The Credit Crunch Goes Global

The euro launched in 1999 to unite Europe as a single economic zone. Today, the currency is under fire as the EU's member nations struggle to react to what has rapidly become a severe global credit crisis. After all, what good is a common economic zone when finance ministers across Europe can't agree on an EU-wide solution?

The euro, of course, covers developed markets, while we typically talk about emerging markets in this column. Nevertheless, the story's the same everywhere: This credit crisis is downright frightening.

Abstract economic theory does affect the Everyman
Though the talk here in the United States has largely distinguished "Wall Street" woes from "Main Street" impacts, that line is much more blurry in the export-driven economies of Asia. Financial Times has reported on previously booming Asian shipbuilders who are seeing order cancellations -- and facing potential bankruptcy -- as buyers face an ugly combination of slowing shipping demand and an inability to obtain financing from banks.

Financial institutions in Indonesia are also being rocked as that economy -- fueled recently by rising prices for its natural resources -- has seen oil, gas, minerals, and other commodity prices fall. With inflation sitting around 12%, the falling value of the country's natural wealth could prove lethal to its financial stability. Concerns about the Indonesian economy resulted in a massive sell-off of Indonesian stocks this week -- so massive, in fact, that trading has been suspended until further notice.

And then there's India, long home to the technicians who helped you troubleshoot the fact that your computer wasn't turning on because it wasn't plugged in. The Economic Times there warned outsourcing employees that trouble is brewing and advised them to stick with big companies like Infosys (Nasdaq: INFY  ) and Wipro (NYSE: WIT  ) , and to find work that's not U.S.-centric. But finance minister Palaniappan Chidambaram projected that India will still grow its GDP 8% this year thanks to companies like Sterlite Industries (NYSE: SLT  ) and Tata Motors (NYSE: TTM  ) , telling a group of Indian business leaders that with "Huge capacities … being added in power, steel, commercial vehicles, passenger cars, and two wheelers … [t]here is nothing to fear but fear itself."

Mr. Chidambaram, however, may be alone in his continued belief in decoupling, the theory that holds that many of the world's economies can continue to grow even as the United States -- the world's largest economy -- recesses. Institutional investors have been betting the other side of that idea these past few weeks as they dump holdings in the emerging markets left and right. That's prompted double-digit sell-offs in Brazil, Japan, and Hong Kong since the beginning of the week.

At Motley Fool Global Gains, we still believe decoupling is taking place, but that it's proceeding much more slowly than expected. The current slowdown in the United States will affect the world, but countries such as China, which has a budget surplus and continues to build out its infrastructure, will cope far better than they would have 10 years ago. Thus, it behooves you as an American investor to up your exposure to international stocks and make sure that the value of your savings, home, job, and other assets aren't all tied up in the United States.

Speaking of China
It's not all bad news in the world this week. We did get some good news on Monday, when China's Central Bank released this very cordial announcement expressing support for the Emergency Economic Stabilization Act of 2008 (you may know it better as "The Bailout" or as the bill formerly known as the Paul Wellstone Mental Health and Addiction Equity Act of 2007). We can only hope this means they don't decide to sell our Treasuries -- and with them our currency and economy -- into oblivion.

It could be worse
Fortunately, neither the U.S. nor the world at large has the same problems as Zimbabwe, which outlawed electronic bank transfers this week. This puts the nail in the coffin of the country's financial system, eliminating one of the last ways for businesses to move money in, out, or around the country. In order to cope with 11,000,000% (yeah, that's six zeros) inflation, citizens have adopted a barter system, with gas coupons becoming the currency of choice. We wonder if ExxonMobil (NYSE: XOM  ) has considered going into banking.

Anyway, good luck on the recovery, Mr. Mugabe. Your people deserve far better.

Tim and Nate are Motley Fool Global Gains analysts. Neither owns shares of any company mentioned. Tata Motors and Sterlite Industries are Global Gains recommendations. The Fool's disclosure policy feels bad for Zimbabwe.


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