Debt Crisis Worsens, Stocks Up Anyway

Russia is the latest victim of the global debt crisis.

Economy Minister Elvira Nabiullina said today that Russia’s economy will slow to only 2% to 3% growth per year if the country doesn’t enact economic reforms. Those comments come two days after the world’s sixth largest economy saw its debt outlook slashed by Fitch Ratings.

But Russia’s financial struggles pale in comparison to euro-zone countries. Nine of them saw their credit ratings slashed by Standard & Poor’s  last week, most notably France, Italy, Spain, Portugal and Austria. Germany, the world’s fifth largest economy and the largest among the 17 euro-zone nations, avoided a similar fate, as its perfect AAA credit score remained intact.

But that doesn’t mean Germany has been immune to Europe’s spreading debt crisis contagion. The country’s GDP contracted slightly in the final quarter of 2011. Another negative quarter is expected from January through March. If that happens, Germany would technically be in a recession.

Amazingly, despite all the bad news, European stocks haven’t skipped a beat. The STOXX Europe 600 index is up 1.6% since the downgrades were made, finishing up 0.1% today.

Unlike most of last year, U.S. stocks have also been similarly unaffected by the grim economic news out of Europe. The S&P 500 is up 1% today and is on pace to close above 1300 for the first time since July. The index is up 1.3% this week.

One reason stocks have shrugged off the downgrade news is because the International Monetary Fund could be on the brink of yet again bailing out the troubled euro-zone countries to the tune of $600 billion. That little ray of hope has been enough to brighten up an otherwise cloudy financial picture.

But the worst still may be yet to come. Yesterday the World Bank cut its forecasts for global economic growth. The bank is now projecting 2.5% growth in 2012 and 3.1% growth in 2013, down considerably from its previous predictions of 3.6% growth for both years.

The European debt crisis is one reason behind the World Bank’s pessimistic projections. Curbed growth in emerging markets is another factor, the bank said. Developing countries such as India, Brazil and Russia are reining in their borrowing to slow down their economies and avoid inflation.

With international investments in emerging markets down 45% year-over-year during the second half of 2011, the World Bank believes that the European debt crisis and slowdown in developing countries are in the midst of a vicious cycle of feeding one another.

That has some World Bank officials saying that if another global recession hits, it could be worse than three years ago.

“No country will be spared,” World Bank economist Justin Yifu said.

Consider yourself forewarned.

To top