Second credit crunch ?
Fears are increasing that the combination of the unprecedented downgrading of America’s credit rating together with the european debt crisis will ultimately impact significantly on the commercial banks in both continents, many of which are exposedas creditors to the Governments in question. If the banks suffer huge losses (and more may even go under), liquidity in terms of borrowing will disappear again (many would argue it is only just starting to recover now) and this creates a second credit crunch.
To seek to avoid this it looks like the most likely tactic will be attempted bailout by methods of the stronger remaining economies being asked to continue buying bonds of the economies most at risk of needing a formal bailout. We think it is doubtful that stock markets around the world will see this as anything other than another short term “band aid” to cover up the bigger problem. However, doing nothing is also not an alternative, and the one thing that holds true in thi8s century is that the stronger economies need to help the weaker ones because there is a genuine global economy. A catastrophe in Europe or the US will affect the entire world economy far more than say 50 years ago.
In terms of specifics, as investors are very nervous and edgy about certain economies, particularly Italy and Spain, bond yields, representing interest rates have risen. For heavily indebted eurozone members, 7% is the ‘line of death’ above which the country concerned is believed to be in deep trouble.
