The Canaries in the Coal Mine
The severe decline in the commodities complex associated with slower economic growth, particularly from China, has seen Emerging Markets selling their holdings of US Treasuries in order to stop their currencies declining too rapidly.
As China exports excess capacity and the price of globally traded goods are under pressure, deflation becomes a distinct possibility. In a recent blog I referred to China exporting 124 million tonnes of steel in 2015, up from 80 million tonnes in 2014. And this compares with the world’s number two steel producer, Japan, at 105 million tonnes.
In another blog entitled “Eastern Europe – The Epicentre Of Our Next Crisis” I noted academics Carmen Reinhart and Kenneth Rogoff claim that if a country’s external debt to GDP ratio exceeds 30 per cent, there is a material risk of a credit default.
At the time of writing, Hungary, Georgia, Croatia, Bulgaria, Belarus, the Czech Republic, Chile, Brazil and Columbia all had a gross external indebtedness to GDP ratios exceeding 40 per cent, and the average figure for these nine countries is a nose-bleeding 80 per cent.
Meanwhile, two canaries in the coal mine – the Athens Stock Exchange General Index, has just hit its lowest level since 1990 (451 points) – while the Deutsche Bank share price (€13.23) is now 20 per cent below its Global Financial Crisis trough recorded in early 2009. Both have declined around 90 per cent from their 2007 peak.