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US credit woes ripple across globe
Can the global economy shake off economic weaknesses in the US?
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the July 31, 2007 edition
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It's a good thing that the world economy had a head of steam going into this summer, because it now faces financial headwinds made in the USA.
On Monday, shares of the German industrial bank IKB plummeted as the bank announced its earnings would be hit hard by the rising default rate of American subprime home loans.
The news served as a reminder: Politics may be local or national, but the realm of banking and finance is international.
In fact, when concerns about a tighter flow of credit sent stocks tumbling in the United States last week, the phenomenon was really global. Borrowing is becoming more difficult and more expensive worldwide. And stock markets fell as much last week in Europe and developing nations as in the US.
The good news is that these financial tremors come at a time of robust growth in most nations. For American workers that means a healthy demand for exported goods, which helps offset the impact of a deep housing slump.
"The likelihood is that the global economy will move through this OK," says Michael Cosgrove, publisher of the Econoclast, a market newsletter in Dallas. Although credit markets are global, many nations' economies are "not nearly as linked to the US as they once were."
Still, the process of unwinding after years of easy credit is fraught with risks.
In recent years, relatively cheap money has been available worldwide, fueling a surge of corporate buyouts backed by borrowing. Now, investors worldwide are rethinking this leverage, and repricing the debt.
"This is not just a US phenomenon," says Jay Bryson, a global economist at Wachovia Corp., a large bank based in Charlotte, N.C. "As investors become a bit more risk-averse in the United States, they're clearly going to become more risk-averse abroad as well."
In just past six weeks, he notes, investors have begun demanding sharply higher interest on higher-risk debts. In both Germany and the US, the gap between the interest rate on 10-year government bonds and the rate for B-rated corporate bonds has widened by about one full percentage point.
This adjustment may be a healthy one, many analysts say.
Last Friday, US Treasury Secretary Henry Paulson said that a global market swoon the day before represented simply a "repricing" of risk. "We have a strong economy, a strong economy globally. So I take real comfort in that," he said.
So far, credit isn't drying up. But it is becoming more expensive, and banks are having a harder time reselling loans to other investors.
