GRIM. Serious. Terrifying. Nerve-rattling.
These are the words some prominent American investors and
strategists are using to describe the worsening debt crisis in the eurozone and
its impact on the global economy.
While growth has been slowing in China and the United States
and companies warn about the effect on earnings, there is a mounting sense
among the financial community that politicians and markets are operating on two
completely different timelines.
They see a fractured Europe fiddling in the near term,
attempting to seal one fissure as another larger one appears while they talk
about a five- to 10-year timeframe for
real solutions, such as a more fiscally integrated eurozone.
They see investors who want solutions in the next few weeks
and months or else nations like Spain and Italy could find they cannot borrow
at all on capital markets, starting an economic firestorm that would make
today's problems seem mild.
Some even suggest markets are taking on shades of the 2008
global crisis, with the potential for a collapse in investor confidence, bank
runs in Europe and a seizure for the global financial system.
"History may not repeat but it often rhymes. The fear
is that it could be a replay of 2008.
"The reality is that the potential for a replay of 2008
on steroids is not exactly zero," said Bonnie Baha, portfolio manager at
DoubleLine Capital, which oversees $35bn. Baha, who is based in Los Angeles,
was speaking while visiting Europe last week.
Added financier Steve Rattner, who is the former head of the
US auto task force: "We should be terrified about the euro crisis because
the Europeans are trying to fix a deeply flawed system with the equivalent of
And Dan Fuss, vice-chairperson and portfolio manager at
Loomis Sayles, which oversees $172bn in assets, sees little reason not to be
"We have uncertainties of the wrong kind. Bringing the
political cohesion together has proven to be more difficult than I had thought.
The headlines coming out of Europe are scary."
To be sure, while these are the views of highly credible
investors, they are not necessarily the mainstream. Most economists and
strategists still think Europe will be able to muddle through its problems as
it has for the past few years.
And while the majority of them see weak growth in the United
States, they don't expect the economy to slip into a recession.
But most economic pundits were wrong in 2008 when they
didn't foresee the financial crisis, and this time around even the optimists
have had to pull back their US and global growth expectations in recent months.
What's more, some investors and economists say central
banks, including the Federal Reserve, are running low on ammunition after
having loosened monetary policy considerably.
The economic crises in global history that have stemmed from
excessive debt and financial leverage have proved to be the deepest.
And while the United States has managed to maintain slow, if
steady economic growth, many European countries are dealing with the threat of
deep recessions: very high unemployment and intractable deficits that are only
worsening because of the lack of growth.
The modest stimulus measures that have been talked about -
top eurozone leaders agreed at a meeting this week to spend €130bn ($156bn) to
seek to revive growth and the European Central Bank may cut interest rates at
its meeting on July 5 - may be too little, too late given the tsunami of debt
some nations in the eurozone face.
"The realisation that Spain will most probably need a
bailout by the EU has rattled investors' nerves," Baha of DoubleLine said.
Spain, the fourth-largest economy in the eurozone, will need
between $350bn and $400bn to stabilise conditions in the wake of a real estate
crash, according to Mark Grant, managing director at Southwest Securities, who
has been one of the biggest bears on the eurozone throughout the crisis.
"I do not think most people realise how serious the
situation is with Spain," Grant said.
Grant, who forecast Greece was going to go bankrupt in
January 2010, said on Sunday: "I fear the shades of 2008 are almost upon
us once again and the increasing darkness is discernible."
The atmosphere was hardly helped on Sunday when German
Finance Minister Wolfgang Schaeuble told Bild am Sonntag in unusually blunt
language that Greece's new coalition government should stop asking for more
help and instead move quickly to enact more reform measures that had been
agreed in return for previous bailouts from European partners.
The new Greek government has indicated in a proposal seen by
Reuters that it wants tax cuts, extra help for the poor and unemployed, a
freeze on public sector layoffs and more time to cut its deficit.
The impact of the European debt crisis on the global economy
is increasingly weighing on such American bellwethers as United Technologies,
Procter & Gamble Co and FedEx.
P&G lowered its fourth-quarter earnings and revenue
forecasts on Wednesday, hurt by unfavourable foreign exchange rates, weak
growth in developed markets and a slowdown of growth in China. It is the second
time in three months that the consumer products maker has cut its outlook.
Also last week, FedEx said slow global growth would crimp
its earnings over the next 12 months. The world's second-largest package
delivery company forecast moderate growth for both the US and global economies,
citing the debt crisis in Europe and slowing growth in Asia.
Perhaps most pessimistic was UTX chief financial officer
Greg Hayes, who said just over a week ago that "the situation in Europe
has gotten a lot worse than we had expected" and that the"Spanish
market continues to convulse".
Ray Dalio's Bridgewater Associates, $120bn hedge fund,
summed up the state of affairs in a note late last week. "Global growth
has continued to slow in a fairly broad way and is now as slow as it has been
since 2009," he said.
"The expansion in the developed world has not been
In the developed world, the US economy has slowed the most
from 4% earlier in the year to the current 1% to 1.5% rate, said Bridgewater,
which described eurozone policies as inadequate to deal with the crisis.
"Europe has kicked the can just about as far as they
can without doing something," said John Mauldin, president of investment
advisory firm Millennium Wave Investments in Dallas.
"It's just like when they got to the Greek moment where
they had to say: 'We're going to have to write off bonds.' They're now again to
another 'do something' moment, except that this is a lot bigger."