Does the Euro Crisis Threaten the Global Economy in 2011? PIMCO’s Answer is Yes

Here is a cautiously optimistic perspective on the coming year’s economic outlook from PIMCO’s Saumil Parikh .  He forecasts a cyclical bounce in U.S. economic growth as a result of recent monetary and fiscal policy measures, mostly QE2 and tax policies.  On the other hand,  risks lurk in unsolved structural problems, including persistently high unemployment and excessive debt levels.

PIMCO agrees with Econgirl that the euro crisis poses a huge risk to global financial stability :

Policy coordination failure, coupled with political failure, is a non-trivial risk in Europe over our cyclical horizon. It is conceivable that one or more sovereign defaults in Europe give rise to a banking crisis with potentially deleterious consequences for “animal spirits” around the world. (our bold for emphasis)

This assessment refers to the architecture of cross border finance and the vulnerability of  20 large, complex financial institutions (LCFIs) with assets totaling about $56 trillion. Cross-border interconnections in a handful of countries (8 ‘nodes’ to be exact) in which the LCFIs are based pose significant systemic risk to global financial networks.  Spain is one of these 8 nodes. Together  they provided 2/3 of the on-balance sheet financial claims vis-a-vis the rest of the world at the end of 2009, according to BIS international banking statistics on foreign exposure. These claims break down as follows: 65% of advanced economies, 77% of emerging markets, and 81% of offshore centers. Spain holds 5% of all foreign claims — same as Switzerland.

Spain can set off a lot of dominos fast.

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