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|Waiting for the next crisis|
|Wednesday, 23 February 2011 07:33|
Nobel prize-winning author Samuel Beckett once wrote a play entitled “Waiting for Godot”. But in contrast to Godot who never came, you can bet your bottom dollar that the next crisis will come -- and perhaps sooner than you might imagine. This is the clear impression that you get from the IMF’s latest economic forecasts.
The current global recovery is “two-speed”. But neither speed is the right speed. In fact, it is a wrong-speeded recovery.
In advanced world, economic growth is subdued, and unemployment still high. The financial and economic crisis has morphed into a jobs crisis, and there are signs of an emerging social crisis in many countries. With the prospect of continued weak growth, there is very little hope of unemployment falling soon.
And as bad as things are, they could well get worse. Most of the risks are on the downside. In Europe, markets are stil worried about sovereign and banking risks, the political feasibility of the necessary austerity measures, and the lack of a comprehensive solution.
Tensions in the euro zone periphery (Greece, Portugal and Ireland) from sovereign debt and financial problems could easily spread to the core of Europe. German, French and other European banks lent big time to the Greece, Ireland, Italy, Portugal and Spain, and there are concerns about the lack of transparency of bank exposures. Nonperforming real estate-related loans also carry downside risks for US banks.
There is also a need to get fiscal policy and government debt under control most everywhere in the advanced world, especially Japan which has just seen its public debt rating downgraded again. But there is no real progress in formulating medium-term fiscal consolidation plans.
In many parts of the emerging world, economic activity is buoyant. But inflationary pressures are emerging, and with strong capital flows, there are clear signs of overheating in Brazil, Indonesia, India and China. And in China, the government will be nervous about slowing the economy down for fear of stimulating an Egyptian-style “jasmine revolution”. But if policy makers don’t get the overheating under control, there is a real risk of a crash landing. This would be a disaster for the world economy where emerging economies now account for about 40 per cent of global consumption and more than two-thirds of global growth.
While the US and Europe are struggling with the conjuncture, they have still not worked off pre-crisis excesses. Global financial stability has not been restored. The massive pre-crisis private sector debt build-up in the US, Euroland and the UK, has been barely reversed. In other words, there has yet been very little progress on deleveraging. This will slow the recovery and pose continued risks to banking systems which are still fragile and in need of repair.
Little progress is being made on the global imbalance front. The US recovery is domestic demand driven, and China is stubbornly refusing to revalue its exchange rate, so everything points to a new widening of the US and Chinese current account imbalances. And despite their good intentions, it doesn’t look like the G20 can fix this one.
At their recent Paris meeting, G20 finance ministers agreed on a set of indicators to measure global imbalances. The indicators are: public debt and fiscal deficits; private savings rate and private debt; and the external balance composed of the trade balance and net investment income flows and transfers, “taking due consideration of exchange rate, fiscal, monetary and other policies.” They also said that they aim by their upcoming April meeting to decide on indicative guidelines against which each of these indicators will be assessed.
What does all this mean? It means that China is doing all it can to drag out and block this process, and will not do anything on the RMB exchange rate under pressure from the G20. You can also be sure that the US for its part will run its loose monetary policy for as long as its wants, without regard for the impact on other countries. The G20 is a toothless tiger.
The Basel Committee on Banking Supervision has worked quickly to agree on new standards for improving banks’ capital, so-called Basel III. But, most regrettably, the famous shadow banks which played such a big role in the global financial crisis, are free from these standards.
At the global level, regulatory reforms are still required to put the financial sector on a sounder footing. While regulatory reform efforts have been moving forward, they increasingly suffer from a combination of fatigue and the sheer complexity of the issues. Progress has been made on microprudential banking regulation aimed at ensuring the solidity of individual institutions, though important gaps remain. Macroprudential policymaking, which aims to preserve the stability of the financial system as a whole, is still in its infancy in most countries, and there are concerns that systemic vulnerabilities may build up again before solid progress is made to prevent such a build-up.
New entities are being established to improve systemic oversight, like the new European Systemic Risk Board and the new Financial Stability Oversight Council in the United States. But it is far from clear that they can get their acts together in time for preventing the next financial crisis.
In short, it ain’t a pretty picture. Hold on tight to your dreams!
World Economic Outlook Update: Global Recovery Advances but Remains Uneven
January 25, 2011
Global Financial Stability Report: Global Financial Stability Still at Risk
January 25, 2011
More Action Needed for "Right Kind of Recovery", IMF Survey online
February 19, 2011
Two-speed Global Recovery Continues, Posted on January 25, 2011 by iMFdirect
By Olivier Blanchard