As reported by Reuters Mike Dolan, August’s dramatic financial shock, which is now both feeding off and risks fueling another economic downturn, may well introduce a third phase of the four-year-old global credit crisis — the infection of the ultimate creditors.
The crisis, triggered by mortgage and housing bubbles in many western economies, first hobbled the banks and is now undermining the governments who where forced to bail them out.
The United States has lost its risk-free credit rating from one agency and the euro zone is in a seemingly endless struggle with either sovereign insolvency or liquidity crises across its members.
With faith in western powers’ ability or willingness to resolve those debt problems ebbing rapidly, the next twist in the saga shifts to the surplus countries who’ve bankrolled them.
China has lent the United States up to $2 trillion — that’s 30 percent of Chinese annual output banked in one country — and probably the lion’s share of the rest of its $3.2 trillion of hard currency savings to European governments.