As Europe falters and struggles to emerge from its economic slump, credit availability is becoming a casualty. This does not augur well for the global economy, which is fast approaching the tipping point of another recession.
Although, economic indicators, like industrial output and growth data are weaker in major Asian economies, emerging countries, like China, India and Indonesia continue to grow at a fairly good clip. Western businesses, like HSBC Holdings Plc (HBC) – Europe’s largest bank by market value , Wynn Resorts (WYNN) – a hotel major and Wal-Mart (WMT) – the retail major among others continue to expand in Asia because that’s the region seeing growth.
However, a credit squeeze would discourage trade flows across the globe; stall new projects and expansion, and impact growth. What’s worse, it would further weaken business confidence — no less critical an ingredient in the recipe for global economic recovery.
Amid the Euro-crisis, major European banks are facing a scarcity of cash and rating downgrades, such as HSBC Holdings Plc and UBS AG (UBS), Switzerland’s largest bank. Downgrades exacerbate the problem because they increase the cost of raising resources and more so, in difficult economic conditions.
Shoring up liquidity of financial institutions needs to be looked at as the first step – as borne out by the actions of the Federal Reserve, European Central Bank, The Bank of England, The Bank of Japan, Swiss National Bank and Bank of Canada, who have lowered dollar swap rates by 50 bps. People’s Bank of China, on the other hand, has lowered the reserve ratio that banks require to maintain by 50 bps.
Concerted Central Bank action across the globe should hopefully thaw the frigid state of credit and help it to take off.
Financial institutions also need to be recapitalized either by direct infusion of cash or by buying out the sovereign bonds of the crisis-stricken nations held by these institutions. There are shades of similarities between the crisis in Europe and the Latin American debt crisis in 1980s, where several Latin American nations defaulted on their bank debts.
As part of the Brady Plan, then, bonds were structured as tradable instruments allowing banks to remove the country exposures from their balance sheets. Although, the numbers involved now are much larger and the global economy is not in the pink of health, we could perhaps re-visit that option to find a much-needed Euro-solution.
HSBC HOLDINGS (HBC): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
WYNN RESRTS LTD (WYNN): Free Stock Analysis Report
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