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.”