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Stephen Long discusses market panic -

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Economics correspondent Stephen Long joins Lateline to discuss what is causing panic on the world
markets.

Transcript

LEIGH SALES, PRESENTER: To make sense of the sell-off on world markets, we're joined by economics
correspondent Stephen Long.

Stephen, firstly, can you update us with what's happening on the European markets that are trading
now?

STEPHEN LONG, ECONOMICS CORRESPONDENT: It hasn't got any better, Leigh. The route continues in
Europe, with markets down, the key share markets down, by 1.5 to 2.2 per cent after the morning
session. And Britain's key index, the FTSE 100, has fallen below 5,000 points for the first time
since November last year, a fall of 1.7 per cent. And you're also seeing a repricing for risk with
an increase in the spreads on corporate bonds and various other debt securities - almost a case of
déjà vu all over again, although we're not quite back there yet.

LEIGH SALES: So just give us a sense of that, of a fall of 1.5 to 2 per cent, just some context of
that. Is that serious or within the realms of what they would be expecting?

STEPHEN LONG: Well, they're paper losses on markets and you can't put too much stock on it, because
markets move up and down. But we've seen about $US5.3 trillion wiped off markets before tonight, so
you can add another trillion. I mean, they are big losses. Of more concern really is what's driving
it, and ...

LEIGH SALES: And what is that?

STEPHEN LONG: Well, clearly, the catalyst has been the debt woes in Europe, but I think
fundamentally you've had pricing on world financial markets which has been based on an expectation
that there would be a return to higher growth; that the problem was fixed; the GFC was over; we'd
rescued the banking system, and now we were back on track for growth. And what's happened is those
expectations are coming undone and with it you're seeing these precipitous falls on share markets
because of expectations now that profits won't be as high and that you won't just see sovereign
debt woes in Europe, but a general economic contagion which leads to a vicious cycle where European
growth gets hit by that, Chinese exports get hit by that and then Australia gets hit, because
commodity prices fall and our national income gets hit. And there are multiple negative feedback
loops here. For example, on the currency markets you've seen a massive revaluation of the Chinese
currency, the renminbi, against the euro. Now, Europe is now the biggest market for Chinese
exports, bigger than the United States, and what that means, a 14.5 per cent fall in the Chinese
currency against the euro means that Chinese manufacturing exports are far less competitive. So
you've got a double whammy there: far less demand if you've got an economic contraction in Europe
being driven by austerity measures, fresh risk and plus the currency movements hitting the
manufacturing exports from Asia.

LEIGH SALES: Interesting times. Stephen Long, thank you and happy birthday for tomorrow.

STEPHEN LONG: Thank you, Leigh.