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World Crisis scenarios for the 21st century – Worldwide economic depression. (update 10)

Posted by Adrian on January 29, 2008

World Crisis scenarios for the 21st century – Worldwide economic depression. (update 10)

With economists forecasting the global economy to slow between 3% and 4%, some economies may drop further or fall into a harsh recession. The decoupling (countries detaching from the US recession and avoiding a spill over effect) theory is holding little validity as the world may fall into a global recession, in someways started by the massive credit bubble in the US (primely from Subprime mortgages) that has become a crisis for the world financial and credit markets. The shudders in the credit markets that have reverberating around world and has effected economies that are more leveraged with debt as they have used credit for manufacturing productivity and expansion.

The one economy that comes to mind is Spain, problems with the Spanish economy have been discussed on morbius glass in Dramatic economic downturn in the works for Spain and Spain’s contracting property market (with detailed links regarding the Spanish markets). The Northern Rock banking crisis in the UK is a prelude to the dangers of a financial system under strain, by shrinking accounts, foreclosures, debt and trouble refinancing to stay liquid. Interbank lending froze last year, due to the credit crisis that swept the world from the massive write downs and losses from Wall Street banks, big retail banks like Citigroup and Countrywide. Another serious indicator is all the major world reserve banks from the Federal Reserve, European Central Bank, Bank of England all offering to buy up debt from banks in trouble and allow banks that are in trouble to borrow from reserve bank discount windows. According to a report from the Telegraph online ECB aid to Spanish banks matches Rock rescue, the Spanish banking sector has placed mortgage backed securities with the ECB, so they can borrow to raise capital.

from the ECB aid to Spanish banks matches Rock rescue,

“The market has shut down,” said Sandie Arlene Fernandez, the author of the report.

“Few, if any, of the transactions in the RBMS market (mortgage securities) have been placed since September. Some of the banks are hoping that the market will open up again but most are just preparing these deals to use as repos, which they can do since the ECB accepts AAA-rated securities,” she said.

The total volume of securities issued since the credit crunch began to bite in July has reached €63bn.”

Remember, these mortgage securities from the Spanish housing market are to be expected to be trading on the market, but instead are now kept with the ECB; it also is noted that the ‘securities’ are AAA rated, which means they are relatively stable. Where have we heard that before?

It is appears that this operation, which was essentially to keep Spanish banks from becoming insolvent or going bankrupt, was done covertly. From the ECB aid to Spanish banks matches Rock rescue;

“The data appear to confirm suspicions that the EU authorities have carried out a covert rescue of the Spanish mortgage banking system.

It may equal the taxpayer rescue of Northern Rock in Britain, and possibly exceed it in proportion to the overall size of Spain’s economy.

The key difference is that the ECB rescue operation in Spain has been disguised. A veiled method is necessary since the eurozone lacks a clear-cut lender of last resort.”

Is Spain, which was one of the booming economies in Europe as far as manufacturing and housing, an indicator to what happens when highly leveraged economies go bust. Like Spain highly leveraged economies are a global phenomenon, as the economic boom, excess liquidity and credit expansion was global. So if Spain is in a lot of trouble with a housing market ready to go bust, massive amounts of business debt; could Spain be a prelude to a greater economic bust globally? With America in a recession, will Europe’s downturn fuel a greater dire economic predicament?

“Moody’s said the total issuance of securities by Spanish banks last year reached €143bn, up 55pc on the 2006. Over €62bn were mortgage securities. The agency said the default rate was likely to rise, with mounting concerns among participants over a possible “housing crash”. Some of the mortgage securities have already begun to draw on their reserve funds.

David Owen, Europe of Dresdner Kleinwort, said Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country.

“The size of the Spanish corporate sectors financial deficit is truly is really scary. It rose to 14.5pc of GDP in the third quarter of 2007 from 10pc in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding, quickly and very painfully,” he said.



One Response to “World Crisis scenarios for the 21st century – Worldwide economic depression. (update 10)”

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