Bill Witherell's Contributions

While the Gulf Coast is dealing with far too much rain, food prices are reflecting the effects of the worst drought in 50 years in the corn-, soybean-, and wheat-raising areas of the US, to which are added the effects of drought conditions in Russia, the Ukraine, and Australia and the possibility that one or more countries will impose export controls.

The global food crisis of 2007-2008 is threatening to repeat in the coming months, as the worst drought in 50 years devastates the US corn crop, with 51% of the crop rated "Poor/very poor" by the US Department of Agriculture.

Last week the Spanish government released reports on the results of “stress tests” applied to Spanish banks by two independent consulting firms. These indicated that Spanish banks will need between 16 and 62 billion euros of new capital.

This weekend, leaders of 20 of the world’s largest economies headed to Mexico for a G-20 meeting, at which the outcome of the elections in Greece and the implications for Europe and global financial markets are a central topic, along with the future course of actions by the countries of the eurozone to address the current crisis.

The renewed flare-up in the sovereign debt crisis and accompanying political developments have brought the Eurozone back to the forefront of investor concerns in April. Strong prospects of a Socialist government taking power in France in May, the fall of the Dutch government, and heavy headwinds for the reform/austerity program in Italy have combined with spreading recession in much of the Eurozone, in particular in Spain.

The French economy, the second largest in the Eurozone and considered to be a critical part of the “core,” is increasingly seen as “struggling.” Fundamental structural deficiencies that are continuing to gnaw at France’s ability to compete internationally are now being emphasized in a presidential election campaign in which both leading candidates are making election promises...

As another week draws to a close with the bailout of Greece still unresolved, financial markets, while still volatile, appear to be taking a more positive view of the eventual outcome and its implications.

All eyes have been on Greece and Italy in recent days, with only limited references to Spain in market commentaries. Yet Spain is the fourth-largest economy in the Eurozone, following Italy, and has the fourth-largest sovereign bond market.

Following almost two years of “kicking the can down the road” through a series of actions that have proved to be both too little and too late, the member states of the European Union, and particularly those of the single currency Eurozone, reached agreement in the early hours of Thursday, October 27 on a comprehensive package of measures.

Global markets have experienced another volatile week, buffeted again by concerns centered in the Eurozone. Developments in Germany were an important factor. Our friends at Action Economics have written about the "stability anchor" role played by Germany, as the largest economy with the most robust growth, strongest fiscal position, most liquid bond market, and a history of prudent economic and financial policies.

Yesterday’s release of second-quarter GDP data for the Eurozone indicates that the “increased softness in the Eurozone economies” we foresaw in our July 6 Commentary has been more severe than consensus expectations.

As global investors’ attention moves back across the Atlantic to the US debt-ceiling/budget-deficit drama, the Eurozone crisis has eased. However, as discussed below, we still have not seen the final act.

Global equity markets rallied in the final days of the second quarter as investors became increasingly confident that a default by Greece will not occur in the near term. This upturn reversed much of the quarter’s earlier losses that occurred in volatile markets buffeted by largely negative economic news and the significant tail risk of a financial market crisis in Europe.

Earlier this year it appeared that economic and financial policy officials were finally coming together with an effective approach to addressing the critical debt crisis in the smaller “peripheral” economies of the Eurozone — Greece, Ireland, Portugal — and ring-fencing the other Eurozone economies, particularly Spain, Italy, and Belgium, from the risks of contagion.

Yesterday the third annual round of the Strategic and Economic Dialogue between the United States and China opened in Washington, D.C. It is difficult to over-state the importance of the US–China relationship. We will focus on the economic and financial perspective. Trade concerns, currency (progress towards a more flexible exchange rate for the yuan, the fiscal outlook in the US, QE 2 and what follows) and financial services (market access and financial-sector reform) are expected to be key subjects for discussion.

Twice-a-year meetings of the International Monetary Fund and the World Bank bring to Washington, DC the world’s Finance Ministers and Central Bank Governors, followed by many other current and former high-level economic and financial policy makers. Preceding the Fund-Bank meetings are a number of other official meetings, along with conferences, press briefings, and cocktail parties.

This year North America is playing a leading role in sustaining the recovery of the global economy. While the US economy experienced a relatively weak patch in the first quarter, with GDP growth likely easing to about a 2.5% annual rate, following a robust 3.1% in the final quarter of 2010, leading indicators suggest the pace will pick up in the remaining three quarters of 2011.

The global economy is emerging from a shock-filled first quarter, still on the path of recovery, with growing signs of momentum in the US and Europe more than offsetting the slowing in China, some other emerging-market economies, and Japan. The shocks have been significant.

It is too soon to develop good estimates of the likely economic and financial effects of last Friday's massive earthquake and subsequent devastating tsunami, particularly with the situation in the damaged nuclear plants still unresolved.

A year ago, my colleague David Kotok wrote a Commentary entitled “2010: The Year to Focus on Sovereign Debt.” That has certainly proved to be correct. The year that is drawing to a close witnessed a welcome recovery in the global economy that was overshadowed by a fiscal crisis in the periphery of the eurozone that periodically undermined investor confidence worldwide.