European-turned Asian debt crisis

What does it mean by last resort?

If you are not asking a Catholic or Christian who cares only for his or her religion a month or so ago, the answer may be the European Financial Stability Facility (EFSF) remained the one.

From a few weeks earlier on, there have been calls for the European Central Bank (ECB) to take this seat by printing more paper notes. The ultimate guarantee that backed these calls was said to be France and Germany, the two biggest pillars of the economy in Europe.

Last week, we saw France, among other European nations that boost the highest sovereign credit rating, coming under threat of escalating borrowing costs due to its potential downgrade by rating agencies.

What about Germany? This week, despite its relatively sound financial health, it failed to secure enough support for its debt auction of 6 billion Euro, leaving the country’s central bank to underwrite the remaining 2 billion Euro debt.

With none of the European nations being able to guard themselves from a meltdown, let’s set the eyes onto the US and Japan whose currencies are considered the last safe havens for investors. While US dollars continues to be the reserve currency for most settlements around the world, America itself is still very much haunted by always above 9% rates of unemployment which have deterred the country from taking a breath, let alone a real recovery. A third time of quantitative easing is just a matter of time.

Amid an ever-appreciating yen, Japan is deeply troubled by export contraction which is in turn pushing the country to the brink. Meanwhile, anyone who wants to bet on the rise of yen should beware of the possible intervention of the Japan Central Bank (JSB) urged by exporters suffering from the loss of competitiveness. Very lately, Standard &Poor’s said Japan is close to a further downgrade from the second best rating caused by the administration’s failure to tackle public debt burden.

You may say “hasn’t China stayed unscathed” and we should no doubt park our monies into renminbi or RMB-denominated assets. As soon as we form this opinion comes the HSBC-released Purchasing Manager’s Index (PMI) for China that fell from 51 in Oct to 48 Nov, with a below-50 PMI being generally interpreted as an advanced indicator of a recession of the manufacturing sector.

Given the inter-dependence and inter-connections between states in terms of trade and finance, no economy can stand alone from the debt crisis. In the 2008 crisis, financial institutions got bailout from the governments.

This time is worse as the governments are in trouble. Their lack of fiscal discipline and their delay to face the real problems have made normal courses of remedy not functioning and may put others who come to rescue in economic danger.