August 9th, 2011
05:43 PM GMT
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London (CNN) – The unprecedented downgrade of the U.S. debt rating Friday triggered mass sell-offs in equity markets around the world, with $2.5 trillion wiped off global stocks yesterday following last week’s losses.

While markets are steadying, the dramatic slump and unhealthy economic data has raised questions over the risk of another U.S. recession – one which could tumble into Europe.

The debt crises on either side on Atlantic have also thrown into sharp contrast the different strategies employed to deal with financial meltdowns.

The U.S. used stimulus; Europe turned to austerity. Both strategies are struggling to stave off economic pain.

As the U.S. was downgraded, the European Central Bank was preparing to reactivate its bond buying program, this time for Italy and Spain, in an attempt to stabilize the eurozone markets.

The ECB move comes after austerity programs introduced in the eurozone’s troubled economies failed to calm investors.

The ECB’s program kicked off this week but it is not regarded as long-term safety net, given the EUR660 billion debt burden for Italy and Spain until the end of 2012.

Tobias Blattner, of Daiwa Capital Markets, says that load means the two countries simply can’t rely on the ECB for support. The most likely medium-term option to inject confidence into the eurozone bond markets is a combination of market interventions by the ECB and later the European Financial Stability Facility, Europe’s bail-out fund, he says.

Meanwhile, as the ECB strategy comes under scrutiny, focus has turned to the U.S. Federal Reserve amid speculation it could provide further stimulus. On Tuesday, it said it would keep rates low through until 2013 in response to a slowdown in the U.S. recovery.

But does stimulus or austerity work? According to Elisabeth Afseth, fixed income strategist of Evolution Securities, both approaches are failing. “It’s hard to see how to get out of it...it’s a frightening prospect,” she says.

The U.S. officially exited its 18-month recession - defined by two successive quarters of negative growth - in June 2009. Just under a year ago, economists surveyed by CNNMoney put the chances of a double dip recession at 25%.

Post downgrade, economists including Nouriel Roubini, of Roubini Global Economics, are getting more bearish.

Roubini told CNN's Piers Morgan the chance of another recession is now at least 50%, in the U.S. and periphery of the eurozone.  He pointed to the loss of equity wealth, falling value of homes, a lack of job creation and flat consumption as being contributors to another recession. Further, he said, there is a lack of policy tools to jumpstart the economy.

Any recession in the U.S. would impact to Europe, with Germany, the export led-economy driving the eurozone through its own economic trauma, likely to be hard hit.

Others are less bearish. Societe Generale’s chief European economist James Nixon is not yet picking a recession, although he expects three to five years of mediocre growth in the U.S. and Europe.

Afseth also expects a long period of sluggish growth. Either way, “it’s hard to see a positive outlook,” she says.



soundoff (6 Responses)
  1. Steve Thompson

    The Federal Reserve is out of ammunition. QE1 and 2 didn't work and now a prolonged period of near zero interest rates has proven itself ineffective as well.

    Here's what the Federal Reserve had to say about the markets and the American economy back in February 2011 after just 3 short months of QE2:

    http://viableopposition.blogspot.com/2011/08/americas-sliding-economy-what-can.html

    Wrong!

    August 10, 2011 at 12:17 pm |
  2. Vivek

    QE will never help US and Europe economy, as this will ,ake rich more richer and poor will be left behind as QE money only goes in increase stock and comodity prices and not real economy growth. FED is stupid in priniting money , they should ask compnies to be more competitve and work harder for profit.How come US inflation is at very low level when thehy get all manufacturing from China where inflation is at 3 yr high.

    August 10, 2011 at 1:29 pm |
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    August 10, 2011 at 5:32 pm |
  4. raj

    The root cause of this so-called recession is ‘global warming and climate change’, businesses are going down because the general public/common man does not have money in their hands, the wealth in this world should be generated from earth, the basic thing is ‘agriculture’, that’s how the world’s economy keeps moving, as long as there is no rain/water or climate change continues, and because of population explosion the food demand is high and the production is low/hindered, the global warming will push the world deeper and deeper into recession, there are scientific methods to reverse this global warming, but nobody wants to take initiative, ‘carbon sequestration’ is the only solution I think.

    August 14, 2011 at 4:12 am |
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