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Global Economic Uncertainties Turn Darker

By Hans Parisis
Monday, 18 Jul 2011 08:09 AM Current | Bio | Archive

Uncertainties and lack of transparency and honesty abound on both sides of the Atlantic but also in many important economies on the globe.

To know how long this abundance of uncertainties can go on is certainly written in the stars, but, unfortunately, most of us can’t read the stars and can’t change what’s written there…

In Europe, the euro zone and the EU remain jolted by a degree of political and financial chaos where the sovereign debt crisis is once again dragged into another week, mainly on request of Germany, which wants to postpone its discussion as long as possible.

Meanwhile, the much touted EU bank stress test results still don’t take into account the scenario where a euro member sovereign default occurs at a moment that Credit Default Swaps (CDS) indicate an 86 percent chance Greece will fail to meet its commitments within five years.

If that wasn’t enough, the Greek newspaper Kathimerini reports the Greek Cabinet met yesterday to discuss how the government would manage the public impact of a selective default on its debt, a development which now seems inevitable.

Besides all this, investors should now also start looking at euro zone economies beyond the so-called “periphery” countries, which seem to expand to a zone demarcated by the Alps and the Rhine river, where now we see Belgium trading at its highest spread-rate to Germany since the ERM crises in the early 1990s, but also France trading at 16-year highs. Who’s right? The “markets” or the politicians?

There are now also, still unconfirmed, rumors (“laughable” if you ask me) that China has begun to “intervene” in European debt markets.

Meanwhile, China faces “parlous” finances at home of a mindboggling US$1.6 trillion “admitted” and $2.1 trillion “conceivable” of local government debt that so far has fueled China’s “febrile” activity, where every passing day we see new evidence of profligate mal-investments while the pyramid of mispriced plants, equipments and infrastructures continues mounting and its associated “landfill” of unproductive debts and misdirected efforts continues growing.

In the U.S., the big question remains whether Republicans and Democrats can stay in the same room long enough to get down to agreement on tax and spending measures before the current debt-ceiling expires on Aug. 2.

Bill Frenzel, a Republican former member of the House Budget Committee, said earlier last month: “As it gets closer and closer, you’re talking about simply a debt-ceiling solution, not a deficit and debt solution … Instead of making the $4 trillion or $5 trillion arrangement they need to make to stabilize the debt in a decade, they’ll probably do something to coast them through the end of the year or perhaps through the election.”

That said, S&P has now also placed the U.S.’ short-term rating on CreditWatch negative, reflecting its view that “the current situation presents such significant uncertainty to the U.S.’ creditworthiness.”

The agency added that “if an agreement is reached, but we do not believe that it likely will stabilize the U.S.' debt dynamics, we… would expect to lower the long-term 'AAA' rating, affirm the 'A-1+' short-term rating, and assign a negative outlook on the long-term rating.”

Too many balance sheets remain tainted by poor decisions that were made over the past decades.

Unfortunately, there are still no signs of a lasting and equitable-distributed prosperity.

Instead, a financially delusional and narrowly focused world continues to prosper.

The “stop and go” trading environment continues to flourish, which isn’t the place where long term investors should stroll.

Because it’s so extremely important, investors should keep in mind that what’s developing in China, and I’m talking about the Chinese “numbers,” could well reinforce the Chinese Central Bank’s (PBOC) arguments against the Chinese Communist Party’s hierarchy and so give it the needed green light to encompass even more restriction in the months ahead that could cause that globally feared “hard landing.” Yes, where China goes the world will follow.

My preferences remain “risk off.” I don’t compete with time.

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HansParisis
Uncertainties and lack of transparency and honesty abound on both sides of the Atlantic but also in many important economies on the globe. To know how long this abundance of uncertainties can go on is certainly written in the stars, but, unfortunately, most of us can t...
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2011-09-18
 

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