Global Economic Trade Issues Affect Diverse and Disparate Companies, Part Two of Three: INFECTION
Wednesday, August 25, 2010 at 03:55PM By Ron Doyle
In the first part of this series of three blog posts about how global economic problems can spread quickly to affect seemingly unconnected companies, I discussed how bank problems in Mexico quickly resulted in defaults on amounts owed to exporters into that country.
In this second part in the series, I describe financial infections that we see developing on the horizon today. Infection is the process of contaminating a healthy entity with disease-causing organisms. The infection of mounting debts is a real risk in international economies – and there are others:
1. Sovereign debt is the most obvious and most infectious. Many of the Organisation for Economic Co-operation and Development (OECD) countries are carrying record levels of debt in relation to their Gross Domestic Product (GDP). These countries are not developing countries, but rather some of the major economies of the world and their debts are held on the balance sheets of leading financial institutions. In today’s global economy, the value of financial assets held by a bank is subjected to rigorous scrutiny.
2. Greece's recent bailout avoided an imminent crisis and also addressed the short term problems of some other European countries. The problem with this solution: it creates more debt. This type of solution “solves” a debt crisis in highly leverage countries by having better managed economies take on more debt. This type of debt is also held on the balance sheets of major financial institutions.