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Worried about Europe’s debt troubles?


With the European debt situation getting worse by the day many of us here in Australia are wondering how serious the situation is, and what it means for us. According to the Bank for International Settlements (BIS), the official banker to the world's central banks, the European debt crisis is beginning to look remarkably similar to the subprime mortgage meltdown. That financial fiasco came out of the United States in 2007 and spread like a virus through the global economy.

The head of Australia's central bank, Glenn Stevens, has warned that Europe's financial problems could spread to the global economy, if conditions continue to worsen. While we are getting used to predictions of economic doom and gloom it is worth remembering that Australia was the only developed nation in the world to avoid recession during the global financial crisis. Australia's strong trade links with Asian countries also provides us with some insulation from debt problems coming out of Europe.

In some ways Europe's debt problems are advantageous to Australians. In May 2009, one Aussie dollar bought around 56 Euro cents; in May 2010 that same Aussie dollar now buys around 69 Euro cents. Meaning your trip to Paris, Berlin or Rome is cheaper now than it was 12 months ago. For home owners too, a volatile world economy may make the Reserve Bank of Australia (RBA) think twice about raising official interest rates.

The European debt crisis however still has the possibility to get significantly worse and may cause problems for Australia. Governor Stevens recently cautioned that 'the issues will continue to need careful handling by all concerned and close monitoring by the rest of us. It cannot be denied that the potential for the further financial turmoil exists.'