Sunday 22 April 2018

We're in real danger of a double-dip recession

The markets have been badly spooked as policymakers in Europe and the US play catch-up, writes Colm McCarthy

The likelihood of a worldwide double-dip recession has increased markedly, with markets perceiving an absence of firm policy leadership in the US, as well as in Europe. The European leaders' most recent attempt, at the Brussels summit on July 21, to address the eurozone banking and sovereign-debt crises began to unravel through the week. While the turmoil in the Spanish and Italian bond markets grabbed the headlines, the freezing of interbank credit is just as threatening.

European banks are unwilling to lend to one another, uncertain as to where the losses on sovereign debt and credit derivatives are located and unnerved by the collapse in bank share prices. The atmosphere in Europe is eerily reminiscent of the summer of 2008 in the US as the interbank credit famine intensified.

There are several reasons for the sharp deterioration of the last few weeks. First and foremost, the decisions at the Brussels summit have unfortunately proven to be inadequate. While an immediate disorderly default in Greece has been averted, contagion to Spain and Italy has not. Should these two countries find themselves unable to borrow (if one goes under, they both will), the funds needed to rescue them are simply not available to the EU institutions, the International Monetary Fund or both combined.

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