OECD: Growth Slowdown Expected Among All Industrialized Nations
Whether the forceful installation of leaders unaccountable to their populations will “save” the euro project or not reflects an effort to solve the wrong problem in the industrialized world. If the changes to governments in Greece and Italy succeed – and that’s no guarantee – they plan to supply more rounds of painful austerity on their publics. We have already seen in Britain and across Europe the consequences of austerity during this fragile time. It leads to recessions, depressions and larger budget deficits than before. The problem that needs to be solved, then, is growth, which will bring with it better employment. But the OECD now predicts a growth slowdown throughout the developed world:
None of the world’s major economies will escape a slowdown, the Organization for Economic Co-operation and Development said on Monday, highlighting increasing signs that growth momentum is dwindling across the board.
The Paris-based organization’s composite leading indicator (CLI) for its members fell for the seventh straight month to 100.4 in September, down from 100.9 in August and hitting the lowest reading since December 2009.
Readings for individual countries and big developing world economies were broadly lower at levels indicating slowdowns, and were in many cases below their long-term averages.
“Compared to last month’s assessment, the CLIs point more strongly to slowdowns in all major economies,” the OECD said in a statement.
Well, yes, considering that practically every developed country is at least considering austerity, and considering that all of them have significant exposure to the European banking crisis (don’t call it a sovereign debt crisis), this is fairly obvious. That includes the United States, which is actually plenty exposed to the situation in Europe:
While the Treasury has been at pains to say that direct U.S. bank exposure to European countries now receiving bailout aid — Greece, Ireland and Portugal — is moderate, once the debt of Italy and Spain, plus credit default swaps, and U.S. bank indirect exposure through European banks are added, the potential sum could exceed $4 trillion.
“As such, the potential for contagion to the U.S. financial system is not small,” the Institute of International Finance, the lobby group for major international banks, said last week.
Indeed, this exposure has already been set in motion. The deal reached on Greece mandates a “voluntary” 50% haircut to creditors. Though there’s nothing voluntary about it, this work-around was designed to avoid triggering credit default swaps on a sovereign debt default. This has made sovereign CDS completely worthless, as indicated by current statistics on yields. However, because of Basel III capital requirements rules, CDS remain nominally important for hedging risk, even if they do not actually hedge much of anything. So you’ll have this worthless market in place because outdated regulations – which have become outdated in less than a year! – say this prevents collapses.
So the hedges won’t help US banks, which means the exposure is even more significant. The Fed claims to be building a firewall – you can safely read that as more bailouts – but even Ben Bernanke said last week that “I don’t think we would be able to escape the consequences of a blow-up in Europe.”
Maybe someone should grow an economy.
UPDATE: A good point from Brad DeLong – US policymakers could be engaging in what he calls “banking austerity,” which would contract the economy as well.