Led by the United State’s stimulus spending efforts with QE1 & QE2, Europe responded by following suit with its own bail-out initiatives with Portugal, Ireland, Greece and most recently, Spain.  Finally, China, with the Shanghai Market dropping last week to 2,281, after reaching a high in October, 2007 of 6,092, decided to address the downturn by implementing its own stimulus spending program.

Consider the following for client discussions this week:

China – In an effort to support growth and fight economic contagion, China has promised generous financial support to lenders and borrowers, alike.  There is real concern that the recent slowdown in China’s remarkable growth could be the beginning of serious problems in China that could include a bust. Now, the economies of both Europe and China pose significant threats to the fragile recovery underway in the U.S.

 

Europe–  As Europe continues to struggle with the prospects of entering a severe recession, there are many issues to digest when evaluating the prospects of a recovery.

• Spain – Recently claimed that it’s banking crisis has closed credit markets to Government borrowing, despite the fact that the Spanish Treasury was able to sell $2.5 billion in bonds at high rates last week. Banks in Spain are experiencing much the same situation that banks in the U.S. experienced.  They are in need of European bail-out funds to recapitalize big banks weighed down by nonperforming real estate loans that have been excluded from capital markets because of higher borrowing rates of 6% or more. (Compare to Germany’s cost of just 1%.)
• Greece – Inches closer and closer to the possibility of leaving the European Union. This coming Sunday, the Greek people will vote to elect a government that will ultimately decide the country’s fate.
• Germany – On a brighter note, Germany has indicated it may be willing to accept the concept of The European Central Bank introducing euro-zone bonds to thwart further deterioration of the euro-zone’s economy.
• Portugal & Ireland – Competitiveness has improved in recent reforms that were enacted to help the economies of both countries.

 

United States–  It’s likely The Fed will attempt to introduce additional stimulus programs after the disappointing jobs report last week. The Fed Open Market Committee meets next week under substantial pressure to take action to avoid a further deterioration of economic conditions. Economic risks also persist because of the possibility of the U.S. falling off a “fiscal cliff” on December 31st, of this year. This is the date that tax breaks and stimulus measures are set to expire if Congress and The President don’t take action to renew these programs.

The Triple Threat– Alan Abelson, columnist for Barron’s, states that, “Beijing has now become the latest convert to the dubious notion that the antidote for what ails you, is more of the stuff that got you into the mess in the first place, reckless spending and reckless lending.”  One can’t help but to ask the question, “What if stimulus isn’t the antidote to what ails world economies?” And, based on governments policies worldwide, unfortunately is a risk it appears we all must take.

Side Note– Wisconsin’s Governor, Scot Walker, last week became the first governor in U.S. history to survive a recall attempt. The vote was seen as a referendum on Union bargaining rights, which had been curtailed by Walker’s policies.