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Discussion and analysis of the latest economic issues.

By Sean O'Grady, Economics Editor of The Independent.

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Credit Crunch II

Posted by Sean O'Grady
  • Monday, 22 June 2009 at 04:34 pm
The latest from the World Bank on global economic prospects, especially those in poorer nations reminds us of two salient points. First, how much the developing world will be hit by the downturn; and second, how we can’t just shrug and move on from that.

For the past few years the emerging economics of the world - especially Latin America and eastern Europe - have depended on a steady flood of western private cash to fund their trade deficits and their general economic development. With the credit crunch that has dried up. So have their exports to us - and so many of these economies are extremely dependent on their export earnings, far more than powers traditionally associated with impressive trade performance such as Germany and Japan. Their tax revenues have crumbled, their public finances are a mess and they are turning to the Eu and IMF for assistance. So that is how it comes to affect us. The poorest nations - often commodity producers dependent on a single crop such as cocoa or coffee - have seen their incomes shrink along with the value of their produce, (though some are up sharply since December).

The most immediate danger is posed to western banks. Some $1.2 trillion external debt raised by emerging market banks and firms between 2003 and 2007 is now maturing, and they are hardly able to pay it off or roll it over. That means more write downs for banks, especially those in Europe exposed to the eastern half of the continent - and more instability in the financial system.

What would happen if a big European banking group go into trouble? Answer; Credit Crunch II: the sequel. Coming to an economy near us…
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