Getting Ready for Next Year's Great Recession

by Cesar Bacani, 23 July 2011

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topics:
Finance and Banking Risk Management

tags:
cost-cutting double-dip recession Greece Ireland Italy Portugal Spain

Don’t say you weren’t warned.

“We’re going into a recession, a really big one, bigger than 2008 – I’ll hang my hat on it,” John Taylor, founder of FX Concepts, the world’s largest currency hedge fund, told Bloomberg on July 20. “It’s descending upon us already. Next year’s going to look worse.”

Others are not as forceful, but they are nevertheless worried. “It would be fair to say there is some concerning information in circulation at the moment when it comes to the global economy,” says John Sutherland, executive manager, risk services, at leading trade credit insurer Atradius. “But it is far too early to be talking about a double dip [recession].”

Indeed, the markets cheered up on July 21 with the news that an agreement has been reached on a second rescue package for Greece, involving €109 billion (US$157 billion) in fresh funds.

Europe’s leaders also made an open-ended commitment to bail out any EU country, a declaration aimed at stopping the debt contagion from the EU periphery – Greece, Ireland and Portugal – to the much larger economies of Italy and Spain.

But the markets have become unsettled again as they digested the details of the accord -- and as US politicians failed to craft an agreement to raise the country's debt ceiling ahead of an August 2 deadline, risking a downgrading by the ratings agencies of America's prized triple-A credit rating.

Open Question

Is Taylor wrong? That’s an open question. Greece’s problems – and those of Europe as a whole – appear to be far more complicated and systemic to be easily solved by the mere injection of €109 billion in cash.

In a report published before the July 21 draft agreement, Royal Bank of Scotland economists estimated the price tag of solutions to “system wide issues” in Europe, not just Greece, at nearly €2 trillion. However, they warned, “the lack of political cohesion and rating threats to AAA countries are likely to prove to be a major impediment to actual execution.”

“There are new questions in Europe,” Atradius’s Sutherland told CFO Innovation. “At the same time, the US continues to struggle with its problems with regard to debt funding and political impasses.” Economic activity in the world’s largest economy has also failed to remain “at the consistent levels anticipated previously.”

In Asia, Japan is trying to recover from the recent devastating earthquake, tsunami and nuclear accident “without clear and strong leadership and policy,” he adds, “and China, which was a force in driving growth in 2008, 2009 and 2010, is revising expectations and preparing to battle inflation.”

“The key for me will be the next six months and how the reality of markets and trading zones plays out in conjunction with the sentiment,” Sutherland concludes.

“If both [reality and sentiment] head down, then we will see a double dip. If the circumstances remain as confusing as they are today, then the discussions will focus on winners and losers, the size and timing of a small dip and the longer road to sustainable recovery.”

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