What's ailing investors? Global debt deadlock

By John W. Schoen, Senior Producer

There?s only so much bad news the stock market can ignore.

Investors woke up Monday morning to news that a select congressional committee had failed, as expected, to break a long-running deadlock on solutions to the federal budget deficit.?Analysts had been saying for weeks that the committee?s work would have much less impact on the markets than the high-profile bickering that sent stocks reeling in August.?

But the deepening debt crisis in Europe is harder to ignore.

?Complacency is running at an uncomfortably high level,? said Gluskin Shiff's Chief Economist David Rosenberg. "Hope is one thing; denial quite another. ?Neither are very effective investment strategies.?

That complacency was tested Monday, as heavy selling sent stocks lower, knocking more than two percent off the major market indices.

While Congress once again kicks the U.S. debt can down the road, European leaders remain equally frozen in a political stalemate over how to head off looming debt defaults by Greece and Italy. As one failed plan followed another, bond investors have been fleeing.

Earlier this month, the Italian government edged toward the financial abyss after investors demanded higher interest rates on Italian bonds to offset the rising risk of a default. Now, yields on bonds issued by France, Austria, Belgium and the Netherlands ?- so-called ?core? European economies -- have risen sharply.

?Investors are increasingly concerned that policymakers will not be able to contain the crisis and perhaps even keep the euro-zone together at all,? said John Higgins, a market economist at Capital Economics in London.

Bond investors got another jolt Monday after ratings agency Moody's warned that if the recent rise in France's borrowing costs continue, that would have "negative credit implications" for the country?s triple-A credit rating. The agency cited "significant downside risks," noting that higher taxes and lower spending could undermine France?s economic growth. Until recently, the hope was that Europe?s stronger ?core? economies, including France and Germany, could come to the rescue of the weaker ?periphery? countries like Greece, Italy, Spain, Portugal and Ireland.

While the European crisis has not yet produced the immediate panic brought by the collapse of Lehman Brothers in 2008, the European credit crisis has begun to take a toll. Last month, losses on European bonds forced the breakup of Belgian French bank Dexia and forced U.S. investment firm MF Global?to seek bankruptcy protection.

In response, European banks have begun shedding their holdings of Eurozone debt and tightening credit. With fewer buyers, governments are forced to pay higher interest rates to attract investors. Higher rates have crippled Europe?s?weaker economies. As the credit squeeze widens, the entire eurozone is slipping into recession.

So far, the U.S. economy has held up relatively well; a series of fresh economic data last week helped raise hopes that the European debt crisis would not spread across the Atlantic. But even as U.S. growth appears to have to have perked up in the third quarter, the recovery remains fragile. Public and private forecasters, including economists at the Federal Reserve, have pared back estimates for growth next year.

The latest cautionary note came from a survey of business economists released Monday, which found that they see the U.S. economy avoiding a recession next year but not growing rapidly enough to make significant improvements in the job market.

In its latest outlook, the National Association for Business Economics sees the economy growing by 2.4 percent in 2012, up slightly from the 1.8 percent growth they expect for this year.

The survey highlighted one of the key reasons for lackluster growth: business leaders are reluctant to ramp up until the dust settles over the U.S. budget debate and until the European debt crisis subsides. Some 72 percent of the panel members characterized the economic outlook as either "somewhat" or "much" more uncertain than usual.

According to the NABE outlook, recession is not in the cards. Insight on the results and an economic forecast, with Bill Strauss, Chicago Fed Reserve senior economist/economic adviser and CNBC's Steve Liesman.

Source: http://bottomline.msnbc.msn.com/_news/2011/11/21/8932675-whats-ailing-investors-global-debt-deadlock

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