A Look at Canada, China and Japan
The U.S. subprime mortgage crisis of 2007-2009 has morphed into a full-scale global banking and sovereign debt crisis. No one knows how far the shock waves will travel because it is widely perceived that many countries no longer have the resources to backstop their undercapitalized banks. Political paralysis in Europe continues to feed the accelerating decline in confidence. Money continues to flee Europe, driven by weakening economies, very high unemployment and the lack of adjustment of economic imbalances.
We are clearly into what will be a broad and prolonged period of deleveraging. Currently, the weakest links are being picked off. The flawed euro monetary and political union combined with the debt dynamics of the PIIGS make for easy targets. Loss of confidence and a broad reassessment of sovereign risk has led to contagion: France’s bond yields have spiked up relative to Germany’s, and Germany’s relative to the U.S. Germany struggled to attract buyers at recent bond auctions.
There are many weak links in the global economy. Almost every developed nation has accumulated debt obligations, seen only before in wartime. They are financeable only with extremely low interest rates. As Italy and Spain have clearly demonstrated, a modest rise in interest rates can rapidly tip the balance between solvency and bankruptcy.