Thursday, September 29

Europe's woes raise global recession risk

AppId is over the quota AppId is over the quota By John W. Schoen, Senior Producer

As the European financial crisis threatens to drag the global economy back into recession, leaders from Washington to Beijing are calling for Eurozone leaders to intensify their efforts to contain the spreading contagion.

Treasury Secretary Timothy Geithner on Wednesday sought to calm growing fears that European debt defaults could spark a repeat of the Panic of 2008. But he called on Europe's leaders to move more quickly to resolve Europe's escalating debt crisis. 

"They recognize that they have been behind the curve. They recognize that it will take more force behind their commitments," Geithner told CNBC television.

Those remarks were echoed by leaders of the developing world, who fear that the deepening crisis threatens to stifle one of the world's largest markets for imported goods.

Chinese Premier Wen Jiabao said Wednesday that Beijing is willing to help its biggest trading partner, but added that European leaders must act on their own stop the crisis from growing.

"What we have to take note of now is to prevent the sovereign debt crises from spreading and expanding further," Wen said.

American businesses and consumers are already seeing the impact of Europe's failure to deal with its debt woes. Economic growth in Europe has slowed to a standstill, cutting into demand for American products by its largest single trading partner. The threat of a global recession brought on by European debt defaults has given American businesses one more reason not to hire more workers.

Once thought to be limited to the weaker economies on the continent, larger European economies like Italy and France are being dragged down by the lack of consensus among 17 eurozone governments. That political failure has intensified worries about the prospect of a financial solution.

"I think we're all staggered by the lack of concerted continuity between leaders in western Europe to deal with the problem," said Martin Sorrell, CEO of WPP, one of the world's largest advertising agencies.

After more than a year and a half of failed efforts, Greece is on the brink of defaulting on its debt. With its economy contracting, it has been unwilling or unable to cut spending fast enough to win support for a bailout from stronger countries like France and Germany. Leaders of those two countries were expected Wednesday to press Greek Prime Minister George Papandreou once more to enforce the harsh austerity measures.

There is fresh evidence that the debt crisis is spreading. On Tuesday, Moody's cut the credit ratings of two large French banks, Societe Generale and Credit Agricole, that hold large portfolios of Greek debt. A default by Greece would put a major strain on the banks’ ability to raise capital.

Italy, Europe's third-largest economy, is already having trouble selling bonds as investors see rising risk that it may eventually default on its 1.9 trillion euros in debt. On Tuesday, the Italian government had to pay those investors 5.6 percent interest to auction off its latest offering of 10-year bonds. The last time those rates hit 6 percent, European Central Bankers stepped in to buy Italian bonds to avert a wider panic

As investors grow increasingly skittish about Greece, they've begun pulling back from buying bonds issued by other European countries. Governments outside the continent are also weighing whether to expand their bond purchases to help avert a global crisis -- or step back until European leaders agree on a more credible solution to the crisis.

With foreign currency reserves of more than $3 trillion, China could play an important role as a buyer of last resort for debt issued by European countries such as Greece and Italy, whose bonds are being shunned by investors.

The Financial Times reported Monday that Italy had asked Beijing to buy "substantial quantities" of its debt. But an Italian ministerial source told Reuters that his government is discussing a Chinese investment in its industrial sector, not government bonds.

Brazilian president Dilma Rousseff said on Wednesday that her country is also ready to join any international effort to help stem the spread of Europe's financial crisis. Russia, another of the so-called BRIC developing countries, wants to see a clear strategy from Europe's leaders before it commits to buying more European bonds, President Dmitry Medvedev's chief economic adviser told Reuters Wednesday.

"We would like to know what actions will the European Union take itself, what scenario will they opt for: a default on Greek debt or no default? Whom will they help: banks or governments?" said Arkady Dvorkovich.

Russia, which is the world's third-largest holder of gold and foreign exchange reserves, already holds a sizeable portion of European debt. That could limit additional purchases.

The BRICS -- Brazil, Russia, India, China and South Africa -- are expected to discuss possible solutions to the Eurozone crisis next Thursday at meetings at the World Bank and International Monetary Fund in Washington. But for now, said one Greek official, they have not stepped up their Greek bond buying.

"We have invited all the (BRIC) countries to take an active part in covering the country's borrowing needs," said Greek Deputy Finance Minister Filippos Sachinidis. "Despite the invitation, we have found there was little or no participation at all."

Discussing whether there is a light at the end of the tunnel for Europe, with Louise Cooper, B.G.C. Partners market analyst and Keith McCullough, Hedgeye Risk CEO.

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