President Barack Obama's assurances early this week that U.S. debt will remain "among the world's safest" failed to keep American markets from plunging further. At the close of trading Monday, the Dow Jones had dropped 5.5%, while the S&P 500 and Nasdaq were down 6.7% and 6.9% respectively.
Many experts see the U.S. credit downgrade and the market reaction as the first signs of a looming crisis. Some economists hope, however, that international regulators have learned the lessons of 2008 and will be able to avert a new global crisis.
In the spring of 2008, few people believed that widespread economic collapse was possible. "There's no crisis; there's just some turbulence owing to problems on the U.S. subprime mortgage market" - this was the standard expert assessment in Russia only a couple of months before Lehman Brothers went under.
These days, economists are far less optimistic. They tend to regard any noticeable decline on the world's markets as a sign of an imminent crisis. And according to many forecasts, another global economic upheaval is inevitable.
Russia's Ministry of Economic Development argues that this doom and gloom is unfounded. "Markets are supposed to go up and down," a ministry official told RIA Novosti in response to the massive sell-off following the U.S. credit downgrade last week.
The debt woes of various European nations and the United States suggest, according to some experts, that the world economy has not recovered from the 2008 downturn and that the symptoms have spread from the private sector to the public sector. Part of the reason is the U.S. government's financial rescue policy, which involved large bailouts of private companies on the brink of bankruptcy.
"While the United States was trying to overcome the first wave of the crisis, many economists warned that those measures, aimed at dealing with current problems, may generate other problems in the long run," says Yevsei Gurvich, head of the Russian government's Economic Expert Group. "Mid- and long-term consequences were widely expected to emerge a few years afterward, but they have surfaced earlier than expected."
However, it would be wrong to compare stock markets' reaction to the U.S. credit downgrade to the Lehman Brothers collapse, which marked the beginning of the active phase of the 2008 crisis, argues Igor Nikolayev, director of the strategic analysis department at FBK Inc.
According to Nikolayev, current developments on the world's stock markets are a wakeup call, warning that a second wave of the crisis is forthcoming - just like the outbreak of the U.S. subprime mortgage crisis was a precursor of the global economic downturn of 2008.
"The reaction of stock markets indicates that the economic preconditions for another crisis exist," Nikolayev argues. "But that new crisis will require more of a trigger than the U.S. credit downgrade." This could come in the form of a reaction to the very real threat of default by a major European economy, such as Italy or Spain, should the European Central Bank's rescue measures prove ineffective.
On August 7, the European Central Bank said it was prepared to buy up the countries' sovereign bonds so as to prevent a debt crisis there. France's economics minister, Francois Baroin, reaffirmed the ECB's plan the next day.
The principal difference between the current situation and the one we faced in 2008 is that the prospect of a global crisis no longer seems unrealistic and international regulators are now prepared.
"In 2008, the very thought of the U.S. Federal Reserve or the European Central Bank buying up toxic assets would have seemed crazy. But now the ECB is saying it is prepared to do just that in the euro zone," says Vladimir Bragin, director for analysis of currency markets and macroeconomics at Alpha Capital. Bragin believes this plan will prevent a repeat of the 2008 crisis, yet debt problems are likely to continue to surface.
The problem is that fiscal authorities in Europe and the U.S. have found no other anti-crisis tools besides financial injections. They have learned to treat the symptoms but not the disease.
"[Regulators] have tried to avoid major repairs, concentrating on patching holes instead. For three years, they've been stabilizing the patient with monetary injections. But as soon as financial injections are stopped, the economy gets worse," says Yelena Matrosova, director of the Center of Macroeconomic Research at BDO Unikon.
However, huge liquidity infusions without adequate product supply could cause an upsurge in inflation and, consequently, a new crisis.
According to Matrosova, the U.S. credit downgrade indicates that borrowing, by individuals and nations alike, has been exhausted as a tool for economic growth.
The least successful of the euro zone nations have for years been borrowing money to sustain themselves. But in Greece, for one, the level of consumption has not been consistent with the level of the country's economic performance, notes Yevgeny Gavrilenko, managing director and chief economist at Troika Dialogue.
In Matrosova's view, consumer demand is the only force capable of producing economic growth. Declining consumer demand in the United States will result in a decline in the industrial output of countries such as China, which has exhausted nearly all of its tools to stimulate domestic demand. And this could lead to a protracted global recession.
The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
