markets, often at the news of the death of a CEO, where it’s now common practice for shares to dive. But it’s unusual to see it in the money and currency markets and worryingly so during the midst of Europe’s biggest debt crisis.

It’s a cause for concern that a single announcement of an individual’s actions can cause a change in the markets, and one that needs to be carefully monitored.

Of course positive news and announcements of new strategies, fiscal plans, Governments and financial aid will always affect markets positively and ministers will use these announcements strategically.

But it shows how unpredictable the markets can be and that they cannot be controlled despite our world leaders’ best efforts. It indicates the possibility that the markets will undermine whatever decision Europe's leaders make in the following weeks and months as they attempt to contain the Euro crisis.

Greg Secker, CEO and founder of Knowledge to Action