So, uh, the rest of the world economy... how's it doing?

As the hullabaloo of the banking crisis fades, it seems increasingly to have been a kind of distraction from the wider topic. Investors are now once more contemplating the non-financial corporate world. It is not a pretty sight.

As an apparently minor sign of distress, take the Baltic Dry Index, which measures bulk shipping rates. It has halved this month, and is down more than 90 per cent from its peak in May.

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The main reason, apparently, is that shippers cannot get trade credit. This is the time-honoured procedure where exporters get a guarantee of payment from a bank, for a fee, until the end customer settles.

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It is also part of a wider issue. As Ian Harnett of Absolute Strategy Research points out, the entire model of global industry over the past 20 years has been based on the premise of cheap, abundant credit. Take that away, and what happens, for instance, to outsourcing? Indeed, what happens to globalisation?

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According to the latest Merrill Lynch fund managers’ survey, the danger least preying on global investors’ minds at present is geopolitical risk.

They might perhaps ponder the fact that derivatives markets are now pricing in some quite startling probabilities of sovereign default: 90 per cent for Pakistan, 80 per cent for the Ukraine and so forth.

The idea of the already tottering Pakistani state defaulting is not reassuring. The fact that China apparently offered last week to underwrite Pakistan’s overseas debt payments is not necessarily comforting either.

The view isn’t pretty as the banking crisis dust settles (Financial Times, 19 October 2008)