US politicians rejection of $700bn bailout leaves the United States on the brink of recession, says JLT
Increased levels of economic uncertainty, coupled with the possibility of a future sovereign ratings downgrade, has increased the level of risk for foreign businesses operating in the United States, according to the latest findings of the World Risk Review, a country risk ratings guide produced by broker and risk consultant Jardine Lloyd Thompson.
“Following US politicians rejection of initial plans to a $700bn bailout for bad debt, the United States is either already in or teetering on the brink of recession,” says Doctor Elizabeth Stephens, Head of Credit and Political Risk Analysis at Jardine Lloyd Thompson. “And while the initiative has already been seen by many as putting a financial gun to the head of the ordinary American, a failure to bail out Wall Street will only weaken an already fragile US economy.”
“Interestingly though, it appears little consideration has been given, to date, to the means through which the US government intends to fund this complex rescue venture. The administration has already made it clear that additional capital will not be secured through an increase in tax, while cuts in domestic spending are unlikely given current market commitments. Add to that the ongoing financial pressures of Iraq and Afghanistan and the future looks somewhat bleak. If the government intends to meet at least part of this cost through the sale of bonds, the million dollar question is – who buys them?”
Worryingly, as the rest of the world looks on, it is clear that the mortgage bailout is not enough, the JLT report says. It continues: "With mortgages only representing half of US consumer debt, requests for further government funding in 2009 look likely, further destabilising global markets. Future western financial market volatility is inevitable.
"Meanwhile, in Russia, capital flight can be measured in billions of dollars as the economy continues to decelerate. Evidently the war in Georgia proved to be the final straw for many foreign lenders and investors to what was an already tense environment and with the stock market dropping by almost fifty percent, the region has quickly become a riskier and more expensive place to conduct business. Before the end of 2008 Russian companies are due to repay $45bn in international loans, creating further consolidation across many sectors and increasing non-payment risk," the report states.