Forget about this week’s Y1.38 trillion (about Rs75,000 crore) capital raising for Norinchukin Bank. That was flagged by the Japanese cooperative back in November. Also forget about Saab filing for bankruptcy: General Motors Corp. has long been clear that it couldn’t rescue its Swedish subsidiary. Instead, there is plenty of genuinely shocking bad news to worry about.
The index of service-sector activity in the euro zone fell to a record low on Friday. Euro zone gross domestic product (GDP) is shrinking at a 6% annual rate, according to JPMorgan. Meanwhile, Japan’s central bank gave the bleakest forecast in its modern history.
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In its monthly report on 20 February, the Bank of Japan said that economic conditions were rapidly deteriorating and would continue to worsen. The GDP decline there could be even greater than in the euro zone. A key US manufacturing index released on Thursday also hit an all-time low. It is another week of record-breaking bad data.
On the other side of the ledger, UK retail sales rose in January, according to official data. But so what? The weak pound is pushing up prices of imports and that will soon squeeze sales hard. The bigger challenge to non-euro zone Europe lies to the east. A multi-nation crisis is hitting both eastern European economies and the western European banks that financed them. Those banks don’t need the grief, as loan losses in home markets are rising fast.
US banks mostly missed the eastern European bubble, but they are far from surmounting their own problems. Complete nationalization has moved from a fringe idea into the mainstream. If it happens, falls in the value of bank debt could speed up the spiral of losses.
The global financial system is showing its Humpty-Dumpty nature: much easier to shatter than to put back together. And judging by the price of gold, expected to touch $1000 (about Rs50,000) an ounce, investors fear that the crisis could take another nasty twist and become an inflationary one. The global stock market rally that started in November has been almost completely reversed. Indeed, the mystery about that rally—which took the MSCI world index up by 23%—is why investors ever thought policymakers could put Humpty Dumpty back together again so quickly.