Global economy weekahead: From a soft patch to quicksand

Posted by Press Release | September 26, 2011 .

By Emily Kaiser, Asia Economics Correspondent

Sun Sep 25, 2011 6:16pm EDT

(Reuters) – The global economy was supposed to be better by now.

Just a few months ago, the prevailing wisdom was that growth was going through a “soft patch” caused by a combination of Japan’s earthquake and unrest in the oil-producing Middle East. Once global supply chains got back to normal and oil prices receded, the second-half recovery could begin.

Judging from the tone among world finance leaders who gathered in Washington over the weekend, no one is buying that theory any more.

“The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike,” the International Monetary Fund’s steering committee warned on Saturday.

Australian Treasurer Wayne Swan spoke of a “somber mood” among policymakers. Financial markets priced in a growing risk that Greece may default, which could touch off a panic worse than what followed the Lehman Brothers bankruptcy.

“The Lehman crisis was about rescuing a company. Now it involves a country’s sovereign debt so in a sense, the situation is more severe,” said Japanese Finance Minister Jun Azumi.

Yet the strongest statement Group of 20 officials could offer was a promise that, by November, euro area leaders will find a way to “increase the flexibility” of a financial stability fund widely considered inadequate to cope with a crisis which could engulf Italy or Spain.

“If a generous sovereign from Mars came down and paid off every penny of Greece’s debt tomorrow, the fundamentals of the European crisis would not be altered,” said former White House economic adviser Lawrence Summers.

J.P. Morgan economists blamed the renewed global weakness on a “crisis of competency.” In a note to clients entitled, “Yes we can; no we won’t,” they argued that the economy was indeed shaking off the Japan quake effects — until August, when Europe’s debt strains intensified and the U.S. debt ceiling drama cast doubt on Washington’s political will to address its own long-term budget needs.

Europe came under fresh pressure on Sunday to ramp up its crisis response when a top IMF official said the ECB was the only

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