Tag: reuters

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As fears mount that the developed world is shifting from slow growth to no growth, emerging markets seem to many economists better placed to weather the storm than they were during the great financial crisis of 2008/2009.

However, Rob Subbaraman, chief Asian economist at Nomura in Hong Kong, said the region would run into headwinds from slower exports to the United States, Europe and Japan. This was the main factor behind a cut in Morgan Stanley’s projection of 2012 GDP growth in Latin America, announced on Thursday, to 3.6% from 4.6%.

A clear worry is that while the economic fundamentals look better in many emerging economies than they did in 2008, policy makers generally have less leeway. India is especially constrained: the general government deficit has more than doubled since 2007 and wholesale inflation exceeds 9%. The government and central bank, which has raised interest rates 11 times since March 2010, are still forecasting growth of at least 8%in the financial year that began in April.

“There is now less policy room to respond to a significant deterioration in domestic or external demand than in 2008, but adequate measures are still available,” according to Stephen Green, head of China research at Standard Chartered Bank in Shanghai.

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One bank in Asia has cut credit lines to major French lenders while five other banks in Asia are reviewing trades and counterparty risk as worries about the exposure of French banks to peripheral euro zone debt mounts, banking sources told Reuters on Thursday.

Rumours on Wednesday that France was to lose its AAA rating, later denied by ratings agencies, helped trigger the biggest widening in the European credit default swap index since the credit crunch in 2008.

That sudden rise in risk perception, combined with sharp share price falls in French banks, prompted some banks in Asia to speed up reviews of counterparty risk and look at whether they should cut exposure to European lenders, sources at each of the six banks in Asia said.

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According to JP Morgan the biggest impact of a US downgrade will be on tri-party agreements in Europe and the US repo market.
Certain tri-party agreements have strict ratings requirements which would result in US Treasuries no longer being accepted as collateral.
“If the US sovereign were no longer rated Triple A, US Treasuries would not be eligible anymore.
According to the JP Morgan research note, “US money market funds would not be required to sell US Treasury Securities in the event of a US downgrade, it is investor redemptions that pose most risk.
“Many US investors will remain loyal and patriotic to Treasuries but for European and Asian investors they will be looking for alternatives,” he said.
Foreign central banks who hold around USD3.5trn of US Treasury securities are already seeking alternatives to US Treasuries.

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Leaders from European powerhouses Germany and France will hold talks on Friday after a global market rout signalled fear Europe’s debt crisis is spinning out of control and a U.S. recovery is stalling.

In Japan, Finance Minister Yoshihiko Noda said global policymakers needed to confront currency distortions, the debt crises and concerns about the U.S. economy.

Japan and Switzerland are trying to reduce the allure of their markets as safe havens and after gold has more than doubled in price since the global financial crisis, many investors are having second thoughts about seeking refuge in the precious metal.

Investors slashed positions after the European Central Bank failed to include Italy and Spain in a fresh round of bond buying, even though yields on their debt shot above 6%, the highest level since the euro was launched over a decade ago.

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In a matter of days, investor relief that the United States avoided default has been replaced by fears Europe’s debt crisis is deepening and the world’s biggest economy may be slipping back into recession.

“The odds of the economy going back into recession are at least one in three if nothing new is done to raise demand and spur growth,” Summers said of the United States in his column.

The bellwether S&P 500 index dropped more than 2.5% on Tuesday to wipe out 2011 gains after data showed U.S. consumer spending fell in June for the first time in nearly two years.

Insight: Debt relief replaced with recession fear | Reuters.