Fears of global recession rebound as Italy teeters on brink

Just when it looked things may be quiet on the economic front, at least for a short while economists are suggesting a world recession has drawn closer after the G20 summit failed to agree to more financial help for distressed countries, and debt-ridden Italy was forced to agree to the International Monetary Fund (IMF) monitoring its austerity program.

And there is worse to come for the world economy…

While all that seems a long way away – on the other side of the world, we’re not an island here – well …actually we are – but our economy doesn’t operate in isolation.

The Sydney Morning Herald reports that financial markets fell sharply late last week after two days of talks in Cannes broke up in disarray, amid concerns that Italy will replace Greece at the centre of Europe’s deepening debt crisis.

Hopes that the Germans would relent and allow the European Central Bank to become the lender of last resort for the euro were also dashed.

In a sign that the spread of the debt crisis to Italy could break up the single currency, the British Chancellor, George Osborne, admitted Treasury was undertaking crisis planning for a euro zone collapse.

The British Prime Minister, David Cameron, hinted at worse to come, saying this was only ”a stage of the global crisis”.

There had been hopes that the G20 would agree to increase IMF resources by as much as $US250 billion to more than $US1 trillion, but disagreements about the wisdom of doing so, its structure, size and the contributors to the fund forced world leaders to pass on the issue to a meeting of G20 finance ministers in February.

Italy pays more for it’s money than the fixed home loan rate inAustralia.

The yield on 10-year Italian bonds rose from 6.2 per cent to 6.4 per cent, the highest since the euro was founded, raising fears that the country would face problems financing its huge debts.

Italy has debts of €1.9 trillion, or 120 per cent of gross domestic product, and if it followed Greece down the path towards a financial bailout, or default, the impact on the European banking system would be vast. Italy faces new tests in further auctions of its debt this month: it has to raise €30.5 billion in November and another €22.5 billion in December.

British officials privately admit a potential economic collapse in Italy is the single biggest concern gripping world leaders. ”We cannot have the Italians meeting in crisis every three days,” one official said. ”We need some action.”

My thoughts:

The Global financial crisis rolls on and 2012 is likely to be a very volatile year in the world of economics and finance.

Fortunately our economy is closely ties with the powerhouses of China and India, meaning that while things are likely to slow down, it’s unlikely Australia will go into recession.

There is an ongoing debate about what will happen to Australian interest rates, but if things remain troubled overseas as many expect, we can expect interest rates to fall here.

While some people would say it’s a good thing, the only reason the RBA would drop rates would be to bolster our local economy which was slowing down.  And that’s not necessarily a good thing.

Source: Sydney Morning herald.


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