Fears the United States is facing another recession following a series of ugly data results and toxic in-fighting about debt levels sent world sharemarkets plummeting yesterday.
While there is plenty of bad news around, New Zealand is in a better position than most other countries, despite having to borrow an average $380 million a week to support Government spending. The country's total Government debt is a drop of gross domestic product (GDP) compared with some of its larger trading partners.
In Europe, concerns have grown that debt-ridden Italy and Spain might be forced to follow Greece, Ireland and Portugal in seeking bail-outs from the rest of the European Union.
That triggered heavy selling of European bank stocks and fuelled fears of a 2008-style financial collapse.
Italian Prime Minister Silvio Berlusconi promised a comprehensive reform pact with unions and employers, but failed to stem a market sell-off which has dragged Italy ever closer to a full-scale debt crisis.
The future of the euro zone is being threatened. Germany will be in no mood to continue to bail out its indebted neighbours.
Across the Tasman, Australian banks were sold down yesterday and gold fell, as dealers freed up cash to meet margin calls.
All in all, it was an ugly day.
It is probably no use expecting US Federal Reserve chairman Ben Bernanke to step in next Wednesday when the Fed meets.
After the US finally agreed to lift debt levels, bond rates dropped substantially and the fear is that even if the Fed adopts more quantitative easing, no-one will want to buy the bonds.
Fortunately, New Zealand businesses are in sound financial shape. They used the last recession to strengthen their balance sheets, remove costly overheads and pare back their operations to be able to react quickly to any recovery.
In Australia, the mining sector is virtually holding up the economy with retail figures coming out last week disappointingly low.
This morning, the US job numbers will be published and expectations are not high that they will include good news.
Consumer and investor confidence in the US is sliding daily, and is expected to fall even further in the next few days.
There is growing concern around the world about the lack of political leadership in the US and Europe, and that governments and banks are running out of fiscal and monetary ways to deal with the crises.
A tsunami of government debt continues to build with policymakers seemingly at a loss on how to deal with it. First, it was corporate debt. Then it was household debt. Now, it is sovereign debt. There is nowhere left to hide.
News agencies were reporting near panic selling in the US. But after three years of fighting economic fires, what else is left for governments to do?
The volatility of the New Zealand dollar is one example of how the debt crises are affecting New Zealand. When money gets tight for offshore investors, they need to cash up their "riskier" assets like New Zealand bonds, which they have to buy in our currency.
For those who do not think we are not part of a bigger picture, be aware that worse could yet be to come.
The Fed is likely to keep its lending rate at zero percent for years to come, making New Zealand an attractive investment destination, given the signals coming from the Reserve Bank for a 0.5% lift in the official cash rate next month.
The local economy will continue to be buffeted by overseas decisions. Hopefully, the corporate sector will withstand the pressure.
