G-7 Finance Ministers and Central Banks coordinate intervention in capital and currency markets when they perceive unusual risk, (as the Lehman Brothers failure in 2008 and the Asian currency collapse in 1998). Thus, it is safe to say that a high risk is perceived right now of volatility and contagion within the financial markets. It is not only about the S&P downgrade of US debt. The EU and ECB (European Central Bank) has been moving fast to catch-up with a loss of confidence in “PIIGS” sovereign debt, (in particular the big economies of Italy and Spain could tip balance to panic because of relative size). Now, the ECB is committed to purchasing such sovereign debt to stabilize the markets and presumably allow for badly needed systemic fix. Self-Fulfilling Prophecies: The greatest risk probably impacting the markets is a slowdown even perhaps a “double-dip” global recession (on heels of last recession which for housing and employment never ended at least in the US). The austerity being shoved down throats now, the one sided US budget ceiling “compromise,” and the sovereign debt crisis in Europe, already have been pushing economic activity dangerously downward. (Renowned economist Nouriel Roubini perceives same as highest risk). The US debt downgrade by S&P is likely to have more psychological impact rather than direct on US cost of debt. However, it is psychology that is crucial now, and fears of debt crisis and recessions have a way of becoming self-fulfilling prophecies. In a day or two, the bankers will try to convince us and each other that the crisis is coming under control. The equity markets might even stage a brave rebound, for a moment reassuring that it was all more of bad dream. However, after the initial wave, there will come a more steady realization that global economic growth is in trouble. We probably will not have a repeat of 2008 type equity markets collapse. The US Dollar will remain steady. Ironically, US Treasuries once again become safe- havens in fear of recession, (as investors flee volatility and risky assets, from commodities to developing economy equity markets.) US Treasury trading Sunday evening in Asia already indicates a strengthening of US debt prices, more reflecting fear of recession and “flight to quality” rather than any heightened risk of US debt default. Watch the Second Wave: The first wave will pass with some damage, but it is the second that you have to keep your eyes on – which will indicate whether another move downward, a recession, in the global economy is upon us. Besides the obvious impact on jobs, incomes and financial portfolios, unfortunately this could also further weaken fiscal balance sheets, corporate and governmental which initially triggered this crisis, setting off another cycle in a vicious circle that is recession. It is worthwhile to emphasize that there is no certainty of another recession coming, but for now only a significant risk, probably around “50-50.” Politics Fueled: This crisis, whether it develops into a full blown recession or just bad coughing, is also likely to rekindle political debates. Internationally, China has already exploited what it perceives as political opportunity to dethrone US Dollar as primary global reserve currency. Within Eurozone, the debate toward closer fiscal as well as monetary union will tread on national egos as well as wallets. In the US, the blame game is already on, but the downgrade will also be spun to accommodate the desired ideological line of each party regarding further reforms and budget battles. Obama risks being painted as the President who lost the US credit standing even if he caught Osama. If elections are all about the economy, then Obama reelection will reflect the unfolding of any US economic crisis. Last ARTICLE – “China to Exploit US Rating Downgrade”- diplomaticallyincorrect.org/films/blog_post/china-to-exploit-us-rating-downgrade-by-ambassador-mo/33390 More Related Reports at “International Financial Crisis Channel” - diplomaticallyincorrect.org/c/international-financial-crisis













 By Ambassador Muhamed Sacirbey












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