A global economic storm is set to unleash in 2013 and there are no safe harbors
to ride it out, says New York University economist Nouriel Roubini. The
European debt crisis continues to build, while Asian economies are cooling and
Middle East tensions involving Iran's nuclear ambitions are likely to flare up
again. That leaves the United States as an investment safe harbor — for now.
Yields on the 10-year Treasury note recently plunged to below 1.5 percent on
demand from investors seeking shelter from Europe. Yields fall when bond prices
rise, and falling yields reflect investor perception of lower risk. But the
United States carries its own problems, Roubini says. "U.S. economic
performance is weakening, with first-quarter growth a miserly 1.9 percent – well
below potential. And job creation faltered in April and May, so the U.S. may
reach stall speed by year end," Roubini writes in a Project Syndicate column.
Furthermore, tax breaks are set to expire at the end of this year when automatic spending cuts kick in, a combination dubbed as a fiscal cliff that could send the country into recession next year even if Congress acts now to prevent it. "Worse, the risk of a double-dip recession next year is rising: even if what looks like a looming U.S. fiscal cliff turns out to be only a smaller source of drag, the likely increase in some taxes and reduction of some transfer payments will reduce growth in disposable income and consumption," Roubini says.
"Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barack Obama or Mitt Romney wins November’s presidential election. Thus, new fights on the debt ceiling, risks of a government shutdown, and rating downgrades could further depress consumer and business confidence, reducing spending and accelerating a flight to safety that would exacerbate the fall in stock markets." The U.S. economy grew 1.9 percent in the first quarter of this year, down from an original estimate of 2.2 percent. Economists worry the country might not be growing fast enough to achieve escape velocity and break free from the pull of a fresh slowdown. Like a plane that moves too slowly, the economy may hit stall speed and tank, and that doesn't bode well for President Barack Obama, experts say. "Historically, presidents don't usually get re-elected when the economy is performing as sluggishly as it is now," says Nigel Gault, chief U.S. economist at IHS Global Insight, according to Reuters. "Many people out there, if you asked them in surveys, they'd say they still view the economy as being in recession."
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As an international investment manager working for a bank in Germany, finding the best financial product for his clients is Aris Athanassiadis's duty. His dream, however, is that one day that investment will be in his native Greece.
"Our fund managers have not been interested in Greek investments for years," he said. "Greece has not been allowed to grow. Whatever the result of the election, I just hope that people vote with their brains and not their anger, so that my country is given a chance."
Mr Athanassiadis is among 350,000 Greeks living in Germany, who will all be on the edge of their seats as the results of Sunday's election begin to drip through.
And no one is in any doubt that there is a huge amount at stake.
The radical Left party Syriza has vowed to rip up the bailout. Their opponents, including the New Democracy party – which is neck and neck with Syriza in final polls – warn that Syriza's policies will push Greece off a cliff, and out of the eurozone. And with that, some predict, will come the collapse of the euro.
The election of an anti-austerity government would spark the most serious crisis for the euro so far, following the apparent failure of a Spanish bank bailout last week. German chancellor Angela Merkel yesterday ruled out renegotiating Greece's bailout, saying the country must stick to its deals with international lenders. Unofficial polls suggest the conservative New Democracy party is ahead of the anti-austerity Syriza by four percentage points — though as much as 15% of the electorate remains undecided.
As all eyes focus on Athens, Zoellick said: "Europe may be able to muddle through but the risk is rising." He added: "There could be a Lehmans moment if things are not properly handled." The bankruptcy of Lehman Brothers in September 2008 proved to be the trigger for the deepest slump in the global economy since the 1930s, and Zoellick said developing countries needed to "prepare for the uncertainty coming out of the eurozone and the wider financial markets". He added: "It will be better if they can avoid piling up short-term debts that can come due in volatile periods and look to the fundamentals of future growth – infrastructure and human capital."
Zoellick, whose five years at the bank has coincided with the financial and economic crisis, retires at the end of the month. Fearing that Europe's sovereign debt problems could have spillover effects, he said the bank had been increasing its lending to support Bulgaria's banking system and acting to prevent a credit crunch in south-east Europe. Steps were also being taken to protect countries in north Africa that were vulnerable to Europe's debt crisis and trade finance facilities were being strengthened for francophone west Africa.
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