During the past two weeks, the general financial media commented with vigor — and on a daily basis — about the supposed resurgence of the European debt crisis, leading many financial-market participants to become overly concerned about the potentially negative impact of that so-called crisis on the U.S. economy.
Although the burdensome sovereign-debt situation of several European countries might negatively affect certain commercial banks during the months ahead, because those banks will likely face difficulty in collecting the full amounts of loans that they’ve extended to countries whose budget deficits account for a large portion of their gross domestic product, there’s nothing new about that situation – the European debt crisis that began during late 2009 was never resolved.
Rather, the media simply stopped covering that topic.
However, once the 2010 midterm elections ended and the media began to lose interest in discussing the Federal Reserve’s new round of quantitative easing, journalists were forced to identify a “new” topic to cover.
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On Nov. 9, they discovered such a topic – the “resurgence of the European debt crisis” – when credit-default swaps on Ireland’s sovereign debt and on that country’s banks surged to record levels, as investors that hold Irish government bonds and the bonds of Irish banks became more concerned that Ireland’s government and some of its banks might default on their bond payments.
In light of the fact that Ireland’s budget deficit accounts for 14.3 percent of its gross domestic product (GDP), and that Ireland’s GDP has declined during every quarter since the onset of the worldwide recession that began during early 2008, there’s a good chance that Ireland (and its banks) would have defaulted on their bond payments if the European Union and the International Monetary Fund hadn't agreed to provide tens of billions of euros to Ireland and its banks.
Although Ireland’s debt woes have supposedly vanquished, one shouldn't assume that the European debt “crisis” has supposedly once again been resolved. That’s because the United Kingdom, Spain and Portugal face debt problems that are similar to Ireland’s.
For example, the U.K.’s budget deficit accounts for 12.6 percent of that country’s GDP, while the budget deficits of Spain and Portugal account for 11.2 percent and 9.4 percent, respectively, of those country’s GDP.
Yet, the economies of each of those countries have grown at a slow pace during the past few months and economic statistics for those countries indicate that those countries are in danger of falling back into a recession.
Because of investors’ concerns about the burdensome debt situation of those countries, and the possibility that Spain and Portugal will face difficulty in paying their debt, the yield on Spain’s 10-year bonds rose today to 5.7 percent – a euro-era record difference of 3.05 percentage points against the benchmark German 10-year bond – while the yield on Portugal’s 10-year bond remained near record levels. Meanwhile, the yield on Greece’s 10-year bond rose to 11.63 percent.
Meanwhile, the exchange-value of the U.S. dollar continued to trend higher, as an increasing number of investors around the globe came to realize that the U.S.’s government debt offers substantially less default risk than the debt of most other countries.
In regard to the potential impact of the European debt “crisis” on the U.S. economy, my research indicates that few U.S. banks will be adversely impacted by the situation in Europe and that a likely economic slowdown in Europe will have a minimally negative impact on the overall U.S. economy.
With an increasing number of economic indicators suggesting that the U.S. economy will enter a period of long-term recovery during the second half of 2011, I expect the recent downturn in the U.S. stock market that resulted primarily from the media’s recent coverage of the European debt situation to come to an end within the next couple of weeks.
My experience suggests that the general financial media will then, once again, ignore the ongoing situation in Europe and will instead begin to focus on the positive economic developments that are under way in the United States.
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