Newspaper article The Evening Standard (London, England)

Vital for Ecb to Trim Now as Global Picture Dims

Newspaper article The Evening Standard (London, England)

Vital for Ecb to Trim Now as Global Picture Dims

Article excerpt

Byline: ANTHONY HILTON

GOLDMAN Sachs last week rubbished the idea that the US economy might be starting to look a bit like Japan's. The investment bank is probably right. That America's next decade could see four recessions and an annual average growth rate of just 1% - the Japanese record in the 1990s scarcely bears thinking about.

But after 10 Federal Reserve rate reductions this year, conditions in the US are still deteriorating, notably in the corporate sector.

Ford president James Padilla said this week that the company is "in a cash crisis like none we have experienced in recent memory".

While the lowest interest rates for 40 years have helped sustain consumer spending, US financial markets face a credit crunch. Arvinash Persaud of State Street Global Advisers points out that interest rate spreads between better-quality and poorer-quality corporate borrowers are widening significantly.

Despite the plunging Fed funds rate, banks are becoming much more selective in their lending.

This has been brought home forcibly to Texas energy group Enron, which has had to take the begging bowl to its bankers. New York's huge and normally liquid commercial paper market turned its back on the company after it shocked shareholders by announcing more than $2 billion ([pound]1.4 billion) of charges and write-offs.

Enron's travails have sent a shudder through the credit markets, and made investors worry even more about what they may have been missing elsewhere.

A few economists have been warning for months that this economic downturn, triggered not by an inflationary boom but by an unsustainable debt and investment splurge,

would take time to unwind. Most investment banks, however, have been predicting a V-shaped cycle a modest US slowdown followed by a quick recovery, now pushed back into 2002. This makes equities look better value. …

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