Much of the main stream press is calling an end to the recession buoyed by significant rallies on world markets since reaching record lows in March 2009. Australian Treasurer Wayne Swan has even brought an end to the Government funding guarantee commenting that bank funding conditions had improved and the guarantee was no longer needed.
Australian unemployment has remained remarkably low in the face of collapsing labour markets around the world whilst our resources sector and ever reliance on the booming Chinese economy has seen our economy described as a miracle.
Are things really that good? Can our share market continue to rise in isolation?
It is difficult to say given the mounting sovereign debt concerns specifically around the western world which have arisen as a direct result of private debt exploding during the two decades since 1990. This private debt blew up during the GFC prompting governments around the world shifting the debt burden from the private to public sector.
Reports are flooding in from Europe on an hourly basis describing the result of its looming debt disaster. Greece has been the first of the European Union community to put up their hand announcing that they are struggling to meet their commitments as they fall due. Debt to GDP has rocketed to 110%, whilst the budget deficit has ballooned to 12.7% of GDP and its credit rating has been downgraded by Moody’s Corp from A1 to A2.
Greece’s Mediterranean neighbours are faring better but only just. Spain’s unemployment is running at 20% whilst its budget deficit is close to 12%. Meanwhile Italian government debt is at 115% of GDP, however seems to have its budget deficit under control at 5% of GDP.
Outside the Mediterranean we move higher up the G7 chain to find the United Kingdom with a budget deficit of 14% of GDP and stubborn unemployment rate that whilst not as high as some of its European neighbours at 8% is proving very difficult to combat.
Is it possible that one some or all the above mentioned countries could default leading to much higher bond yields and disruption of the very fragile economic recovery around the world? Add a nuclear Iran to the mix and the much touted recovery spoken about in the main stream media looks to be facing some very strong headwinds in the coming months.
How will this end? We are not certain however one could assume that after the period of deleveraging will come a period of inflation and further financial stress for “zombie” companies all around the western world who are being kept alive by the elixir of more and more credit.
It seems the more relevant question is; who is going to bailout the many governments in trouble across the globe. More on this and other global macro issues in our upcoming blog.
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