A fiscal crisis is brewing in the US, UK, Greece, Ireland, Spain, Japan, as well as the highly touted wunderkind, China. Please consider the latest reports from some key countries.



Greece



Bloomberg is reporting Greek Markets Rattled as EU Says Deficit Forecasts ‘Unreliable’.



Greek stocks and bonds tumbled after the European Commission said “severe irregularities” in the nation’s statistical data leave the accuracy of the European Union’s largest budget deficit in doubt. Papandreou’s government raised the deficit forecast for last year to more than 12 percent soon after winning elections in October, from a previous forecast of 3.7 percent, the commission said in its report.



The declines in Greek bonds drove up the extra yield investors demand to hold the country’s 10-year notes instead of similar-maturity German bonds, the benchmark European securities, by 16 basis points to 234, the highest since Jan. 1. The difference averaged 55 basis points over the past 10 years.



Today’s report marks the EU’s latest challenge to Greek statistical data, after revisions in 2004 indicated the country shouldn’t have qualified to join the euro.

United Kingdom

Britain's economy fell last year at the sharpest rate since 1921, despite hopes that it finally emerged from recession in the last three months of the year, according to a respected economics forecaster.



For the year as a whole, the economy contracted by 4.8 per cent, a bigger fall than in any year of the Great Depression and the biggest contraction for 88 years.

Germany

Germany's economy contracted 5 percent in 2009 amid the global economic downturn, by far its worst performance since World War II, official data showed Wednesday.



''What was striking in 2009 is that both exports and capital formation in machinery and equipment slumped heavily,'' the office said in a statement. ''Foreign trade, which in previous years had been a major driving force for growth in the German economy, slowed down economic development in 2009.''

Doctor Doom On The Coming Crisis

In 2009, downgrades and debt auction failures in countries like the UK, Greece, Ireland and Spain were a stark reminder that unless advanced economies begin to put their fiscal houses in order, investors and rating agencies will likely turn from friends to foes.



Going forward, a weak economic recovery and an aging population is likely to increase the debt burden of many advanced economies, including the U.S., Britain, Japan and several eurozone countries.



In 2008 and 2009, the decisions by these governments to do "whatever it takes" to backstop their financial systems and keep their economies afloat soothed investor concerns. But if countries remain biased toward continuing with loose fiscal and monetary policies to support growth, rather than focusing on fiscal consolidation, investors will become increasingly concerned about fiscal sustainability and gradually move out of debt markets they have long considered "safe havens."



The UK, Spain, Greece and Ireland will face sovereign risk pressures, especially if their fiscal imbalances are not addressed immediately. Some eurozone members are quickly approaching their debt sustainability limits as deleveraging through devaluation is not an option for these countries. Countries like Germany—whose fiscal imbalances have deteriorated largely due to the economic and financial downturn—might have a greater capacity to stabilize their debt ratio. The U.S. and Japan might be among the last to face investor aversion—the dollar is the global reserve currency and the U.S. has the deepest and most liquid debt markets, while Japan is a net creditor and largely finances its debt domestically.

States In Serious Trouble

California Cash Crunch

California's main debt rating was cut on Wednesday by Standard & Poor's, which said the government of the most populous U.S. state could nearly run out of cash in March -- and another rating cut might follow.



"The big question is, is there any fear they will get downgraded out of investment grade (so) you may have to sell ... that's where I think it would get interesting or hairy," said Eaton Vance portfolio manager Evan Rourke.



S&P's downgrade was overdue because the state's revenues have been so weak, said Dick Larkin, director of credit analysis at Herbert J. Sims Co Inc in Iselin, New Jersey. "Frankly I can't understand why it took S&P so long," he said. "They could have made that decision back in September."



Larkin said the three major rating agencies will hold off on more downgrades to California's credit rating to avoid roiling the municipal debt market, even in the event budget talks between Schwarzenegger and lawmakers drag on.



"They'll give the state an awful lot of rope," Larkin said. "For a state to go below investment grade would cast a pall on every state and local issuer out there."

Rating Game Scam

Markets Will Sort This Out