“As the Greek debt crisis reached its peak in 2012, it was almost impossible to turn on the news without hearing the word “contagion” — the idea that the economic woes caused by Greece’s huge government debt (or, to some, by the greed of its creditors) would cause a systemic financial crisis across the globe.
“In 2019, a far larger country stands on the brink of potential meltdown, and the global response is … muted. If the United Kingdom does not find some way to either support a deal to exit the European Union or else to negotiate with its 27 EU partners an extension on the Article 50 process, the UK is set to leave the EU on March 29 with no deal.
“It is difficult to describe the scale of economic disaster this outcome would be for the UK. Most coverage has, reasonably, focused on the initial chaos — a country which relies heavily on cross-channel shipping for food, medicines, manufacturing supplies and more could see crossing fall by a reported 75% to 87% for six months, with almost no viable alternative routes to match anything like the lost capacity.
“But the longer-term economic harm would be devastating. The midpoint estimates of such a crisis suggest a drop of close to 9% in GDP — a far, far deeper recession than the financial crisis of 2009 — and huge increases in unemployment, the cost of borrowing, plummeting value of the pound, and more. This damage could easily take a decade or more to repair.
“That combination of chaos and of deep economic crisis would spell trouble in any economy — as the well-founded concerns about the broader effects of a Greek collapse showed — but the UK is not just any economy.
“Depending how you look at it, the UK is either the fifth- or sixth-biggest economy in the world — with a GDP around 13 times that of Greece. It is also, unlike Greece, perhaps the largest financial center in the world: many of the world’s key exchanges rely on London to function.
“More than a third of global foreign exchange trading operates out of London, as does a similar proportion of derivatives trading. Its banking sector is sized at more than €10 trillion ($11.4 trillion). It manages more than a third of Europe’s financial assets, and it is the insurer to the world. And many of the world’s largest global companies are either headquartered or co-headquartered here.
“Britain is an unimaginably sophisticated economy and is in many ways the world’s financial services provider. Its ties across the world economy would take years, if not decades, to unravel. And it stands on the very brink of an economic crisis never seen in living memory…”
“A jump in personal insolvencies in the fourth quarter of 2018 sent the total number of people going bust last year in England and Wales to the highest level since 2011.
“Debt advisers blamed Brexit uncertainty, weak wages growth and tighter credit rules for forcing more people to declare themselves insolvent in the run-up to Christmas.”
“Leveraged loans, which helped cause the last financial crisis and have drawn fear that they could be a spark in the next one, are showing further signs of cracking as investors flock from the market and volumes dry up.
“Mutual funds that track the debt issued traditionally to companies with weak balance sheets and poor credit have seen $18 billion in outflows over the past 10 weeks, including $949 million for the period ended Jan. 23, according to data Refinitiv’s LPC team released Tuesday.”
“The chance of recession in the next 12 months spiked to its highest level in three years as market participants ratcheted up their worries about global economic weakness, Fed rate hikes, the market sell-off, trade tensions and the government shutdown.”
“Chinese executives are sounding warning bells over the world’s second-largest economy.”
“Chinese provinces are downgrading their targets for economic growth in 2019 as exports and consumption slow, pointing to a lower national goal likely to be agreed in March.
“Of the 30 provinces which have released their 2019 growth targets, 23 lowered their goals from those set for 2018, according to local government work reports.”
“Shares of Geely Automobile Holdings and Great Wall Motor slumped to lead a broad decline for Chinese automakers on Tuesday as piling inventory levels
“…and a slowing domestic economy clouded the outlook for demand in the world’s largest car market.”
“Ford Motor Co.’s main partner in China is feeling the pain caused by the slowdown in the world’s biggest car market.
“Chongqing Changan Automobile Co. said in a filing late Tuesday its profit for 2018 may have tumbled as much as 93 percent. Sales at its joint venture with the American maker slumped 54 percent to 377,739 units last year…”
“Nissan Motor Co. reported its first slide in auto sales in almost a decade, adding to the challenges the company faces following the arrest of former chairman Carlos Ghosn in Japan for alleged financial misconduct.
“Global deliveries fell 2.8 percent last year to 5.7 million vehicles, the Yokohama, Japan-based carmaker said in a statement Wednesday.”
“As the trade cycle turns, so goes the global economy. But there is a new twist.
“With growth in global trade sharply diminished since the 2008-2009 global financial crisis, an upsurge of protectionism and disrupted global supply chains is all the more problematic.
“There is a distinct possibility that a turn in an already weakened trade cycle could spark a surprisingly swift deterioration in the global economy.”
“You might say that a Government can never go bankrupt—they can always print more money. But a Government may default where debt is denominated in foreign currencies. The likelier scenario is that in the event of a crisis, Governments will need to pay significantly higher interest rates to sell bonds.
“The US Government currently pays about 8% of its budget to service debt, and this is with extremely low interest rates. What if the US Government had to triple its cost of servicing Treasuries during a recession, when tax revenues are falling? Ouch!
“… it seems that most Governments and corporations have not learned the lessons of the 2008 financial crisis. (Perhaps most households have). This creates a virtual certainty that there will be another financial crisis—the only question is when — and raises the question as to whether the next recession could be more severe than the one in 2008.”