Insolvencies analysis

Editorial

Globalisation put to the test

The process known as globalisation is now undergoing its first genuine test, and perhaps even its first crisis. We are no longer in the same world that we knew seven years ago, at the time of the last slowdown in the American economy : the phenomenal expansion in economic exchanges, the even more disproportionate increase in financial trading, the rise of the euro and the arrival of China and India on the world scene are so many factors reshuffling the cards of the normal crisis mechanisms.

Because of this, attempting a comparison between the current economic slowdown and those that went before will not work. In the so-called ‘globalised’ economy, the shocks we are experiencing are bound to be of a new kind. Why has everyone’s attention been focused for several months on the financial crisis, on the manner of its spread and the suitable monetary policy responses ? The answer, of course, is because of the suddenness and scale of the subprime crisis, and of the systemic risk that it has engendered; but, undoubtedly, it is also because the fact of seeing local governments in Scandinavia being hit by a property bubble thanks to globalised securitisation mechanisms gives us first hand experience of what globalisation means today, and the singular difficulty of mounting a suitable response to a shock capable of instantaneous worldwide repercussions.

Our study of the growth in business insolvencies across the world in2007 and early 2008 is further proof of this phenomenon: the real-economy problems have immediately gripped real-economy businesses across the entire globe. The rapid spread of the economic slowdown to most economies is demonstrated by our Global Insolvency Index (GII), which shows a 6% increase in insolvencies last year, a trend that we expect to accentuate to a 15% increase in 2008. The trend change in the US last year was abrupt, with a 44% rise in insolvencies, and we expect the number of cases to grow by a further 35% this year; those sectors directly or indirectly involved in the real estate market and real estate lending are, of course, on the front line. What is even more astonishing is the nearly simultaneous rise in insolvencies fairly everywhere across the world : a synchronous increase in Spain (an expected +90% in 2008) or in Ireland (+39% in 2008) or, with a slight delay) in the UK, in France, or in Italy (an expected+ 10% in 2008). All these countries, hit more or less sharply by collapse in their real estate sectors, find themselves jointly weakened by the rise in insolvencies.

So far, only the German economy has escaped this development, but this does not mean that it will be protected against it in the second half of 2008: the darkening situation in all of its trading partners should rapidly stem its external surplus, the sole driver of German growth. On top of the financial crisis and the global economic slowdown, there is a third test that globalisation faces, namely, the oil shock that has been unleashed since 2005 and of which we are barely beginning to get the true measure. The gains in wealth and growth from globalisation, up to then brought about by competition in production and thus the deflation that this has brought about, are undoubtedly at the very root of the current oil shock –which is precisely what is relaunching global inflation.

The year 2008 will tell us if, in undergoing this three-fold test, globalisation acts as a beneficial shock absorber or, to the contrary, constitutes an uncontrolled amplifier of major economic shocks.

Karine Berger

Source: Euler Hermes Insolvencies Outlook, June 2008