Bringing the benefits of globalisation to all economies also requires a better international multilateral programme to protect against imbalances. The latest report, Reducing Risks from Global Imbalances, by the Washington-based Committee for Economic Development (CED), a business-led policy group, highlights increasing imbalances as well as recommendations from its authors, William McDonough, former head of the Federal Reserve Bank of New York, and Joseph Kasputys, chairman of Global Insight.
The report notes that since 1991 the global economy has become increasingly “imbalanced”, as the US trade deficit and trade surpluses in many foreign countries have grown rapidly. In 2005 and 2006, the US current account deficit (which includes international investment income flows and transfer payments as well as trade in goods and services) reached an unprecedented 6.1% of gross domestic product (GDP).
The counterpart of these US deficits has been large current account surpluses in the oil-exporting countries, as well as in Japan, China and other Asian and European economies, which have accumulated large private and public holdings of dollar assets. As a consequence, US net international debt rose to 16% of GDP in 2006.
Among a raft of measures, the CED report urges a multilateral co-operative approach to global adjustment, the US to avoid a protectionist response and China to expand public consumption. A useful check-list of how to rebalance the global economy.
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GLOBAL BOND MARKETS WEAKEST LINKS AND MONTHLY DEFAULTS
During mid-September’s Northern Rock financial crisis, rating agency S&P published its latest Global Bond Markets Weakest Links and Monthly Defaults report, which noted that three defaults were recently recorded among rated global corporates, bringing the total to 15 defaults so far for 2007. These defaults affected rated debt worth about $4.5bn.
The 12-month trailing global corporate speculative-grade bond default rate held steady at 1.02% in August, remaining near record lows. The default rate has been below its long-term (1981–2006) average of 4.48% for 43 consecutive months. By region, the speculative-grade default rates were 1.27% in the US, 1.39% in Europe, and 0.38% in emerging markets.
S&P’s US speculative-grade default forecast remains at 1.4% by year-end 2007. Corporate credit risks continue to increase even as corporate defaults are slow to materialise. “There is a material risk that defaults could be more severe beyond the one-year forecast horizon,” noted Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.
“The leaks in the credit markets will continue to sap strength, even though defaults might be staved off in the next six months, in part because of structural concessions that avert payment default.”
While the S&P report suggests relative calm ahead, the world will be watching these default trends very closely in the coming months as the emerging global financial crises of August and September play out among corporates.
