Global Economic Crisis

Another wave of credit downgrades has hit the Eurozone. S & P cut the credit worthiness of several European sovereigns, most conspicuously France, which saw its coveted AAA rating reduced to AA plus.  Austria also lost its AAA rating, and Italy was reduced by two notches, now being rated by Standard & Poor’s at BBB plus.

Predictably, French Finance Minister Francois Baroin said “It’s not good news, but it’s not a catastrophe.” A statement of self-contradicting spin that will be unlikely to arouse confidence among sovereign wealth funds and private investors. But perhaps most alarmingly, with Germany now the only Eurozone economy retaining a AAA credit rating, and the German economy having contracted in Q4 of 2011, all these downgrades and somber economic trends undermine the supposed savior of the insolvent Eurozone countries, the so-called European Financial Stability Facility. How will the EFSB sell its bonds to generate capital lend to the fiscally most vulnerable members of the Eurozone? Things are looking increasingly gloomy in Europe, with no resolution for the sovereign debt crisis or economic downturn in sight. And yet, the politicos are still banking on the European Central Bank and its printing press as the savior of last result. What a thin reed to base hope of an economic miracle on.

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After months of individual sovereign downgrades by the three leading ratings agencies, S & P has now entered a quantum leap by placing almost the entire Eurozone on a credit watch, including the behemoth economies of Germany and France. Furthermore,  Standard & Poor’s followed up by placing the European Financial Stability Facility, the vehicle for supposedly bailing out problematic Eurozone sovereigns and banks, on a negative credit watch. The fact that even the EFSF is on the verge of a downgrade, along with potentially almost all the sovereign states using the euro, is proof positive that the Eurozone debt crisis is irreversible, the politicians have lost control, and when the inevitable downgrades follow this devastating credit warning from S & P, all hell will break loose.

In the meantime, the clownish politicos of the Eurozone continue their interminable series of emergency meetings, continuing to promise a final and complete solution to the Eurozone debt crisis. However, in a rare moment of candor, German Chancellor Angela Merkel admitted that at best, a solution was years away.   Given all that, will China and the other BRIC nations, along with private investors, really want to invest in Euro bonds? 

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

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For the first time in its history, the United States has seen its sovereign debt downgraded by a major credit rating agency. S&P lowered its grading of U.S. government long-term debt by a notch, from AAA to AA +.  Predictably, the Obama administration is attacking the rating agency, accusing it of mathematical errors, similar to the reaction of Eurozone politicians when ratings agencies cut the rating of insolvent sovereigns. American financial pundits are also attacking this unprecedented decision by a major ratings agency as “premature,” while boasting that Moody’s and Fitch have thus far held their AAA rating of American debt.

In my view, the reaction  and rationalizations of American politicians and financial commentators responding to the loss of the nation’s coveted AAA status is totally irrelevant. What is relevant is the point of view emerging from America’s largest overseas creditor, the People’s Republic of China. The official Chinese news agency, Xinhua, has issued a commentary on Standard and Poor’s downgrade of U.S. sovereign debt which clearly reflects the attitude of ruling circles and policymakers in China. What follows is the Xinhua commentary in its entirety:

The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor’s (S&P) for the first time on Friday.

Though the U.S. Treasury promptly challenged the unprecedented downgrade, many outside the United States believe the credit rating cut is an overdue bill that America has to pay for its own debt addiction and the short-sighted political wrangling in Washington.

Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.

China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.

To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.

S&P has already indicated that more credit downgrades may still follow. Thus, if no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way.

Moreover, the sputtering world economic recovery would be very likely to be undermined and fresh rounds of financial turmoil could come back to haunt us all.

The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.

It should also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits.

A little self-discipline would not be too uncomfortable for the United States, the world’s largest economy and issuer of international reserve currency, to bear.

Though chances for a full-blown U.S. default are still slim now, the S&P downgrade serves as another warning shot about the long-term sustainability of the U.S. government finances.

International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.

For centuries, it was the exuberant energy and innovation that has sustained America’s role in the world and maintained investors’ confidence in dollar assets. But now, mounting debts and ridiculous political wrestling in Washington have damaged America’s image abroad.

All Americans, both beltway politicians and those on Main Street, have to do some serious soul-searching to bring their country back from a potential financial abyss.

global economic crisis Standard & Poor’s, u.s. debt crisis, u.s. debt downgrade, Xinhua news agency

S&P has weighed in on a bizarre scheme by the Eurozone crisis managers and French banks on supposedly enabling debt-stricken Greece to finance its insufferable fiscal burden. In the view of Standard & Poor’s, the French plan for banks to, in effect, roll-over private debt connected with the crisis will be seen by the ratings agency as an actual default.

With virtually every sane economist and observer believing that Greece is already insolvent and will inevitably default on its sovereign debt, it appears that the ratings agencies are now joining the choir. All that are left are the EU and IMF spin-masters preaching the falsehood that the debt crisis in Greece will be resolved without a default. What is tragic is that massive amounts of European taxpayers’ money is being poured down a rat-hole for no good purpose.

global economic crisis greek debt crisis, greek default, S&P, Standard & Poor’s

History may not exactly repeat itself, but it often rhymes. The recent spike in oil prices, now above $100 per barrel, mirrors a development that occurred in the middle of 2008. Then, oil prices hit more than $140 per barrel.  Earlier in 2008, the U.S. Congress passed a major stimulus spending bill, financed with borrowed money,  with the promise that this step would ensure America did not slide into a recession due to falling house prices. We all know what happened afterwards; the oil spike trashed the global economy, after which the world’s financial system was brought literally to its knees. The subsequent global economic and financial crisis brought on the worst recession since the Great Depression of the 1930s.

While supposed experts maintain that the global economy is undergoing a recovery, it is fragile at best, and totally dependent on massive sovereign indebtedness, which is now bringing on a sovereign debt crisis. Just days ago, the ratings agency Standard & Poor’s turned negative on the future credit worthiness of the U.S. government.  If, on top of all these developments, oil prices return to the highs of the summer of 2008, the largely state-subsidized economic recovery underway in many advanced economies is likely to  falter, precipitating a double-dip recession.

Oil prices are not the only metric to watch in the months ahead. It  is, however, a leading indicator of  what is likely to occur to the global economy. If oil price inflation causes enough economic downturn to further depress government revenues, the accelerating sovereign debt crisis will inevitably get much worse.

global economic crisis oil price rise, sovereign debt crisis, Standard & Poor’s

It is the rating agency statement heard across the world, like the first cannon ball fired at Fort Sumter. One of the three iconic ratings agencies, Standard & Poor’s, sent panic waves through global financial market when it issued a statement on the U.S. fiscal situation, changing its previous outlook on the U.S. government’s finances from “stable” to “negative.” However one interprets the latest statement from Standard & Poor’s ( and many Washington cheerleaders claim that the statement is meaningless and America will never default on its debts), the reality is quite clear: not even the “late to the party” rating agencies that previously classified subprime mortgage-backed securities as AAA grade investments can ignore any longer the catastrophic fiscal trajectory of the United States.

In its statement, S&P indicates that if the fiscal crisis in the U.S. remain unresolved, within two years U.S. Treasuries will be downgraded. The statement acknowledges that the American political system is totally dysfunctional, and appears unable to craft a viable plan to restore fiscal sanity to America’s out of control federal government budget. Reading between the lines, and adding my own perspective ( see my report “Global Economic Forecast 2010-2015: Recession Into Depression”) it seems increasingly obvious that save for a miracle, the United States is headed for a fiscal train wreck of calamitous proportion, probably sooner rather than later.

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The Athenian financial tragedy continues on its inexorable path towards fiscal destruction. The ratings agency Standard & Poor’s has now officially downgraded Greek sovereign debt to junk status. Clearly, without a European Union and IMF bailout, Greece will default on its public debt. However, the terms of the potential saviours of Greece, namely reducing the deficit to GDP ratio of Greek government finances, are politically and socially unachievable without the collapse of the current government in Athens.

Even with a bailout, Greece will only survive on life support until its next fiscal crisis. In the meantime, Portugal is also on the brink, followed by Italy, Ireland and Spain, the so-called Eurozone PIIGS. Since it is mathematically impossible for Europe to bailout itself, it won’t be long before the collective European Union is reduced to junk bond status. In that eventuality, will the equally debt and deficit ridden UK and USA remain bystanders?

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