(VIENNA) A string of regulatory reforms across the banking sector could cut 3 per cent off global economic growth over the next five years and cost almost 10 million jobs, top banks said yesterday.

The Institute of International Finance (IIF), a bank lobby group representing over 400 firms, said a need to hold more capital, proposed bank taxes and other possible reforms could hit economic growth hard.

Gross domestic product (GDP) in the United States, eurozone and Japan would fall by 0.6 percentage point annually between 2011 and 2015 and by an annual average of 0.3 percentage points in the 10 years to 2020, the IIF said in a report released at a meeting in Vienna.

‘The IIF calls on the participants of the forthcoming G-20 Summit and the international regulatory authorities to consider carefully the content, timing and calibration of proposed bank regulatory reforms, mindful of the potential drag on economic activity that could result,’ said Josef Ackermann, CEO of Deutsche Bank and IIF chairman.

The economic impact would be hardest in the eurozone, where GDP growth would be cut by 0.9 per cent annually until 2015. US GDP growth would be curtailed by 0.5 per cent annually, and in Japan it would be 0.4 per cent, the IIF said.

Some 9.7 million fewer jobs could be created due to the reforms over the next five years, the report warned.

Banks face new taxes and requirements to hold more and better quality capital and liquidity and other reforms to ensure there cannot be a repeat of the recent financial crisis, the worst since the 1930s.

Banks admit change is needed, but are resisting some proposals and are concerned about the cumulative impact of a range of measures and want more time to implement change.

‘The point of this report is not to argue against regulatory reform,’ said Peter Sands, CEO of Standard Chartered and an IIF director. ‘But there is a price for making the banking system safer and more stable, and that price will inevitably be borne by the real economy.

‘The challenge is to strike the right balance, to get the maximum benefit for the minimum negative impact,’ Mr Sands added. — Reuters

Source: Business Times, 11 Jun 2010

(WASHINGTON) Anxiety about Europe’s debt crisis last month caused US stocks to suffer their worst month in more than a year.

Yet many experts say fears that Europe will deal a sharp setback to the US economy are overblown.

They note that trade between the US and Europe is comparatively small. US banks do lend to their European counterparts and hold billions in investments in those banks and other European firms.

But US banks have enough capital to withstand losses from a European crisis, analysts say.

In addition, the European Union is preparing a US$1 trillion bailout for weak member states. And its central bank has begun buying government debt to protect European banks – and their US counterparts – from the risk of default by EU countries.

The anxieties that have spooked US stock markets could linger a while. The Dow Jones industrial average has fallen more than 12 per cent since late April. But the foundations of the US economy remain secure, experts say.

‘The physical linkages with Europe just aren’t big enough to undercut the US economy,’ said Ethan Harris, head of North American economics at Bank of America Merrill Lynch.

If European countries default on their debt, big US banks with operations in Europe could suffer. US banks don’t hold much national debt of Greece, Spain and other countries.

But they do have investments tied up in big European banks – those most at risk in case a European country defaults.

The European Central Bank has warned that European banks might have to reduce the value of assets on their books by US$239 billion over this year and the next. Such losses could prevent the banks from repaying their debts to US financial firms. And if US banks fear such defaults, cross-border lending could dry up.

For all of Europe, US banks have US$1.1 trillion at stake. That’s roughly 38 per cent of the US$3.1 trillion in loans and derivatives US banks have with all foreign banks. Derivatives are investments whose value depends on the price of underlying assets, such as stocks or mortgages.

Substantial losses from investments tied to Europe would cause US banks to reduce lending. A deep credit crisis could reduce US growth by 1.5 per cent and possibly cause another recession, Goldman Sachs said in a recent note.

The threat from Greece, Spain, Italy and Portugal – the weakest eurozone countries – itself is small, says Mr Harris of Bank of America Merrill Lynch. US banks’ exposure to those countries is US$165.9 billion – just 5.4 per cent of all loans and derivatives US banks have with foreign banks. And US lending to Europe accounts for only about 10 per cent of total US bank assets of nearly US$12 trillion.

Even in case of another credit crisis, few predict anything like the damage caused when banks lost billions on sub-prime loans after homeowners defaulted on their mortgages. Since then, banks have added billions more in capital. They are better able to withstand Europe’s problems, Fed governor Daniel Tarullo has said.

Thirty per cent of US exports of goods and services – or US$461 billion – last year went to Europe, according to the Bureau of Economic Analysis. Economic troubles in Europe could sap demand for US exports, slow hiring and drag on the US economy.

Exports could be hurt in two ways: A stronger dollar relative to the euro makes US-made goods and services costlier to foreign buyers. So foreigners buy less. Secondly, budget cuts by European nations further reduce the ability of European customers to afford US products.

‘Weaker export growth wouldn’t derail the US recovery,’ Mr Harris says. Exports account for only about 12 per cent of US economic activity. And US exports to Europe equal only 3 per cent of US gross domestic product – less than the size of the US auto industry.

By contrast, US sales of goods and services to Asia, whose economy is far stronger than Europe’s, accounted for 27 per cent of all US exports last year. Exports to Asia would help blunt some of the reduced US export business to Europe. China’s currency is pegged to the US dollar, so Chinese customers could still afford US products even if the US dollar kept rising versus the euro.

As the US dollar rises in value compared with the euro, oil prices are falling, too. Lower interest rates and lower oil prices could lead consumers to borrow and spend more and invigorate the economic recovery.

‘The U. may actually be an unwitting beneficiary of the crisis in Europe,’ James Bullard, president of the Federal Reserve Bank of St Louis, said in a speech last month. — AP

Source: Business Times, 10 Jun 2010

IMF urges govts to be ready to take appropriate action

(SINGAPORE) The International Monetary Fund (IMF) warned Asia yesterday of the potential spillovers of the European debt crisis, saying it could dampen trade, make capital flows volatile and overheat economies in the region.

‘Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,’ IMF deputy managing director Naoyuki Shinohara told a forum in Singapore.

On the financial front, he said major credit problems could result in a ‘significant spillover’ through funding channels, especially where banks were dependent on wholesale funding.

There was also increased uncertainty and potential for volatility in the outlook for capital flows, Mr Shinohara said at the forum hosted by the Monetary Authority of Singapore.

He said Asia’s bright growth prospects, together with low interest rates in major economies, would likely attract more capital that could ‘lead to risks of overheating in some economies if appropriate policy action is not taken. ‘On the other hand, further increases in global risk aversion could see capital flows change direction quickly.’

Mr Shinohara called on Asian governments to be wary of the potential risks and be prepared to take appropriate action.

‘The key will be for policymakers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold,’ he said.

‘With Asia’s economic muscle growing, the policy choices made in this region will have an important impact on the global economy,’ he added.

Greece is at the epicentre of a mounting debt crisis that threatens to spread across the eurozone and has pulled down the euro to four-year lows.

Asian markets have also been affected by the impact of the crisis.

Mr Shinohara said there was a risk that sovereign debt problems being experienced in some eurozone countries could spill over to others.

He said the strong fiscal position of most Asian economies provided the ‘space’ to respond flexibly to the European crisis.

‘In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus,’ he said. — AFP

Source: Business Times, 10 Jun 2010

Rebound driven by trade flows, emerging markets and stimulus policies

PARIS: Despite mounting concerns about European debt and fears that Asian economies may be overheating, the global recovery is taking root, an international research group says.

The Organisation for Economic Cooperation and Development on Wednesday raised its overall growth forecast and its outlook for the United States, the euro zone, China and Japan.

The rebound from the severe downturn that plagued the global economy for much of 2008 and last year is driven by a healthy increase in trade flows, booming emerging markets, the continued support of government stimulus policies that are now unwinding, and better market conditions, according to the organisation’s twice-yearly Economic Outlook report.

‘There’re objective reasons to be positive about the outlook,’ said the organisation’s secretary-general Angel Gurria. ‘World growth is picking up – it’s quite better than it was even a few months ago – led by China, led by India, but also a very brisk recovery in the US, where we’re seeing a pick-up in jobs.’

The organisation has 31 member countries, all advanced industrial democracies. And the group predicted that gross domestic product across the OECD area would rise 2.7 per cent this year and 2.8 per cent next year; in November, it had estimated that growth would be 1.9 per cent this year and 2.5 per cent next year.

‘We’re slowly moving from a policy-driven recovery to a self-sustaining recovery,’ the organisation’s chief economist, Mr Pier Carlo Padoan, said.

The US is in a stronger position than the euro area, he said, helped by better financial market conditions and ‘a number of more favourable elements on the fiscal side’ – notably the outlook for stronger tax revenue, which gives it more time than Europe to undertake debt-reduction steps.

The report forecast real GDP growth in the US of 3.2 per cent this year and next, compared with its previous forecast of 2.5 per cent this year and 2.8 per cent next year. It predicted that the American jobless rate would fall to 8.9 per cent next year, from 9.7 per cent this year.

Mr Gurria suggested that the doubts about the viability of the euro area had been excessive. Bad news ‘tends to sell better than good news’, he said.

Growth in the 16-country euro area was estimated at a much more modest 1.2 per cent this year and 1.8 per cent next year, but that was up from the previous forecast of 0.9 per cent this year and 1.7 per cent next year. Unemployment will remain high in the region, at 10.1 per cent next year, the report said.

NEW YORK TIMES

Source: Straits Times, 28 May 2010

New York – Renewed worries over the European debt crisis have sent markets lower and further devalued the euro.

Investors, who had started the week reassured by the huge rescue of Europe’s indebted nations, have expressed concerns that the austerity measures demanded by the bailout would stunt the continent’s already anaemic economic growth.

The euro fell to its lowest level in 18 months on Friday, and one by one, markets across Asia, Europe and then the United States sank lower under the renewed pessimism about European growth caused by governments cutting back spending.

Investors continued to depress the price of oil, as traders bet on slower global growth and continued to push up gold, an asset perceived by investors as a safer, long-term store of value in times of stress.

The sharp worldwide market decline came only five days after the European Union and the International Monetary Fund hoped their US$957 billion (S$1.3 trillion) rescue package would signal a ‘shock and awe’ commitment to ending the continent’s crisis.

But economists said that while the package had eased concerns that countries like Greece would encounter trouble in rolling over old debts or borrowing new money, it had done nothing to help them grow.

There was also a growing worry on Friday about how governments would find the billions needed to pay for the rescue package, economists said, and a growing suspicion that central banks might eventually resort to allowing inflation to lessen groaning debt loads.

Some economists regard that step as a troubling departure from the European Central Bank’s (ECB) mandate to focus solely on price stability, and as a result, is adding to the pressures undermining the euro.

A continued hammering of the euro would make European exports cheaper, but the side effect would be weaker American exports, potentially dragging the US – and the rest of the world – back towards recession. Since the start of the year, the euro has fallen by 13 per cent against the dollar.

‘What you get is markets worrying about a whole cascading of weakness stemming from Europe being transmitted through the euro to the United States,’ said Mr Martin Murenbeeld, chief economist at DundeeWealth Economics.

In the US, the Dow Jones Industrial Average, which had been seesawing since the rescue package was announced on Monday, declined 162.79 points, or 1.51 per cent, to 10,620.16 on Friday.

Bank stocks led the market decline, mainly over worries about Europe. Another factor might have been the Senate’s approval of a proposal on Thursday that could cut bank revenue by imposing limits on fees they can charge businesses to process debit card transactions. The Senate also approved an initiative to end reliance on major credit rating agencies, putting further pressure on financial stocks.

In Paris on Friday, stocks slumped 4.6 per cent; in London, the FTSE 100 lost 3.1 per cent; and in Germany, the benchmark DAX index lost about 3.1 per cent. Spain’s stock market fell by 6.6 per cent.

ECB president Jean-Claude Trichet was quoted yesterday as saying that the euro was not under attack by speculators and described as ‘nonsense’ any suggestion that euro zone governments had forced the central bank to act, sending out a fatal signal on its independence and credibility.

Source: Sunday Times, 16 May 2010

It sees slow growth, high jobless rate and possible failure of rescue plan

ATHENS: An internal International Monetary Fund (IMF) assessment paints a gloomy picture of Greece’s ability to recover economically, with years of high unemployment, slow growth and political bickering threatening to undermine a recently approved international rescue programme.

In approving a US$140 billion (S$194 billion), three-year bailout for the indebted European country, IMF and European officials praised the current Greek government for budget cuts and tax increases it has already enacted to right its finances, and for its plans to further overhaul one of the continent’s least competitive economies.

But a detailed staff assessment released, as is the routine, after the IMF board approved the rescue programme details both the depth of the social shock in store for the country, and the substantial risks that could leave Greece, at the end of the day, once again facing insolvency.

There are global implications: The Greek rescue programme was approved to stop a ‘contagion’ from undermining confidence in other indebted European countries, eroding the value of the euro, and throwing the world economic recovery off course with a new financial shock.

The risk that the joint IMF-European Union rescue plan will come undone is ‘undeniably high’, said the IMF staff note, which detailed the way in which even slight variations in the fund’s assumptions about growth, inflation, interest rates, restructuring and other variables could leave Greece’s debt load climbing despite the international effort to help bring it down.

The staff note suggested the effort was justified as much by the ‘systemic concerns’ posed by a Greek default as by the likelihood the programme will succeed.

‘Support is nevertheless justified,’ it concluded, because the Greek government had proposed an aggressive plan to improve finances and other euro-zone countries were willing to help, and because of the larger problems that could arise ‘if Greece were not given an opportunity to improve its economic policies’.

The level of concern about ‘spillover effects’ became clear last weekend when European finance ministers and the IMF approved a separate, nearly US$1 trillion effort to support other indebted European nations if they run into the type of trouble Greece faced.

The programme was viewed as a necessary emergency measure, but its success is far from guaranteed. After a sharp rally on Monday, European stock markets declined on Tuesday, as did the value of the euro, amid doubts that Europe’s massive offer of financing would cure the continent’s longer-term economic problems.

That will require political action – not just financing – and the IMF staff note portrayed the pressures likely to mount on Greece. The country must now go through years of ‘internal devaluation’ – meaning falling wages and living standards, and a drop in economic output.

Unemployment, the IMF projected, will rise sharply, from around 10 per cent this year to near 15 per cent next year.

WASHINGTON POST

Source: Straits Times, 13 May 2010

Analysts are split over whether a strong response will halt slide for long

ON Wall Street, the adage goes that on trading days where Thursday is bad and Friday is bad, Monday is rarely good. After two positively terrible days to end last week, investors have had the weekend to worry about how much more they could lose and will be coming to work today primed to sell.

‘That will likely be the case unless we get some strong statements from the ECB over the weekend clarifying how they’re going to handle this crisis,’ said Max Bublitz, chief market strategist at SCM Advisors.

On Saturday, French President Nicolas Sarkozy and his German counterpart, Chancellor Angela Merkel, jointly promised that the European Union would have a ‘financial defence plan’ in place by the time financial markets open Monday to protect the euro, support the EU’s most troubled economies, and reassure investors frazzled by a tumultuous week that featured a harrowing plunge of nearly 1,000 points in the Dow Jones Industrials.

Investors will surely be holding them to that promise this week, with the stock market equivalent of all hell breaking out if the EU fails to convince the financial markets it is taking sufficient steps to backstop its beleaguered economies and keep the sovereign debt crisis causing such turmoil in Europe from sweeping through the globe, a la 1997′s Asian contagion, which started with a run on the Thai baht and ultimately threatened economies worldwide.

The rise of a new global credit crisis over the last week has all but guaranteed a strong response from the European Union, but the question is whether the measures being voted on by the finance ministers of all 27 of the European Union member countries in Brussels will be sufficient to convince the stock and bond markets that it is doing enough to get out in front of an economic crisis that has swelled far beyond Europe’s borders.

‘The thing that really touched off this whole thing for me, and most professional investors I think, was the Trichet press conference, when he didn’t even discuss quantitative easing,’ said Nick Colas, chief market strategist at ConvergEx, referring to European Central Bank president Jean-Claude Trichet’s refusal last Thursday to consider quantitative easing, or new liquidity measures to calm investor fears over the sovereign debt crisis.

‘It was just like when the House wouldn’t pass Tarp the first time through Congress,’ said Mr Colas.

Assuming the EU and its central bank do enact emergency measures to combat the crisis, Wall Street traders said it must be on the same level of response that the US government and Federal Reserve took back in October, 2008. ‘Otherwise, the dominos will keep on falling,’ said Joe Saluzzi, co-manager of trading at Themis Trading, LLC.

Even with a strong move from the eurozone’s finance ministers and central bankers, Wall Street market pros are split over whether it will staunch the bleeding in the stock markets for long.

‘If the ECB does the ‘right thing’, we’re oversold in US equities and the euro, and there are buying opportunities,’ said Mr Colas, a view echoed by Mr Bublitz.

‘The crisis in Europe automatically adds another three months’ worth of the Fed keeping interest rates at zero per cent, which has been the basis of the 14-month rally,’ he said.

Mr Saluzzi disagrees. ‘Even with a strong response, we’ve got plenty of room to go down further. The market has already baked in all the good news on the economy’s recovery and corporate earnings, and now it wants more before you see momentum go back with the bulls.’

Indeed, investors should remember that US stock indices faced their worst losses on a percentage basis weeks after the US government’s emergency bailout was passed by Congress in response to Lehman’s collapse and the sub-prime mortgage crisis. For veteran trader James Awad, its all about clarity.

‘Regardless of the steps the ECB takes, markets are now profoundly shaken and worried about public sector debt and its effect on the private sector. Will these worries overwhelm the positive cyclical economic uptick here? That’s the question, because if not, the cyclical upswing has further to go, and that’s bullish for stocks,’ said Mr Awad, the managing director at Zephyr Asset Management.

‘I think it’s too early to say. I certainly won’t be laying any big bets over the next few weeks without a lot more clarification on the extent of the risks, and the EU’s capacity to mitigate those risks,’ he added.

On Friday, US stocks slid further into negative territory after Thursday’s collapse. The Dow Jones Industrials sank for the fourth straight day, this time by 140 points, or 1.3 per cent to finish a tumultuous week at 10,380.43. The S&P 500 retreated 17.3 points, or 1.53 per cent, to 1,110.88, while the Nasdaq was the day’s biggest loser, with a 54-point, 2.3 per cent decline to 2,265.64.

For the week, the Dow lost 4.7 per cent and the S&P 500 fell 6.4 per cent while the Nasdaq dropped almost 8 per cent.

The dollar gained nearly 5 per cent in the past week against the euro in a flight to safety, which also boosted gold prices, which rose to new 2010 highs on a 1.3 per cent surge on Friday.

If the way investors disregarded last Friday’s big, estimate-beating April employment number of 290,000 new jobs is any indication, the number of key economic reports and earnings releases due out this week may matter very little compared to the moves by the European Central Bank and EU finance ministers to address the sovereign debt crisis.

Source: Business Times, 10 May 2010

TOKYO: Asian governments moved quickly yesterday to dampen the effects of the global turmoil triggered by the Greek debt crisis.

Japan’s central bank said it would inject more than US$20 billion (S$28 billion) in liquidity to calm markets, while its counterparts in India and Indonesia intervened in the markets to shore up their sliding currencies.

The Malaysian and South Korean authorities vowed to defend exchange-rate stability amid concern that Europe’s debt crisis will worsen.

In Singapore, the Monetary Authority of Singapore said it will respond to the market turmoil if there is a need. It ‘continues to monitor international developments closely as well as their impact on our markets’, a spokesman said in response to questions from Bloomberg News.

‘We will take appropriate actions where necessary.’

The yen’s surge and sharp falls in Tokyo share prices have alarmed Japanese policymakers.

The Bank of Japan offered 2 trillion yen (S$30.51 billion) in funds to financial institutions in an emergency market operation aimed at soothing market jitters.

Japanese Prime Minister Yukio Hatoyama said yesterday he was ‘very worried’ about the market moves and said the government will act accordingly if needed, without elaborating.

India’s rupee fell to a two-month low yesterday.

‘The Reserve Bank of India has supported the rupee intermittently since yesterday as things move from bad to worse in the global financial markets,’ said Mr J. Moses Harding, a Mumbai-based executive vice-president at IndusInd Bank Ltd.

‘I think the RBI is only trying to cushion currency weakness and check volatility rather than influence direction.’

Indonesia’s rupiah had its worst week since June, dropping as much as 2.7 per cent against the US dollar yesterday before recouping its losses on speculation the central bank intervened.

Officials in Indonesia and the Philippines ruled out imposing capital controls in response to the market turmoil.

The Indonesian monetary authority ‘is always in the market to smooth currency volatility’, said Ms Lindawati Susanto, head of currency trading at PT Bank Resona Perdania in Jakarta.

Australia’s central bank, meanwhile, warned that an escalation of Europe’s debt woes may cause a ‘sharp’ global economic slowdown.

BLOOMBERG, REUTERS, AGENCE FRANCE-PRESSE

Source: Straits Times, 8 May 2010

Parliaments approve Greek aid even as euro continues plunge

EUROPEAN leaders yesterday sought to convince fearful markets that the Greek debt crisis won’t spread to other countries and derail the continent’s wobbly shared currency and hesitant economic recovery.

France, Italy and Portugal approved their share of a 110 billion euro (S$195 billion) bailout to keep Greece from imminent default as the 16 leaders from countries using the euro headed for an evening summit in Brussels.

Germany’s contribution awaited only a presidential signature, while Spain’s government approved its share by decree with formal parliamentary approval expected next week.

The meeting – initially called to sign off on the bailout and draw lessons for the future – faces the challenge of urgent crisis management, after the euro dropped to its lowest level in 14 months and bond markets dumped Greek debt.

EU leaders have insisted for days the Greek financial implosion was a unique combination of bad management, free spending and statistical cheating that doesn’t apply to any other eurozone nation, such as troubled Spain or Portugal.

They said the bailout should contain the problem by giving Greece three years of support and preventing a default when it has to pay 8.5 billion euros in bonds coming due on May 19.

Again yesterday, European leaders were almost desperately trying to talk away the problems.

Agreement on rescue for Greece ‘will be a demonstration of Europe’s force, of solidarity’, French Prime Minister Francois Fillon said after a meeting with Portuguese Prime Minister Jose Socrates. ‘We will protect Greece and reinforce the stability of the eurozone,’ he said.

The markets have taken little heed. Stocks, Greek bonds and the euro plunged even yesterday.

Along with the eurozone meeting, the G-7 finance ministers will hold a teleconference yesterday on the crisis, according to Japan’s finance minister.

And on top of the eurozone summit, key leaders like France’s Nicolas Sarkozy, German Chancellor Angela Merkel and ECB president Jean-Claude Trichet will huddle ahead of time seeking a common strategy to soothe the markets.

A French official said no completely new decisions were to be expected from yesterday’s meeting but that some emergency measures could be discussed. He said the leaders would be looking at ways to prevent other countries, including Spain, Portugal and Ireland, from coming under pressure. — AP

Source: Business Times, 8 May 2010

HOW quickly sentiment sours. Just weeks ago, the broad consensus of expert opinion was that the international economy was well on the road to recovery from the financial meltdown of 2008-9. In Singapore, the official growth forecast range for 2010 was hiked 2.5 points to 7-9 per cent, on the back of very strong first-quarter estimates. The US economy appeared to be on the mend, even if employment creation remained weak. There was concern over the unwieldy sovereign debt of European nations like Greece, Portugal and Spain, certainly; but financial markets continued to rise in tacit belief that the system would resolve the problems.

Not any more. The system did intervene; the European Union and the International Monetary Fund (IMF) responded to rescue pleas from Greece, the worst-hit of the indebted countries, with a 110 billion euro (S$197 billion) bailout package.

But investors have not been reassured. After a brief upsurge following the announcement of the rescue offer, markets everywhere have tumbled on fears of a Greek default and, worse, the spreading of the debt crisis to other economies.

Even Asian bourses, including Singapore’s, have got the jitters: a sober testimony of how intimately linked today’s financial markets are.

Inevitably, the situation raises the spectre of a ‘double dip’ – a repeat of the recent financial holocaust. That crash was triggered by the infamous sub-prime debt crisis in the US mortgage industry. Could it be an avalanche of European sovereign debt that takes the system down this time?

That concern, while genuine, should not be overblown. Certainly, it is a crisis for the eurozone, but its financial and political leaders will surely have learned from the lessons of just a year ago. The EU and IMF are working together on the Greek debacle, and stand ready to stanch the bleeding should Spain or Italy start haemorrhaging. German Chancellor Angela Merkel is fronting an important initiative to bind euro-states to a strict debt regime to prevent such crises from developing, and if they do, to allow orderly defaults by the errant states.

It is possible, even likely, that major European banks will be hit by the crisis and, in a worst-case scenario, drag Europe into another recession. If that happens, other regions (notably the United States and Asia) could be affected, given the size of the European economy and its extensive trade and investment ties. All these possibilities need to be faced and dealt with rationally, with firm policies implemented to ensure that problems are resolved at source. Where possible, they should be cauterised to keep the contagion from spreading.

It might not even come to this. The US economy is showing encouraging signs of strength, while in Asia, China has moved quickly to stop property and finance bubbles from building up. There is a clear resolve on all fronts to keep the recovery going. If Europe can get its act together, the feared second dip could turn out to be no more than a blip.

Source: Business Times, 7 May 2010