GROWING WORRIES IN ATHENS
A Greek Default Would Hit the ECB Hard
Hopes that Greece can be saved are dwindling. Athens had hoped to reach a deal with its creditors on a 50 percent debt haircut, but banks have now made it clear that efforts to reach an agreement could fail. Should the country go bankrupt, the European Central Bank stands to lose the most.
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Mervyn King was in no doubt about the importance of global trade imbalances when giving evidence to the Treasury Select Committee in June.
“I am afraid we are doomed to repetitions of the problems that we have seen in which there will be, from time to time, quite significant crises in the world economy, precisely because the positions of the surplus and deficit countries are not co-ordinated, and the problems that result from that in financial markets lead to substantial recessions”.
“The ultimate cause of what we have been through in the last two years was the imbalances of the world economy and the inability to cope with the resulting capital flows, and I do not think it is a question simply of exchange rates, and it certainly is not a question of which currency we denominate trade flows in, it is much deeper-seated than that.”
“It is about ensuring that the policy frameworks of countries fit together, and at present, if you have countries which, on the one hand, believe in domestic monetary frameworks and floating exchange rates and other countries that believe in development strategies in which a large current account surplus is a key part of that strategy, these things will not fit together well.”
Why then has the governor with his “iron fist” allowed such a feeble article on global imbalances to be published in the Bank’s latest quarterly bulletin.
On the Peterson Institute for International Economics Monitor, Mohsin S. Khan sits down with Steve Weisman and argues that both India and Pakistan have much to gain by putting aside their hostilities and increasing economic cooperation and trade. Please read Benefits of More Trade Between South Asian Rivals.
Economic Freefall Ends in Germany and France
Germany and France, Europe’s two largest economies, on Thursday revealed they are officially no longer in recession. Signs of economic green shoots bolstered the euro — and surprised both policymakers and economists. The euro zone economy, however, continues to contract.
Michael Pettis discusses how the U.S., Japan, Europe, and China are each trying to figure out how to get themselves out of their respective messes, and while there don’t appear to be any bad guys, coordination opportunities have been squandered and the trade environment continues to decline. Read Squeezing out the Exporters.
As U.S. deficits increased, global investors edged away from the dollar into the German mark, the Japanese yen, the Swiss franc, the Euro, and more recently baskets of Asian currencies.
Which brings us to today. Only goodwill (defined both as an accounting term and as political deference to military might) now supports the U.S. dollar as a reserve currency, which is what allows the United States to issue dollar-denominated bonds in world money markets.
It is this borrowing capacity that allows the Obama administration to bailout the banking industry, offer to pay for universal health care, fight colonial wars in the Middle East, stimulate the economy, send billions to Egypt and Israel, buy out General Motors, and subsidize every windmill start-up company in Nancy Pelosi’s home district. (Madoff’s problem was that he failed to set himself up as a country. He otherwise understood deficit spending.) But the shell game requires full faith in the dollar.
For those riding out financial storms by “sitting on cash,” here is what’s under your seat: in recent months U.S. federal debt has grown to $11.3 trillion, almost equivalent to gross domestic production. About one quarter of this indebtedness, or $2.8 trillion, is held abroad, and China and Japan hold just under half of those assets (liabilities to Uncle Sam).
Elsewhere on the American balance sheet is another $11.4 trillion in household debt, an annual trade deficit of about $725 billion, and a federal budget deficit that is estimated in 2009 to be approaching $1.8 trillion. That’s if the economy grows at 3 percent.
Off-balance sheet risks, what accountants call contingent liabilities, include about $10 trillion in new bailout guarantees (Fannie Mae, Bear Stearns, Countrywide, and whatever the administration launches as its New Deal of the Day). None of the above includes the unfunded liabilities of Social Security ($41 trillion), which, by comparison, make the shares of Lehman Brothers and AIG look like Scottish bonds held for widows and orphans.
The geese laying the golden eggs of U.S. financial stability are the printing presses of the U.S. Treasury, and, for now, those collecting them in their Easter baskets include a number of countries and regions perhaps tiring of American arrogance, if not of the drop in the dollar’s value. Who would blame such popular targets of moral abuse as China, Russia, Switzerland, Arabia, or Latin America for dumping their dollar-denominated assets?
All that lies between the U.S. dollar and a financial Armageddon is the Faustian house of credit cards under which Asian economies invest their trade surpluses in U.S. Treasury instruments — to keep the dollar strong, their own currencies weak, and purchases brisk between the likes of Wal-Mart and the Asian Greater Co-Prosperity Sphere.
Sooner than we think, China and Japan, like all nervous creditors, may send the United States a letter, suggesting that, henceforward, if Washington needs to borrow money, the bonds be issued in renmimbi, yen, or a basket of Asian currencies (a Pacific Euro).
Wall Street bankers did the same to the farm interests in the late nineteenth century, when they insisted that debt be based on a gold standard, as opposed to “free silver.” President Obama may be as eloquent as William Jennings Bryan. But at that point he will need to use all his oratory for the business of selling junk bonds.
The Dollar: Running On Reserve – Matthew Stevenson, newgeography
Is there a clandestine understanding between the world’s two most powerful central banks, the Federal Reserve and the People’s Bank of China?
Naturally, no one can talk about it, let alone confirm or deny anything. But it’s not too difficult to make out the broad outlines of how Chinese-American monetary cooperation may be working.
People’s Bank governor Zhou Xiaochuan and other figures in the Chinese leadership seem to use every opportunity to broadcast finely calibrated skepticism over the dollar’s future. Such Jeremiahs feed on and — in turn — feed doubts about potential American inflation caused by the Fed’s quantitative easing and exploding budget deficits.
But both Washington and Beijing appear to recognize — whatever the saber-rattling — that large-scale shifts in the currency composition of Chinese currency reserves are more or less impossible. Roughly two-thirds of Chinese reserves of more than $2 trillion are thought to be held in the greenback.
Heavy Chinese sales, or even a deliberate policy of diverting export proceeds into Euro or yen by re-dominating sales contracts, would depress the U.S. currency and lower the value of Chinese reserves. It’s the well-known Beijing dollar trap. And it has to be said: the Chinese have maneuvered themselves into it of their own volition, and in full knowledge of the potential problem.
So Governor Zhou’s strictures are, to a certain extent, shadow boxing. However, in return for a tacit standstill agreement on the currency composition of reserves, the Americans have to acknowledge that the renminbi’s value will rise only moderately.
If the Chinese continue taking in dollars, logic tells us the Chinese currency can hardly revalue strongly. A signal of the U.S. authorities’ acceptance of this state of affairs is that the word “manipulation” for Chinese currency management now clearly is banned.
There is another, still more intriguing, side to Chinese currency pronouncements. The doubts voiced from Beijing on the dollar’s stability, far from unsettling the U.S. monetary authorities, are actually manna from heaven for the Federal Reserve. The Obama administration hardly can go in for years of reckless deficit spending when the country’s largest creditor is emitting so many warning signals.
More importantly, the Fed is getting a certain amount of cover from Beijing for its eventual “exit strategy” — a reversal of quantitative easing and a rise in interest rates as soon as economic recovery gets under way.
The Chinese even are giving a strong tailwind to Fed Chairman Ben Bernanke’s bid for re-nomination after his initial four-year term ends in January. The reason? With the Chinese appearing to turn the knife through gloom-laden dollar prognostications, President Obama knows that appointing a heavily political successor to Bernanke would be fraught with great risks.
Any Fed chairman who looks less than squeaky-clean on currency stability is likely to send dollar holders heading for the exits — and could spark the full-scale currency collapse that Wall Street bears have been growling about for months.
So, if Obama wishes to replace Bernanke, he can do so only by bringing in a full-scale monetary hawk — a step that he must rule out on domestic political grounds. The conclusion is that the Chinese maneuverings leave Obama with no choice but to re-appoint Bernanke, whatever the doubts about his stewardship that have arisen in recent months.
When Bernanke a little later this year eventually is confirmed in a second term of office, what’s the betting that a laconic red-rimmed telegram from Governor Zhou will turn up in his in-tray?
The missive and its contents, of course, will remain secret. We can only guess at the possibility that the two men, just for a moment, will share the opportunity for a modicum of discreet self-congratulation.
David Marsh is chairman of London and Oxford Capital Markets. The Marsh on Monday column appears in German in the newspaper Handelsblatt.
A Deal Between the Fed and Bank of China? – David Marsh, MarketWatch
uly 3 (Bloomberg) — So you think China’s 6 percent growth will power a global recovery. Think again.
Economists, for example, can’t put a gloss on how ugly Japan’s data are getting. Exports and output are plunging, unemployment is at a 25-year high and those all-important summer bonuses are evaporating. The best we can say is that sentiment among large manufacturers was less gloomy in June than expected.
Where is that smidgen of hope coming from? China, which rarely misses a chance to declare victory over the global recession. Officials in Beijing say stimulus spending and record lending are sparking a recovery in the third-biggest economy.
Export-led Japan would seem perfectly placed to benefit. That is, until you check the evidence. Shipments to Japan’s biggest trading partner fell 29.7 percent in May, more than April’s 25.9 percent. It suggests China’s growth isn’t helping the rest of Asia very much.
China acted quickly to shield its economy from the global crisis. Manufacturing in May expanded for a fourth month. Central bank Governor Zhou Xiaochuan says things may keep improving in the third and fourth quarters.
It’s also worth noting that Japanese exports to China are falling less severely than elsewhere. Shipments to the U.S. fell 45.4 percent in May. Exports to Europe slid by the same amount.
No Engine
China isn’t turning out to be an engine of growth for Asia.
One possible explanation is protectionism, as China works to encourage exports while curbing imports. The country objects to the “Buy American” provisions in U.S. stimulus efforts, yet it is using similar tactics. Another reason may be that China’s revival is more spin than reality.
Either way, talk that China would feed the “green shoots” dynamic that Federal Reserve Chairman Ben Bernanke introduced into Wall Street’s lexicon four months ago isn’t working out. Nor will the Asia-decoupling theory that’s being resurrected.
Yes, Asia is less reliant on the U.S. than it was a decade ago. Its fortunes are still intricately tied to what happens in the $14 trillion U.S. economy. The longer the U.S. is on its back, the harder it will be for Asia to maintain modest growth.
One reason for a resurgence of the decoupling argument so convincingly debunked last year is actual growth. Even with the U.S., Europe and Japan mired in recession, economies in China, India, Indonesia, the Philippines and Australia are still expanding. That’s impressive given the state of credit markets.
Fast Forward
Fast-forward one year, though. If the U.S. economy is still weak in July 2010, Asia will have a hard time supporting growth from within. At the moment, stimulus efforts are starting from a low base. Over time, government spending and low interest rates may get less traction.
The Asian market won’t close the gap. Much of the region’s internal trade involves intermediate goods used in the production of other products — many of which go to the U.S. and Europe. A world without growth will force Asia to retool economies toward greater domestic consumption without the cushion of robust demand.
What’s more likely is an inward-looking period as opposed to regional cooperation. Groups such as the Association of Southeast Asian Nations talk a lot about linking their combined fortunes and outlooks. Meetings, photo opportunities and communiques don’t hide the stark reality that Asian economies compete more with each other than join hands.
‘Buy China’
China has been expanding efforts to help exporters with bigger tax benefits, loans from state-owned banks and other steps. Many “Buy China” directives are coming from Beijing. And don’t expect China to allow the yuan to appreciate much in the second half of 2009, regardless of market pressures.
Such policies suggest China is losing confidence in its 4 trillion-yuan ($585 billion) stimulus plan. They are also a reminder of the limits to governments’ ability to boost growth with public largess alone.
Growth may slip as stimulus spending wanes amid political opposition to a widening fiscal deficit, says Ma Jun, Deutsche Bank AG’s Hong Kong-based China economist. That casts doubts on predictions that Chinese gross domestic product will expand 8 percent in 2010.
The omnipotent reputation many assign to leaders in Beijing is being challenged. Take this week’s Internet fiasco. China postponed the deadline for personal-computer makers to include state-backed anti-pornography software on new PCs after U.S. officials and business groups urged it to scrap the rule.
China is normally a model of implementation. The speed with which it builds state-of-the-art airports, high-speed rail lines and Olympic stadiums is impressive by any scale. Its censorship efforts were exactly the opposite: sloppy and ill-considered.
Economic-stimulus efforts appear to be benefiting from greater competence. That may be a boon for 1.3 billion Chinese trying to get a share of the nation’s growth. The benefits for those outside China are much more limited.
China Will Not Power a Global Recovery – William Pesek, Bloomberg
June is the month for mid-year revisions to economic forecasts by the major international financial organizations and other forecasters. The Organization for Economic Cooperation and Development (OECD) released its new forecasts Wednesday, predicting that the deep global recession is nearing a bottom. It’s projections of world real GDP growth of -2.2% for 2009 and +2.3% for 2010 represent the first upward revisions in OECD’s growth projections since June of 2007. In remarks last week, the First Deputy Managing Director of the IMF, John Lipsky, said he expects that his institution will be revising its projections “modestly upward, mainly with regard to 2010.” The sister organization of the IMF, the World Bank, took a contrary stance at the beginning of the week, setting back global equity markets with a downward revision of its projection for the global economy this year to -2.9%, coupled with strong negative comments on the effects of the global credit crisis on developing countries.
We are in broad agreement that a turning point in the global economy is likely in the coming months. This follows a period of particularly sharp contraction (“falling off a cliff”) in the six-month period to March of this year. A recovery appears to be already underway in many of the emerging-market economies. Among the advanced economies, the United States and Japan appear likely to begin to recover in the course of the second half, driven by what the OECD characterizes as “massive policy stimulus and progress in stabilizing financial institutions and markets.” Continued balance-sheet problems for consumers, aggravated by further increases in unemployment, will likely put a damper on the pace of recovery in the US. Continued heavy deflationary forces will continue to be a challenge to policy makers in Japan, following what was probably that country’s most severe recession in its post-war history.
While there are some “green shoots” also appearing in the euro area, the eventual recovery looks likely to lag that in the US and Japan. External demand for the region’s exports has collapsed; and tight financial conditions, rising unemployment, and financial-sector problems have constrained domestic demand. Positive growth probably will not appear until the fourth quarter of this year at the earliest.
There is broad agreement on the positive economic outlook for the Chinese economy, which appears to be on course for strong growth. The World Bank raised its 2009 forecast for China from 6.5% to 7.2%. The OECD expects 7.7% growth for China this year and 9.3% in 2010. We would not be surprised to see Chinese economic growth top 8% this year and be close to 10% in 2010. The government’s fiscal stimulus of $590 billion, along with sizable monetary stimulus, has clearly been successful in helping the economy ride out the global recession. This is quite an achievement in a year in which world trade growth is on track to register a 16% decline. In May there were notable advances in urban fixed investment (largely government-sponsored), real estate investment, and retail sales. Industrial production accelerated to an 8.9% rate. Declining exports have been a depressing factor in the first half. This trend should reverse with the expected recovery in the global economy.
Global equity markets, as is often the case, anticipated the end of the global financial crisis, the coming recovery and advanced strongly in recent months after bottoming in early March. International investors’ appetite for risk evidently returned to more normal levels as fears of “worst-case scenarios” lessened substantially. The very rapid pace of the advance in equity markets over the March through May period has been followed by a modest 6% pullback in global equities since early June. Markets clearly had gotten somewhat ahead of themselves. While risk appetite seems to have moderated in this period, there are no indications that it has turned negative. Investor flows into equity markets, particularly emerging markets, are continuing. Cumberland’s equity portfolios remain fully invested.
China’s strong performance on the economic front is reflected in its equity markets. The MSCI Index for China is up 28% year-to-date through June 23rd. An important reflection of the continuing strength of China’s market is the fact that this index drew back only -1.8% thus far in June while the MSCI Index for Emerging Markets dropped by -6.4%.
We utilize three ETFs to provide exposure to the Chinese market. The first is the iShares FTSE/XINHUA China 25, FXI. This ETF is by far the most popular China ETF, and therefore is the most liquid, an important consideration. It invests in just 25 ultra-large-caps, mostly government-sponsored Chinese firms. It is heavily concentrated in the financial sector (45.5%) and has 0% in the technology sector. The second is the SPDR S&P China, GXC. It has reached an adequate level of liquidity, with net assets of $315 million (although much less than FXI’s $9.2 billion). It provides considerably more diversified exposure to China than FXI, investing in some 130 firms, mixing large caps and small caps. It also has a high exposure to financials (32%) and includes some tech exposure (8.1%). Thirdly, we also use the Claymore/AlphaShare China Small Cap, HAO. Here we have to limit our position because the net assets of this fund are only $70 million. We are attracted by the differences in its sector exposure as compared to the previous two ETFs, including 16% exposure to information technology and only 7.7% to financials.
China’s strong performance is an important positive factor for other economies in the region, including Hong Kong (iShares MSCI Hong Kong Index Fund, EWH), Taiwan (iShares MSCI Taiwan Index Fund, EWT), and Singapore (iShares MSCI Singapore Index Fund, EWS), all of which we are overweighting in our International, Global Multi-Asset Class, and Emerging Markets ETF portfolios. China’s huge appetite for commodities is also boosting the markets for commodity-exporting economies, including Australia (iShares MSCI Australia Index Fund, EWA), Canada (iShares MSCI Canada Index Fund, EWC, and the Claymore/SWM Canadian Energy Income Index, ENY), Brazil (iShares MSCI Brazil Index Fund, EWZ) and Chile (iShares MSCI Index Fund, ECH).
Thus far we have not seen any evidence of a reemergence of the previous speculative excesses in China. Valuations continue to look relatively attractive. The price-to-trailing 12-month earnings ratio is 14.5, still below its 10-year average of 15.9%, whereas the same measures for Korea, Hong Kong, India, and Brazil are now all higher than their 10-year averages. Nevertheless, as the last 12 months have amply demonstrated, the Chinese market, like other emerging markets, can be highly volatile and requires careful monitoring.
Bill Witherell, Chief Global Economist
Global Recovery In Sight, China at the Wheel – Bill Witherell, Cumberland
The aggressive global policy response to defend against the slowdown has begun to gain traction, as real economic data have shown a slight improvement almost synchronously around the world. These attempts to revive growth have also resulted in a significant rise in asset markets, particularly property prices. Property markets have seen a meaningful rebound from the bottom across the Asia ex-Japan (AXJ) region, particularly in the financial centers of Hong Kong, Singapore, Seoul, Shanghai, Bangkok and Mumbai. From what we can surmise, property prices have risen by 10-40% in various pockets in the region (unfortunately, most up-to-date official national and city level property indices are not available). Hong Kong and Singapore, which are linked more closely to global financial markets, have seen the sharpest rebound. Price indices in some areas are close to the peak levels seen prior to the emergence of the global credit turmoil. Transaction volumes for the property sector have also increased significantly.
The most surprising trend can be seen in Singapore. Although Singapore is likely to suffer the worst recession in its history in 2009, property transactions are now close to their peak. During January-May 2009, total private residence transactions increased to 5,531 units (annualized run rate of ~13,247 units) versus the peak of 14,811 units in 2007.
Many Reasons for the Quick Rise in Property Prices
First, a sharp rebound in the stock market around the region appears to have increased the confidence of the locals. The MSCI Asia Ex-Japan Index (in USD terms) has risen by 71% from the trough following the global trend.
Second, excess liquidity in the system is rising. Central banks have cut rates aggressively in response to the global credit crunch, and the recent increase in capital inflows and trade surplus has added to this excess liquidity trend, as central banks appear reluctant to allow local currency appreciation in view of the still-weak external outlook. As a result, foreign exchange reserves in AXJ excluding China increased to US$1,446 billion as of May 2009 and are now close to their peak level of US$1,491 billion in April 2008. China’s foreign exchange reserves have also risen back to an all-time high of US$1,954 billion in March 2009 after declining to US$1,880 billion in October 2008. Banks have cut mortgage lending rates aggressively. Average short-term rates have declined to unusually low levels at 2% on account of the aggressive monetary policy response. M1 growth in the region accelerated to 14.9% in April 2009 from a 6.6% trough in November 2008.
Third, most countries in the region are implementing a fiscal spending plan of 3-5% of GDP, which has supported growth and employment.
Fourth, most countries in the region also initiated measures to boost property demand during 4Q08 (e.g., Hong Kong, China, India and Korea). These measures included lowering the down-payment for getting a mortgage loan or relaxing lending norms for property and mortgages.
Central Banks Already Voicing Some Concern
What has been the central banks’ response so far? Some have started to relay their concerns on asset prices. Last week a member of the Bank of Korea (BoK) board indicated that funds may be moving into stock and property. The board member commented, “Rising property prices may cause market instability”. Similarly, a few days back, BoK Governor Lee Seong-tae mentioned that the BoK “also has to pay attention to the possibility of rising international raw materials prices hurting (domestic) price stability or for a rapid increase in short-term liquidity causing instability in real estate and other asset prices”. Indeed, the governor of Korea’s financial supervisory service (FSS) has already advised banks to maintain restraint when growing home-backed lending. A Chinese banking sector regulator recently vowed to monitor closely banks’ lending behavior with a view to preventing allocation of bank lending to stock market and property. India’s central bank governor also, for the first time since the credit crunch unfolded last year, mentioned that the RBI would consider reversing its expansionary monetary policy, but he did not indicate any timing on such a reversal.
End of Monetary Easing, but Rate Hikes Are Some Time Away
To be sure, the national level of property prices in countries other than city states has not risen as sharply to justify the aggressive policy response. Any potential correction in the global risk markets could also reduce the pressure of asset price rises. However, considering the pace at which property prices have moved up in certain pockets of the region, it does raise the risk of broader national-level price rises. The challenge for the central banks arises from the fact that the export and IP growth trend remains below potential and has not yet recovered meaningfully. AXJ IP is estimated to have improved to 1.6% in April 2009 from the trough of -7.6% in January 2009. However, it remains below the prior trough that occurred in 2001. Similarly, while exports are declining at a slower rate, they remain weak.
Selective Controls May Be More Likely as a Response
The key question is, if property prices continue to rise in the near term across the region, what would be the likely policy response? We are currently expecting central banks to start raising policy rates in 1Q10 as the growth trend recovers further. Our global economics team expects G10 growth to follow a slow recovery path, starting in 2H09. In this environment, any concerns about asset prices in the next six months could be addressed by sector-specific measures, such as tightening lending standards for the property sector and/or other non-monetary policy measures.
Fed Exit Strategy: When and How? – David Greenlaw, Morgan Stanley
Keith Bradsher’s New York Times story on the recent evolution of China’s foreign portfolio gets — at least in my view — the story right. Of course, that may be because I was — rather obviously — a source for the story. Check out the charts that accompany the article!
The basic story of China’s foreign portfolio is simple: it is trying to reduce the amount of (credit) risk in its fixed income portfolio while simultaneously taking on more commodity risk.
China’s purchases of Treasuries (especially short-term bills) have gone up even as China’s reserve growth has slowed, as China shifted money out of Agencies and — in all probability — out of money market funds that are taking credit risk and other privately managed accounts. The failure of Reserve Primary had a big impact on China. Bradsher:
“Financial statistics released by both countries in recent days show that China paradoxically stepped up its lending to the American government over the winter even as it virtually stopped putting fresh money into dollars. This combination is possible because China has been exchanging one dollar-denominated asset for another — selling the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac in a hurry to buy Treasuries. ….
China was the world’s biggest buyer of [securities issued by government-sponsored enterprises] a year ago, splashing out more than $10 billion a month. But in the 12 months through March, it actually had net sales of $7 billion, and ramped up purchases of Treasuries instead. China has also changed which Treasuries it buys. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States. As recently as a year ago, China actively bought long-dated bonds, seeking the extra yield they could bring compared to Treasury securities with short maturities, of which China bought virtually none. But in each month since November, China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities. This gives China the option of cashing out its positions in a hurry, by not rolling over its investments into new Treasury bills as they come due should inflation in the United States start rising and make Treasury securities less attractive.
At the same time, China has sought to ramp up its exposure to commodities. China’s government clearly is adding to its strategic stockpiles — and perhaps encouraging state firms to build up inventory as well. China’s government is encouraging Chinese state firms to invest more abroad, especially in the mining sector. And China’s government is providing financing to cash-strapped commodity exporters (Russia, Kazakhstan, Brazil and no doubt others) to help tide them through a rough patch and, China hopes, to secure future supplies. Bradsher:
“This spring China has also been stepping up its purchases of commodities, which are usually bought in dollars. Iron ore has been piling up on Chinese docks, government stockpiles of crude oil and grain are being expanded and stockpiles are being started for products like gasoline, diesel and sugar.”
The basic story of China’s foreign portfolio is simple: it is trying to reduce the amount of (credit) risk in its fixed income portfolio while simultaneously taking on more commodity risk.” (Brad Setser)
From the Economist:
The US subprime mortgage crisis inflicted high capital losses for domestic and foreign financial firms that had invested in securities backed with US real estate loans. This triggered a severe credit crunch in the US, which grew into a full-blown financial crisis of global proportions and later ended up affecting the entire global economy. The prime characteristics of the current global economic crisis have so far been plummeting stock and equity prices, skyrocketing bank failures, and a sudden collapse in international trade.
