Crisis Turns Global Economies Upside-Down

This is what the Age of Crapulence has wrought: Nigeria is now less vulnerable to economic crisis than Switzerland.

That the African exporter of oil and spam should be less risky than the stolid banker and insurer of Europe only underscores the depravity of a half-decade of financial drunkenness. Years of massive capital inflows -- a "capital bonanza," in the words of the National Bureau of Economic Research -- combined with colossal deleveraging have put some of the biggest developed economies at the greatest risk for economic calamity.

The world isn't flat. It's upside down.

That's one takeaway from a report published on Election Day by the global economics team at Merrill Lynch (MER), at any rate. The researchers conducted an "old-school" risk analysis, crunching more than 5,000 economic indicators from 60 national economies. Their admittedly subjective risk ranking (see chart below) is based on a number of factors, including current account financing gaps, private credit growth and banks' capital-to-assets ratios.

If accurate, it paints a disquieting picture against a deteriorating economic backdrop. Almost lost during the celebration following the momentous outcome of the presidential election was a torrent of ruinous domestic news. Among the latest chilling developments: The job market is rapidly falling apart, the services sector contracted and the worst monthly sales figures in decades promise that this will be an epically crappy holiday selling season for the nation's retailers.

Beyond our borders the situation is arguably worse. Wednesday's post-election merriment nearly overshadowed some truly unnerving international news: ArcelorMittal (MT), the world's largest steel maker, is slashing output by more than a third -- a third -- because of weaker demand across the globe.

Adding to the dread, and in a move that smacks of panic, global central banks, most notably the U.K., executed surprise rate cuts. Oh, and the International Monetary Fund trimmed its forecast for global economic growth and urged countries to enact more stimulus spending.

At home and abroad it's clear that the consequences of our great binge are truly at hand. It should probably come as no surprise that some who gorged most gluttonously at the trough of cheap credit are now the most vulnerable to economic crisis. Overleveraged financial systems, too much external debt and rotten balance of payments positions have put many of the world's developed economies at greater risk than the emerging ones. Brazil, Russia, India and China -- the so-called BRIC cornerstone of the developing world -- are in better shape than the U.S., U.K. or Euro area, despite collapsing commodity and securities prices.

The bottom line is this: Investors looking to bargain hunt in foreign equities must remain cautious if not outright wary. A five-year credit bender has caused one hell of hangover -- and flushed old notions of risk down the toilet.