The Lurking Disaster Germany and Saudi Arabia Have in Common

By: John_Mauldin

The global exporters’ crisis is intensifying (read my free special report on Germany’s inevitable crisis).

Germany’s largest bank said it is deeply concerned about stagnation in the United States. Separately, Saudi Arabia’s central bank gave $4 billion to the country’s banks to help them deal with liquidity issues.

Both developments will impact their regions, which are already in turmoil, as well as the world.

Exporters are hurting all over the world

In early 2016, we determined the 10 nations that had been hit hard by slowing global demand for exports. Then, we identified those next in line.

Saudi Arabia was third on the list of countries already hurting. Germany topped the list of the five most vulnerable. The recent statements out of Berlin and Riyadh suggest the situation is going from bad to worse.

Germany feeling the crunch

Germany’s largest bank, Deutsche Bank, is already in deep distress, which could affect the US as well.

These two dynamics have come together in a research note from Deutsche Bank. It warned the Fed that an interest rate hike in September would be a “big policy error.” It’s abnormal for a foreign bank to muscle in on US economic policy.

So why is the Deutsche Bank worried about a recession in the United States? It has plenty of other things to worry about.

Because the United States is the largest destination for German exports. And exports make up almost half of Germany’s GDP. Trouble in the US would have a devastating impact on Germany.

Berlin has been able to deal with declining demand from China and Europe so far. The US and UK markets have picked up some of the demand. Beneath the calm tone of the advisory note is a certain fear.

If the US has a recession, there isn’t another market to pick up the slack.

This fear is logical. A decline in exports could create difficult social conditions and political instability. And this isn’t just a German issue. It has serious implications for Europe.

Berlin has already been stretched thin trying to deal with a disintegrating EU (see Mauldin Economics’s slideshow on Europe’s sad realities), especially after Brexit. A hit to the German economy would greatly add to the problems in Europe.

Saudi Arabia in shambles

Another struggling exporter trying to reduce risk is Saudi Arabia. Bloomberg recently reported that Saudi Arabia’s central bank offered banks in the kingdom $4 billion in loans for one year.

The Saudi financial situation is quite opaque. The kingdom goes to great lengths to keep it that way. This is why the Bloomberg report is odd. If the Saudis wanted to hide that they were loaning money to their banks, this information would not have seen the light of day.

But it has, so it appears to be a deliberate leak.

It is also odd because, in this context, $4 billion is a small amount. We know that the Saudi economy has been under strain due to low oil prices. And the first indicator of an economic crisis often comes from the banking sector.

But if there were a liquidity problem brewing, $4 billion would not be enough to help.

Saudi Arabia is one of the world's richest export-dependent countries. Oil exports account for 90 percent of government revenues, and low prices have forced the kingdom to run deficits.

Its economy is under stress, and the Bloomberg report could either be a harbinger of trouble or indicate a balancing act.

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