And the Slide Continues … (But That’s Ok)

Stock markets are tumbling all over the world. Along the lines of my prediction in a recent post, stock markets in the US, Europe, Latin America & Asia, along with commodities markets, experienced significant declines.

Wall Street suffered the biggest fall in two years, brought about by massive “sell-offs” by investors, triggered by “great fear” of a US recession, while European markets also fell significantly, driven by the sell-off contagion and worsening debt problems in Europe’s large economies, including Spain & Italy. Latin American and Asian markets were not far behind either, as the sell-off continued on a global spree.

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Thus Begins the Slide

Global markets are on a downward slide. Stock markets across the globe are either falling sharply (indices in New York, London, Paris & Frankfurt are falling sharply as of writing this piece), or have closed lower (indices in Japan & Hong Kong).

Meanwhile, Spanish and Italian long-term bonds are yielding their record highest – indicating a lack of faith in their sovereign debt by creditors. Also, gold prices have hit a record high, being considered the lone safe investment now.

Having woken up from the keen focus on the US debt limit issue, global markets are now focusing on the general health of the global economy. The poor health of the US economy (slow service sector growth and falling factory order statistics being indicative), the ‘unbailably’ large economies of Spain and Italy, unrest  & uncertainty in the Middle Eastern nations – are all compounding the concerns of investors and markets across the globe.

Meanwhile, credit rating agencies Moody’s and Fitch have maintained their AAA rating for the US, albeit with a negative outlook on the ratings. The harsher S&P has not yet released their ratings. On the other hand, Dagong Global Credit Rating Company, China’s leading credit rating agency, has downgraded the US to A from A+ (which was, itself, a downgrade in Nov 2010). With the “Big Three” raters coming into frequent criticisms recently, rating agencies from developing economies are now gaining a stronger voice.

Overall, all these developments are signs of tougher times to come.

US Debt Brinkmanship – The Global Financial/ Political Chicken Game

The Republican-controlled US Congress, the Democrat-controlled US Senate and the US President Barack Obama are playing a deadly “chicken” game with the issues regarding the US debt ceiling increase, tax raises and spending cuts.

The Republicans want to force the Democrats’ hands in not letting taxes be increased while initiating spending cuts; meanwhile the Democrats have declared dead-in-the-water any proposal that does exactly that. Neither House Speaker John Boehner (Rep) nor President Obama (Dem) has yet managed to find a middle ground acceptable to all parties.

With the August 2 deadline for raising the US debt ceiling or risking credit default looming, either party has to “swerve” or crash horribly into each other. This would have catastrophic consequences for both the US and the global economy.

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The Big Mac Index gets Garnished

The Economist just released an updated version of their Big Mac Index, having run a “best fit” regression line against GDP per person (the line does visibly appear to be a significant fit). A nice, novel metric, based on a measure referencing a good that may not be in the typical consumption basket across all economies.

“Currency Comparisons, To Go” from The Economist

Euro-Zone Bail-out: Media & Market Reactions

Greece has been bailed out. A number of steps have been initiated by the leaders in Europe. A modicum of stability has returned to the Euro-zone financial (and political) system.

Specific to Greece, euro-zone official lenders’ debts have been restructured in the forms of lowering interest rates from 5.5% to approx. 3.5% and extension of term from7.5 years to 15 or even 30 years. These have been backed by €109 billion bail-out money, an additional €20 billion for Greek bond buyback and €35 billion ECB collateral for Greek banks. Private creditors, officially recognized as Private-Sector Involvement (PSI) have been given a choice of either of three options – rollover of maturing bonds, swap with longer maturities (both backed by AAA  -rated collateral) or secondary market bond buybacks. However, the PSI has been defined to include only ‘voluntary’ and ‘substantial’ creditors, which would lead to a number of lenders being short-changed.

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US Default: Impending Doom or Market Resolution

A good read of an article that discusses the possibility and impacts of a US debt default, brought about by Congress not increasing the US debt limit. The piece goes on to talk about (albeit briefly) about the global repercussions of such an event. Also, it touches on the likelihood of market movements forcing the govt’s hand.

The graph (not from the article), interestingly, paints a thousand words as it depicts the Lehman bankruptcy and the resultant cost of debt rise followed by the forced TARP announcement, resulting in some relief. Expect to see such curves just around the corner!

I am inclined to believe that the market will force some resolution to the current impasse between the Republicans and Obama’s policies. Irrespective of the outcome, the markets will suffer – default would set off a string of indices, ratings and prices fall, while resolution-imposed austerity measures will also have negative consequences, although not as profound nor catastrophic.

“US Default would Likely Cause …” from The Huffington Post

Stress Tests in Distress

A nice little write-up on banks in Europe and flawed stress tests. The methodologies should be looked into, improved upon and then applied to banks in Bangladesh. Better clues to the current liquidity crisis would be revealed and a more detailed picture would emerge.

“Ignoring the Obvious” from The Economist