Sunday, January 29, 2012

Davos 2012, World Economic Forum in Switzerland ---> Fear of Global Contagion Dominates

From the link:
  • Powerful businessmen of the world talked about the perilous state of the global economy and the future of capitalism
  • The participants arrived amid elevated unemployment in many economies, worries about government budget deficits, and fears that contagion from a financial crisis in Europe could infect the rest of the world. They went home with all of these worries intact, and perhaps reinforced.
  • The world leaders are divided on a many issues like trade imbalances, currency valuations, threats posed by Iran & North Korea and climate change.
  • There is fear that Greece may yet default on its government debts.
  • That can lead to a CHAIN REACTION as follows:
  • Such an outcome could spook investors into pulling funds out of larger economies such as Italy and Spain. 
  • This could cause these countries to default too.
  • This could eventually trigger the loss of confidence in / breakup of the Eurozone
  • And the end of its shared currency - the Euro
  • This could produce panic in the world financial markets
  • Similar to that seen after the investment banking giant Lehman Brothers collapsed
  • Global share markets could be thrown in turmoil, causing huge losses.  
  • The general consensus is that 2012 and perhaps 2013 shall not be that great for the world Economy. Even the emerging markets are losing steam and their GDP growth rate is declining compared to previous years.   
  • Hong Kong leader Donald Tsang said : "I've never been as scared as now about the world, what is happening in Europe," he said. 
  • Hong Kong faces little direct exposure to potential defaults on European government bonds, Tsang added, but the global financial system is now so interconnected that (NO COUNTRY IS SAFE) this confers no protection. He wondered aloud about the health of financial institutions and the potential for trouble rippling out from the eurozone.  "We do not know how deep this hole will be when the whole thing implodes on us," he said. "Nobody is immune." He urged European leaders to demonstrate a sense of responsibility as global citizens, accusing them of putting the world's economy at risk. "In Europe now, you need decisive action, you need overkill. You need to inspire confidence. That confidence must come in the decisive action of government, working together. And do it quickly." 
  • But there is a sense that Europe is politically incapable of acting in unison. Though the Eurozone shares a common currency, it is comprised of 17 different countries with often-sharp differences over policy -- not to mention history, tradition, culture and language.
  • "The Eurozone is going to be in recession this year (2012)," said Robert Shiller, the Yale economist who warned of both the technology and housing bubbles in the United States. "The U.S. may not. The world may not. It's not going to be a great year, though."
  • A weak Europe translates into fewer orders for goods from developing countries. As European banks seek to bolster their balance sheets, they are pulling funds out of developing economies and bringing them home -- a trend that could prevent even healthy firms in fast-growing markets from getting their hands on cash needed to expand and hire, further crimping growth.
    "You're going to see a credit contraction as the banks pull back," World Bank President Robert Zoellick warned.
  • All of which means that as the masters of finance and heads of government filter out of this ski resort in the Swiss Alps, the anxiety gnawing at the global economy continues unchecked. The damage could run beyond an economic slowdown, further undermining public faith in the institutions that now govern modern life.
    For decades, as crises have assailed developing countries from Indonesia to Argentina, the powers-that-be in the United States and Europe have counseled orthodox advice: Get your fiscal house in order; live within your means; act decisively and resolutely. Yet now that crisis is hitting the wealthy world, leaders are avoiding the hardest decisions and hoping to muddle through -- all while exporting their afflictions to multiple shores.
    "This has got to have effects on influence, perceptions of power in the world that are going to be quite significant for years to come," Zoellick said. "Whatever we see come out over the course of this year and the next year, the world is never going to go back to the way it was."
(P.S: This content is from Huffington Post. This is not written by me. Please do not jail me under SOPA :).


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