Eurozone crisis: What turmoil means for you
- 3 October 2011
- From the section Business
All those red numbers on stock market boards may appear to be a strange and mysterious mix of data to many people.
But volatility on the stock markets in the UK and Europe has come as a result of the eurozone debt crisis, concerns for the UK economic outlook, and following the Federal Reserve's stark warning about the state of the US economy.
In the third quarter of 2011, the FTSE 100 index in the UK recorded its worst quarterly performance since the same three months in 2002, and the fourth worst quarterly performance since it was launched in 1984.
This volatility can affect anyone with a pension, those considering retirement, savers with Individual Savings Accounts (Isas), and even money set aside by families for the cost of children's university education.
On top of this, families are concerned about the state of the UK economy in general, which is in no way immune to what is happening within the eurozone or in the US.
Surely all those worried looking traders have nothing to do with me?
Anyone who has money invested in some way or another could be affected by the continuing turmoil on the markets.
A lot of money is invested in the stock market by pension funds, of which more later, but the effect this is having on the banks could affect anyone hoping for a loan or a mortgage.
If banks continue to write down debts from Greece, and other EU countries, then they might have less to hand out in home loans.
There are also signs that the crisis of confidence is causing money to be withdrawn from the European financial system, further depriving banks of funds.
However, in the UK, they have been encouraged by the government to continue lending.
Millions of people in the UK also have money put away in a stocks and shares Isa. A total of £108bn is invested in these Isas in the UK.
It has always been the case that these investments can go down as well as up in value, but anyone hoping to cash some of this in because they are financially stretched will most likely be taking a hit.
Insurance companies also invest in the stock market, so there could eventually be an effect on the cost of premiums and the products available. However, these companies do have large financial cushions in place to cover volatility.
Anyone receiving a bonus in shares might find they are not worth as much as expected.
So is it time to panic then?
No. Investments are generally for the long term, so these short-term fluctuations should not worry people too much.
People who invest directly into the stock market can log into their account and see how their valuation might have dropped.
But most people only get an annual update on their investments and keep their money in for many years - either for their retirement or to hand down in inheritance.
"This could lead to some panic. People do not pay so much attention when values go up," says Anna Sofat, of financial services company Addidi.
"They should not risk selling out at a time that is not good for them."
Andrew Gadd, head of research at the independent financial advisers, the Lighthouse Group, says: "People should not be panicked out of the market."
What about somebody who is about to retire?
About 60% of an average pension fund is invested in shares, so this affects a lot of people's financial futures. The FTSE 100 fell by 13.7% in the third quarter of the year.
But the situation is most acute for those with personal pension funds and on the cusp of retirement. They will be looking to pull money out of the stock market in order to buy an annuity - a pension income for the rest of their lives.
And the annuity they can get from an insurance company is being affected by the way major investors act.
The annuity rates being offered can be affected by investors who, worried about global shares, are looking to buy safer investments instead. They are going for gilts, so the price of those is rising and the yields falling. This, in turn, affects annuities.
As a result, insurance companies have cut the income paid from annuities, according to Billy Burrows, of the Better Retirement Group.
Employees with a workplace final-salary pension are protected from stock market volatility.
But if the value of shares falls for a long time, then some businesses might consider closing down these schemes quicker than they otherwise might have done.
How long will this volatility go on for?
Now that is a question that a lot of people want to know the answer to.
The background to this is that investors are worried about both the eurozone debt crisis and the weakening economic recovery in Europe and the US. It is not clear how long this will go on for.
For example, the Federal Reserve said there were "significant downside risks" to the economic outlook in Europe and the US, including strains in global financial markets.
But financial advisers are suggesting that small investors sit tight at the moment.
"People should be looking at the long term," says Adrian Lowcock, senior investment adviser at Bestinvest.
"Weak markets often offer buying opportunities."
Mr Gadd says he expects volatility for six months, so investors should ensure their portfolio is diverse.
The UK is not in the euro, so why are we affected?
With various countries in Europe needing financial help to deal with the debt crisis, there is a tab that needs to be picked up somewhere.
Even though the UK is not in the euro, it has still been lending money to troubled economies as part of bail-out packages.
For example, it has contributed more than a billion euros to the European Financial Stabilisation Mechanism. This has been used for loans to bail out the Irish Republic and Portugal. The UK's maximum possible contribution is 7.5bn euros (£6.5bn).
There is also the UK's loan to the International Monetary Fund (IMF) - more than 10 billion euros a year - that is also used to fund the bail-outs, although it is paid interest on this.
Is that all?
No, the UK also made a bilateral loan of £3.2bn to Ireland, because it is seen as such a key trading partner.
That signals another concern for the UK - that slowdowns in economies across Europe means less trading between these countries and the UK.
In other words, they are less likely to buy things made, and services provided, in the UK, and things the UK buys from them could become more expensive.
For businesses operating in the UK, potential custom from Europe could shrink and, for some small and medium sized firms already feeling the pinch, that just adds extra pressure.
Should I be worried about my savings?
Remember that savings, unlike investments, are not going to fall as a result of stock market moves.
Interest rates are low for savers, but there is now greater protection for their money than there was at the height of the banking crisis.
Full compensation up to £85,000 per saver, per authorised institution is paid to those who deposit money in an authorised bank or building society if it goes bust.
For investment products, the first £50,000 is covered per person, per firm.
What about my holiday money?
Volatility in the markets and the eurozone crisis should not be sending holidaymakers scurrying back to the travel agent to book an alternative destination.
There has been relatively little change in terms of what UK travellers can get when exchanging pounds for euros.