Global financial woes continue

While the world has seemingly
escaped a global financial
crash that would have put the
great depression of the 30s in
the shade, it is not out of the
woods yet.
This as US President Barack
Obama announced at the
beginning of this week that
he and top lawmakers had
reached an 11th-hour deal
to avert a first-ever US debt
payment default that would
have sown chaos across the
world economy
“I want to announce that
the leaders of both parties in
both chambers have reached
an agreement that will reduce
the deficit and avoid default,
a default that would have had
a devastating effect on our
economy,” he said.
As described by Obama
and congressional leaders, the
deal would raise the country’s
US$14.3-trillion debt ceiling
by about US$2.4-trn in two
steps, while calling for roughly
the same amount in spending
cuts over 10 years.
At the time of writing, he
still had to get both parties’
support in the Congress and
the Senate.
But, regardless of the US
being thrown a lifebelt, Europe
(and the Euro) is also in danger
of drowning in the deepening
waters of its own debt crisis
– which has so far pushed
Greece, Ireland and Portugal
into bailouts. It shows no signs
of losing momentum, raising
fears in recent weeks that it
will engulf Italy and Spain as
well.
This mostly Mediterranean
debt tragedy could lead the
world into a finance and trade
crash similar to the 2008/9
crisis.
Luke Doig, Johannesburgbased
senior economist at the
Credit Guarantee Insurance
Corporation asked: “Could
the globe and South Africa
re-enter recession? It cannot be
excluded. Be prepared; protect
yourself.”
This fear was also on the
minds of the International
Monetary Fund financial
thinktank. It has expressed
its growing concern about the
deepening crisis in Greece,
stressing that a failure by the
European Union (EU) to take
decisive action could lead to a domino effect through the
single-currency zone and result
in a second global financial
meltdown.
In its starkest warning yet
that Greece has the potential
to replicate the system-wide
shock triggered by the collapse
of Lehman Brothers in
September 2008, the IMF told
Europe’s policymakers to stop
squabbling over the terms of a
bailout and act immediately to
prevent contagion.
At FTW’s request, Doig
examined the Eurozone crisis,
and its possible impact on our
own home soil in SA.
“The ongoing concerns
about debt sustainability in
mainly the Mediterranean
states of Greece, Italy,
Portugal and Spain certainly
pose threats,” he said,
“either to those conducting
direct business with them
or indirectly via shocks to
financial markets.”
The EU is SA’s largest
export destination,
accounting for around 23.5%
of total exports. Germany
(see table) ranks as the
fourth largest individual
destination with Italy and
Spain attracting R5.3-billion
and R3.7-bn respectively of
SA exports in the first five
months of 2011.
“While most of the attention
has been focused on problems
in Greece and Portugal,” Doig
added, “their export relevance
is far lower, and the shift in
attention to Italy and Spain
– the third and fourth largest
Eurozone economies – is more
concerning.”
“The issue at hand is
contagion,” he told FTW.
“Concerns around Greece and
Portugal’s ability to service
their debt implies that debt
costs for other countries shoot
up as fear takes hold.”