How Much Will It Cost to Save the Global Economy?

4 trillion yuan. 200 billion euro. 23 trillion yen. $500 billion. Add it up and what do you get?

Not enough, according to Dominique Strauss-Kahn, head of the International Monetary Fund. Strauss-Kahn declared in a speech this week that the world's largest economies need to inject $1.2 trillion, or 2% of global GDP, in order to address the current economic crisis and avoid global social unrest -- and that the EU's actions to date are inadequate.

Yowsa
That may seem sensationalist, but parts of Latin America were facing social unrest before the slowdown. Moreover, we've already seen a rising number of protests in China as manufacturers close their doors and leave workers without pay or benefits.

But let's check the math. If we add the EU's newly announced stimulus plan of roughly $265 billion to China's $585 billion, Japan's $260 billion, and President-elect Obama's proposed $500 billion stimulus plans, we get $1.6 trillion (give or take) -- putting us reassuringly on track to avoid Strauss-Kahn's warnings of a complete social breakdown.

Wait, there's more
And those aren't the only stimulus packages being enacted. Although it hasn't announced an official package, Russia has been pouring hundreds of billions into its stock market and banking sector. Brazil has aided domestic businesses with $15 billion, and India has proposed another $8 billion plan.

And while these plans should benefit companies such as Cemex (NYSE: CX  ) , Perini (NYSE: PCR  ) , and Siemens (NYSE: SI  ) , which should see revenue from infrastructure spending, there is some danger in such overt stimuli. For example, German finance minister Peer Steinbrueck pointed out when talking about Britain's stimulus package:

When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure? All this will do is raise Britain's debt to a level that will take a whole generation to work off.

Unlike developed countries in Europe, emerging markets still have prospects for relatively high growth rates in the coming years, which should reduce concerns about whether future generations will be able to shoulder some inherited debt. But there are other worries. After all, with the U.S. already running a budget deficit before promising $700 billion to poorly run banks and at least another $500 billion to spark our faltering economy, the market will be flooded with Treasuries for the next few years. This will raise borrowing costs for anyone deemed less creditworthy than the U.S. government (which is pretty much everyone else, at least for now). 

Thus, it looks as if the currently high cost of debt for emerging markets won't subside even if credit markets regain composure, so borrowing to stimulate slumping economies today could hamper prosperity down the road.

On top of that
Adding to the financial stress for emerging markets and Latin American countries in particular, Ecuador announced last week that it would default on $30.6 million in interest payments on national debt, the country's third default in 14 years. Sitting on cash reserves of more than $5.5 billion, Ecuador is still fiscally solvent, but President Rafael Correa is refusing to pay the interest on "illegal" and "illegitimate" debt to bondholders, whom he characterizes as "real monsters."

The fact that the default is purely ideological is relatively good news as it shouldn't raise the specter of Latin American financial dominos falling. However, it does raise fears in the market that other Latin American leaders, whose economies are suffering from rapidly falling commodity prices, will follow a similar path. Thus, we get higher interest rates across the region.

Put all of this together and you have the beginnings of an explanation for why emerging markets such as Brazil, China, and India have seen their stock markets underperform our own U.S. market despite the fact that their economies -- measured on a GDP basis -- have outperformed our own. But we think that disconnect has actually created an incredible buying opportunity today for patient and careful investors.

Though we emphasize careful
But when it comes to emerging-markets stocks, you do need to be careful about whom you align yourself with. The fact is that while more business leaders around the world are becoming better stewards of shareholder value, many of the guys and gals you'll come across in places like Brazil, India, and China are wealthy, well-connected, and used to doing things their own way.

The latest cautionary tale comes from India, where Satyam Computer (NYSE: SAY  ) announced on Tuesday that its board had approved a $1.6 billion acquisition of Maytas Properties and Maytas Infra.

Now, Satyam is an outsourcing company that competes with the likes of Wipro (NYSE: WIT  ) and Infosys Technologies (Nasdaq: INFY  ) . Maytas Properties, on the other hand, is a real estate developer, while Maytas Infra builds highways and ports, and puts up power lines. What does a company that operates call centers want with two companies involved in heavy construction?

A-ha!
As it turns out, Maytas Properties and Maytas Infra are both controlled by the family of Satyam founder Raju Ramalinga, a fact the company failed to disclose in its press release. (Hey, Maytas is Satyam spelled backward!) When the market got wind of this, Satyam's stock dropped more than 50%, since investors were rightfully skeptical that such non-complementary acquisitions would, as Raju claimed, "de-risk the core business."

But this story has a happy ending for shareholders. Satyam announced on Wednesday -- just a day later (but who's counting) -- that it would not, in fact, pursue the acquisitions, sending the stock back up 50%. And while Satyam investors may be happy the company is not cashing out Raju's family, you have to wonder about being part-owner of a business run by a guy who would actually consider doing this.

We've been to India and visited Satyam in Hyderabad, and we heard from a number of sources that individual American shareholders shouldn't expect Raju to put their interests above his own. Fortunately, a 50% drop in the value of his stake was enough to get his attention this time, but there are no sure things going forward.

The takeaway
That's why when it comes to analyzing management teams for our research at Motley Fool Global Gains, we prefer entrepreneurs who would rather subvert oligopolies in their countries than profit from them. We also travel frequently to actually meet with executives so we can form our own opinions of them and their intentions.

We believe that level of research and insistence on management quality in our recommendations gives us a leg up when it comes to recommending international stocks. If you agree and would like to take a look at our top picks today, click here to join us at Global Gains free for 30 days.

And that was this week in the emerging markets.

Tim Hanson and Nate Weisshaar are Motley Fool Global Gains analysts. Neither owns shares of any company mentioned. Cemex is a Global Gains pick. Satyam and Cemex are Motley Fool Stock Advisor recommendations. Perini is a Motley Fool Hidden Gems Pay Dirt selection. The Fool owns shares of Cemex. The Fool's disclosure policy is a rock of certainty in uncertain times like these.


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  • Report this Comment On December 18, 2008, at 6:03 PM, GoNuke wrote:

    The reason you can't offer good advice is that you do not have access to the kind of information you need. Investing in China and India is not like investing in the US. You have to become a de facto "member of the family" in order to find out what you need to know. A few trips to China and India are not enough to become members of any families. Having been involved in Byzantine business arrangements in South East Asia I can only smirk at the cheerfulness and optimism you guys exude after being schmoozed in Asia.

    Risk your own life to rescue a Chinese businessman's brother from a Vietnamese prison and then you may learn something of value from that businessman. You are the perpetual outsiders in a world where only insiders benefit.

  • Report this Comment On January 21, 2009, at 2:50 PM, rmg7 wrote:

    Well put, GoNuke.

    See recent news on SAY's debacle.

    http://www.fool.com/investing/general/2009/01/12/satyam-and-...

    All corporate defaulting, whether west or east, is making the investing world very complex and difficult for us amateur investors to grow our money.

    Fool writers should state "careful when reading this" on the opening line from now on.

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