U.S. financial panic goes global

John W. Schoen Senior producer • Profile • E-mail

For a time, it appeared that the impact of the recent financial panic and ongoing economic downturn might be largely contained to U.S. consumers, businesses and government leaders. No more.

Monday’s global stock market sell-off reinforced fears that the Great American Lending Bubble is now weighing heavily on our major trade partners and the global investors who have been supplying the river of capital that the U.S. economy has come to rely on.

The most immediate impact is being felt by exporters, who have enjoyed something a revival in the past few years as a weak dollar and higher productivity made their products more competitive around the world. But like most businesses those importers rely on credit — both for long-term expansion and short-term funding needs.

Now, as exporters face those home-grown problems associated with the credit drought, their overseas customers are also having tough time borrowing money. As the credit squeeze works its way through the global financial system, trade-related businesses will among the first to get hurt, and exporters are going to take a big hit, according to David Resler, chief economist at Nomura Securities.

“All of our growth in the second quarter was the result of the improvement in our net export position. That’s now over,” he said. “Commerce around the world is ratcheting down, and that feeds on itself. When we buy less from Asia, Asia has less income and fewer jobs to generate(income) to buy from us.”

But the flow of capital across borders dwarfs the flow of goods. That's why the spread of financial turmoil overseas is even more worrisome, according to Chris Varvares, president of Macroeconomics Advisers.

"If foreign investors whose stock values and credit market were functioning well could come in and become buyers and that would support our assets," he said. "If everybody’s going down together, there's nobody out there who’s going step in and provide a floor to these assets. There are no natural buyers. And that’s why we need a coordinated (global) policy response."

On Monday, the panic that began on Wall Street effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession. Even as Sweden, Austria and Denmark followed Germany’s lead by offering guarantees to savers, investors from Tokyo to London continued to slash risk from portfolios and braced for a further tightening of credit and bank lending.

Interactive Worldwide turmoil Learn how the U.S. economic crisis is sending shockwaves around the world.

South Korea said it wanted crisis talks with Japan and China, and equities crumbled in the Persian Gulf region on concerns the fallout would spread.

Until recently the European Central Bank has been holding interest rates at relatively high levels to keep inflation in check, the ECB’s only official mission. The U.S. Federal Reserve, in contrast, has a dual mission of fighting inflation and maintaining economic growth.

But with the European economy slowing, a European rate cut is looking much more likely, according to Jack Bouroudjian, chairman of Capital Market Technologies.

"They’re talking about 7.5 percent unemployment now in the Eurozone," he told CNBC. “They're starting to creep up to levels that are scaring them, even those that are the inflation hawks over there. This is a very important part of the entire puzzle."

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