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The UN Conference on Trade and Development rang the alarm on the possibility of a global debt default contagion due to international economies' over-reliance on deficit spending, low interest rates to stimulate economies.
The next economic crash may be the last warns trade economists at the United Nations cautioning that the next global recession could quickly get out of control plunging the world into an economic depression and resulting in a post-apocalyptic failing of major governments as the world’s bond market teeters on the precipice of a full-on meltdown.
As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the United States housing market in late 2007 before spreading to the European sovereign bond market," said the UN Conference on Trade and Development (UNCTAD).
In the wake of the 2008 economic collapse, countries around the world forced their economies afloat by flooding the market with cheap money by artificially lowering interest rates to near zero – an unprecedented rate point at which benchmark rates have remained for nearly 8 years now.
Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out," the report remarks. In the event of an economic slowdown, the experts caution, the massive debts held by bondholders may not be redeemed forcing whole economies into default.
Large emerging economies including Brazil, Russia and South Africa may be the worst hit in the event of another economic slowdown as they are the most likely to face a credit crunch from lenders who are unwilling to renew their debt or buy more pushing borrowing costs to unprecedented levels.
The US Ambassador to the United Nations Samantha Power © AP Photo/ Virginia Mayo US Ambassador to UN Hints at Removal of Russia From Security Council Over Syria Nonetheless, major Western economies may also feel the squeeze in the event that international credit markets freeze up due to massive issuances of debt. In the United States the national debt is quickly nearing $20 trillion with the danger that interest payments may soon overwhelm the budget – particularly if credit is limited forcing interest rates on repayment upwards. The pressure would most likely be felt most immediately on companies in emerging market economies who are forced to borrow money in a depressed financial sector with risk appetites festering but the decrease in national growth in countries around the world could quickly spread the contagion to the nation-state level.
NEXT POST -Update on Germany Finical Crises.
Deutsche Bank Stock Plunges To All Time Low After Merkel Rules Out State Bailout; Default Risk Surges
See site for the graphs and Pics.
As reported over the weekend, in an unexpected announcement Angela Merkel announced that she has ruled out state aid for Deutsche Bank, and the market reaction has been swift and brutal, with the bank's shares tumbling to a new all time low, sliding more than 6% this morning to €10.70, amid concerns that mounting legal bills, including a looming fine over its pre-crisis mortgage bond business, may force the lender to raise capital.
The 38-member Bloomberg Europe Banks and Financial Services Index slipped 1.5 percent, with Deutsche Bank the worst performer.
The company's contingent convertibles have been likewise dragged down. The lender’s 1.75 billion euros of 6 percent additional Tier 1 bonds, the first notes to take losses in a crisis, fell about 2 cents on the euro to 73 cents, near a seven-month low, according to data compiled by Bloomberg.
Quoted by Bloomberg, Daniel Regli, an analyst at Main First, said that “clearly headlines around the DoJ settlement and those $14 billion continue to weigh on the stock. Nobody believes that they will end up paying that amount, but for some investors it might be a concern that even the German government is discussing Deutsche Bank’s situation."
For those who missed it on Saturday, chancellor Angela Merkel ruled out state aid for Deutsche Bank ahead of national elections in September 2017, Focus magazine reported last week, citing unidentified government officials. The German leader also declined to step into the bank’s legal imbroglio with the Justice Department, the magazine reported.
Germany’s biggest bank would be “significantly under-capitalized” even assuming enough provisions to cover the settlement in the mortgage securities case, Andrew Lim, an analyst at Societe Generale SA, said in a note earlier this month. A settlement range of $3 billion to $3.5 billion would leave the bank room to settle other legal issues, while any additional $1 billion in litigation charges would erode 24 basis points in capital, JPMorgan Chase & Co. analysts wrote.
Meanwhile, the government is stepping its rhetoric, with Merkel’s government saying it sees “no grounds’’ for speculation over state funding for Deutsche Bank, top spokesman, Steffen Seibert told reporters in Berlin moments ago, adding that there "are no grounds for such speculation" Seibert tells reporters in Berlin. "The government won’t participate in any such speculation."
Seibert responded to report in Focus that Merkel has ruled out state assistance for Deutsche Bank. Merkel regularly meets German banking executives, Seibert says, declines to confirm a meeting with Deutsche Bank CEO John Cryan. Seibert reiterates Germany expects a "fair result" in Deutsche Bank talks with U.S. authorities.
Not everyone is sad this morning, however: short sellers have renewed their wagers against the bank. Bearish bets rose to 3% of shares outstanding on Sept. 22 from almost a three-month low of 1.7% on Sept. 16, according to data compiled by Markit Ltd. At this rate, many more short sellers are expected to join the fray.