How the Mighty (Economies) Have Fallen

Three of the world’s most important and, in the past, strongest economies -- Spain, United Kingdom, Japan -- continue to deal with various kinds of threats to their economic stability as all were reminded this week.

The headline-grabber of the bunch is Spain newly escalated bond and banking concerns as its credit rating was lowered to a level just above “junk” by one of the big-three, U.S.-based ratings agencies. Standard & Poor’s (S&P) hit the economically wobbling nation, long a European Union top four economy, with a downgrade of its long-term sovereign credit rating to 'BBB-' from 'BBB+'. It’s not a surprise given Spain’s struggles – deepening recession, rising unemployment and social discontent, banking capitalization levels, credit availability and, “the lack of a clear direction in euro zone policy.”

It would be an exaggeration to say conditions are as grim in the U.K., but it took a shot of its on this week when its Office for National Statistics (ONS) noted that its trade gap more than doubled to a level of £4.2 billion in August from the previous month. That marks the second-largest trade deficit since the U.K. started tracking such measures. But, unlike so many reports of the recent past, the ONS is not hanging its problems primarily n the struggles in the European Union. Rather, ONS noted that a global drop in demand for products manufactured in the U.K. While different, that’s far from comforting.

Meanwhile, the International Monetary Fund (IMF) reminded that the surprisingly strong economic performance of the last year in Japan has been more smoke-and-mirrors than substance. IMF noted that growth has been almost entirely tied to disaster rebuilding, which it believes almost sure to cease soon. There’s also the increasing problem of an overly strong yen, a drag on trade there, because of flight from investors away from the euro.

In addition, some at the IMF believe the escalation of government bond holdings on the part of banks in Japan could prove dangerous in regards to interest rates and inflation should there be another aggressive downturn there, a scenario that would be far from shocking.

-Brian Shappell, CBA, NACM staff writer

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