Tuesday, 30 Nov 2010 01:03 PM
By David Frazier
During the past two weeks, the general financial media
commented with vigor — and on a daily basis — about the supposed
resurgence of the European debt crisis, leading many
financial-market participants to become overly concerned about
the potentially negative impact of that so-called crisis on the
U.S. economy.
Although the burdensome sovereign-debt situation of several
European countries might negatively affect certain commercial
banks during the months ahead, because those banks will likely
face difficulty in collecting the full amounts of loans that
they’ve extended to countries whose budget deficits account for
a large portion of their gross domestic product, there’s nothing
new about that situation – the European debt crisis that began
during late 2009 was never resolved.
Rather, the media simply stopped covering that topic.
However, once the 2010 midterm elections ended and the media
began to lose interest in discussing the Federal Reserve’s new
round of quantitative easing, journalists were forced to
identify a “new” topic to cover.
On Nov. 9, they discovered such a topic – the “resurgence of the
European debt crisis” – when credit-default swaps on Ireland’s
sovereign debt and on that country’s banks surged to record
levels, as investors that hold Irish government bonds and the
bonds of Irish banks became more concerned that Ireland’s
government and some of its banks might default on their bond
payments.
In light of the fact that Ireland’s budget deficit accounts for
14.3 percent of its gross domestic product (GDP), and that
Ireland’s GDP has declined during every quarter since the onset
of the worldwide recession that began during early 2008, there’s
a good chance that Ireland (and its banks) would have defaulted
on their bond payments if the European Union and the
International Monetary Fund hadn't agreed to provide tens of
billions of euros to Ireland and its banks.
Although Ireland’s debt woes have supposedly vanquished, one
shouldn't assume that the European debt “crisis” has supposedly
once again been resolved. That’s because the United Kingdom,
Spain and Portugal face debt problems that are similar to
Ireland’s.
For example, the U.K.’s budget deficit accounts for 12.6 percent
of that country’s GDP, while the budget deficits of Spain and
Portugal account for 11.2 percent and 9.4 percent, respectively,
of those country’s GDP.
Yet, the economies of each of those countries have grown at a
slow pace during the past few months and economic statistics for
those countries indicate that those countries are in danger of
falling back into a recession.
Because of investors’ concerns about the burdensome debt
situation of those countries, and the possibility that Spain and
Portugal will face difficulty in paying their debt, the yield on
Spain’s 10-year bonds rose today to 5.7 percent – a euro-era
record difference of 3.05 percentage points against the
benchmark German 10-year bond – while the yield on Portugal’s
10-year bond remained near record levels. Meanwhile, the yield
on Greece’s 10-year bond rose to 11.63 percent.
Meanwhile, the exchange-value of the U.S. dollar continued to
trend higher, as an increasing number of investors around the
globe came to realize that the U.S.’s government debt offers
substantially less default risk than the debt of most other
countries.
In regard to the potential impact of the European debt “crisis”
on the U.S. economy, my research indicates that few U.S. banks
will be adversely impacted by the situation in Europe and that a
likely economic slowdown in Europe will have a minimally
negative impact on the overall U.S. economy.
With an increasing number of economic indicators suggesting that
the U.S. economy will enter a period of long-term recovery
during the second half of 2011, I expect the recent downturn in
the U.S. stock market that resulted primarily from the media’s
recent coverage of the European debt situation to come to an end
within the next couple of weeks.
My experience suggests that the general financial media will
then, once again, ignore the ongoing situation in Europe and
will instead begin to focus on the positive economic
developments that are under way in the United States.
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About the Author:
David
Frazier
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