The infection spreads

by David Taylor

The past couple of weeks have seen more economic threats emerge across the globe.

More obvious are the debt concerns of many European nations. Front and centre this week has been Greece. The country received approval for a second bailout package two days ago. Many analysts simply describe Greece though as just kicking the debt can along the road. We  have also seen Portuguese and Irish debt downgraded to 'below investment grade' or 'junk status'. To top it off, Spain and Italy's finances have also now been called into question. Largely to do with internal political disputes in Italy's case. The issue here is that both countries have much larger economies than their euro counterparts. The IMF simply can't afford to let either country default on their debt obligations.

Then there's the US. It needs to raise its $14 trillion debt ceiling by the 2nd of August. Needless to say the debt ceiling is already too high, but political chicken being played by democrat and republican senators is causing a lot of market volatility just on its own. There's every chance they'll be successful in raising the debt threshold, but it's extraordinary they need to do it in the first place. Both Standard and Poor's and Moody's have issued credit rating warnings to the US in the past two weeks.

And finally there's China. It's long been held up as Australia's great economic saviour, but leading economists from around the world have started to raise questions about the sustainability of the country's economic growth. Specifically, all eyes are on inflation. At likely a little over 6 per cent, it's too high. Interest rates have been raised and reserve requirement ratios increased but are they the solutions? Concerns have also been raised about what will happen to the economy if the US and European economies contract by any significant degree. Indeed all economies are likely to drag each other down given their interconnectedness with regard to trade and finance.

The OECD's Dr Adrian Blundell-Wignall is a leading academic and says Australia need not concern itself about Europe, but rather stay focused on China and the impact that economy may have on our growth. I agree to an extent, but believe Europe has the potential to impact China and is therefore also very worth watching.

Fascinating but indeed very challenging times. We are witnessing history.

David Taylor


The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.

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