This week was quite a spectacle on the trading floors of all major stock exchanges, as the world watched helpless and panicked investors gasping for air—trying to keep afloat amid the uncontrollable yo-yo effects of all major indexes.
With the U.S. debt rating being downgraded to AA+ by Standard & Poor’s due to its huge debt amid ongoing political confrontations, and European worries about the threat of defaults by Italy and Spain, and the possible credit downgrade of France, there may be signs that the next economic crisis is just around the corner.
“Stocks have been like a tether ball being smacked around the pole by worries about weakening economies around the world,” said Sam Stovall, who is chief investment strategist at Standard & Poor’s Equity Research in a recent report.
"The fear was that they had no plan to deal with the situation," said Randy Warren, chief investment officer at Warren Financial Service regarding the way U.S. leaders have coped with the debt situation and how EU leaders are reacting to the further possible defaults of Spain and Italy, who are the third and fourth largest EU economies, but still relatively small when compared to powerhouses Germany, U.K., and France.
Affected most by the latest disturbances, especially since European banks are the main holders of eurozone debt, the investment and banking industries are trying to absorb the unstable economy by reducing costs, mainly through a series of job cuts. Banking giants like HSBC, Barclays, UBS, Credit Suisse, Goldman Sachs, and Royal Bank of Scotland are all planning to cut full-time employees and reduce payrolls over the next few years.
HSBC stunned everyone with its plan to cut 30,000 jobs by the end of 2013. For the most part, European and American HSBC commercial bank branches will be affected by the cuts, while Asia and emerging markets will see some additional hiring.
“For international banks, the story should be cutting staff in the West while adding people here in Asia,” said Dominic Chan, a Hong Kong-based analyst at BNP Paribas SA. “If HSBC is to improve its cost-to-income ratio, it must make some efforts in Europe.”
“The job cuts will affect support staff where we believe we have created an unnecessary bureaucracy in this firm over a number of years,” said Stuart Gulliver, the CEO of HSBC, in a statement.
Royal Bank of Scotland (RBS) plans to cut 2,000 jobs over the next 18 months as a write-down on a Greek debt and to compensate for the financial losses it suffered in the first half of 2011.
Another British bank, Barclays Capital, plans to ax 3,000 by the end of this year after net revenues dropped by a third in the first half of 2011.
Swiss investment bank Credit Suisse SA plans to cut 2,000 jobs after showing poor performance in the last quarter.
And that is just the beginning. Global stock indices are feeling the pressure of a possible second financial crisis. Many analysts already predicted a second crisis following the first wave in 2007-2008. Nouriel Roubini, the famous New York University economist who predicted the last crisis, is of the opinion that America is in for a double-dip recession.
In his interview with Bloomberg, he was of the opinion that S&P felt pressure from the EU for aggressively downgrading their members while not doing much about the U.S. debt situation, so it had to act in a timely manner to lower the U.S. credit rating. Roubini fears that the EU will see more downgrades coming its way before too long.
“Since S&P downgraded the Fed that is now holding AA+ Treasurys it should downgrade the ECB to junk as it holds lots of BBB to CCC PIIGS debt,” said Roubini.
Others are of the opinion that this is not a double-dip recession, but an ongoing economic crisis that started in 2007 and will go on for a decade.
“This is a massive recession which will extend to a decade until recovery. EU debt crisis is almost negligible compared to the U.S. debt that clocks at $75 trillion (more than all the world economics put together),” commented economist Tilakaratnam Ponnaiah as a response to Roubini’s article.
“Moreover, EU crisis is limited to a few nations (PIIGS), which anyways had very bad fundamentals. So, if the ECB steps in to save the day, we’ll see USD being replaced with the euro as the new reserve currency. Otherwise, it is going to be a free for all. The nightmares of 2008 are back—in gigantic proportions.”