Financial Turmoil Starts to Hit Economy: The Ticker

a | A

By Mark Whitehouse

Political leaders' inability to get a handle on Europe's deepening financial troubles is becoming a real problem for the economy. The shock isn’t yet as bad as it was in 2009, but by some measures it's getting close.

Financial jitters are pushing up borrowing costs for banks and companies alike. The higher borrowing costs get, the fewer profitable investments the banks and companies can make. Result: Less economic growth.

As of this week, the typical European bank would have to pay nearly 3 percentage points more to borrow money than a relatively riskless government such as Germany, data from Goldman Sachs suggest. That's not far from the peak of 4 percentage points during the darkest days of the crisis in 2009.

The stress is less severe in the U.S., where the spread for banks is a bit more than half the peak in March 2009. The spread for U.S. corporations with Baa ratings from Moody's is close to 2.5 percentage points, less than half the level in December 2008.

Economists at Goldman Sachs estimate that the financial shock, if sustained, could shave a full percentage point or more off U.S. economic growth next year. Given the fact that the pain is centered in Europe, it’s fair to assume that the impact would be even greater there. The longer policy makers dither, the worse the forecasts will become.

(Mark Whitehouse is a member of the Bloomberg View editorial board)

-0- Sep/28/2011 21:44 GMT