So the biggest questions about the impact of the S&P downgrade of America’s credit rating are: the impact on the share market here and offshore today and tonight, and how many dominoes will fall as the rating cut impacts on the emerging crisis of confidence.
The downgrade surely won’t help — but it’s just one more factor at the end of a very nervy week for investors large and small that saw an estimated $US2.5 trillion wiped off stockmarket values around the world.
Hundreds of billions dollars of value were lost in commodity and other markets, although hundreds of billions more were added as bond prices in countries from Australia to Germany, Britain and Germany jumped.
An early reaction came in the Gulf at the weekend with the small Saudi stock exchange falling 5.6% on Saturday after news of the S&P downgrade became public.
The Financial Times reported late yesterday that finance ministers and officials were involved in hastily arranged conference calls last night, our time to discuss the twin debt crises in Europe and the US.
The talks saw the European Central Bank reactivate a bond buying program late Sunday night, London time.
The program will see the ECB to buy the government bond of Spain and Italy and support those economies in the current uncertainty.
It has already been buying greek, irish and Portuguese Government debt.
Friday’s controversial move by S&P to cut America’s credit rating by one grade from triple A to double A plus has added urgency to the discussions with both the European Central Bank policy-setting council and the Group of 7 finance ministers expected to hold talks before the Asian markets open on Monday.
Australian and NZ markets will take the brunt this morning, followed by the rest of Asia.
But local investors should heed the International Monetary Fund which said in the weekend that Australia is well placed to limit the impact of any disruption caused by worsening international economic conditions.
"If global financial markets become severely disrupted or world growth falters, macroeconomic policy is well positioned to respond.
"The exchange rate would likely depreciate, limiting the fall in commodity prices in Australian dollars and providing stimulus to the non-commodity tradable sector.
"There is ample scope to cut the policy interest rate and provide liquidity support for banks, which proved effective in the global financial crisis.
"There is also fiscal space to delay the return to surplus and, if needed, to take temporary discretionary measures, given the low level of government net debt (6 percent of GDP)," the Fund said in its statement.
That’s if there is a global slowdown.
Absent that risk, the Fund says Australia’s economic outlook is favourable, with activity “expected to bounce back in the second quarter” of this year.
“We project real GDP growth of 2 percent for calendar year 2011 and 3.5 percent in 2012 on the back of strong demand for commodities and private investment in mining and liquefied natural gas,” the IMF said in the statement which came at the end of the annual consultation with Australian Government and Reserve Bank officials.
"We expect employment to grow at a slower pace than in recent years but the unemployment should remain below 5 percent in 2011 and 2012.”
The country’s external current account deficit is expected to narrow to 1% of GDP in 2011 before “progressively widening to about 6.5 percent of GDP in the medium term,” the IMF said.
The Fund said the risks to Australia’s economy are “broadly balanced":
“An upside risk is that investment in the resource sector could be larger than expected, boosting growth and adding to inflation pressures.
“On the downside, a key risk is that the global recovery stalls or Asian growth falters, impacting demand for commodities.”
That sound like the RBA in its latest Statement of Monetary policy, released on Friday.
In that, the RBA cut its forecast for growth in 2011 to an average of 2% from the May estimate of 3.25%.
It increased its estimate for the increase in 2012 gross domestic product to 4.5% from 4.25%.
Inflation was projected to rise as well.
The Australian dollar is perhaps the best indicator of global unease impacting on Australia (the stockmarket is too volatile to be an accurate guide).
The Aussie steadied in latest trading offshore Friday night to end at $US1.0442, down over 6c on the week, thanks to the global sell-off and the RBA’s decision not to increase interest rates, and then Friday’s cut in its growth forecasts for this year.
The Australian dollar hit a record $US1.108 last week and at one stage traded well under $US1.04.
It eased to around $US1.0430 in early trading Monday morning in Asia.
The US dollar rose, eased and closed lower against the euro and the yen as rumours of the S&P rating cut moved through financial markets in the US in late trading.
For the week, the ASX200 index ended down 171.1 points, or 4%, at 4,105.4 while the All Ordinaries index lost 183.2 points, or 4.2%, at 4,169.7.
Both
