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From the Financial Times: Clock is ticking to apply EM debt lessons to euro crisis
Financial Times Market Insight by William R. Rhodes, IIF First Vice Chairman Emeritus
FT, May 2, 2012 — Mexico, Brazil, South Korea and Turkey emerged in recent decades from severe economic crises to secure dynamic and sustained rates of economic growth, financial market confidence, and establish increasingly strong democratic institutions.
It is urgent that the leaders of Europe and the US learn from the experiences of the key emerging market economies in addressing today’s crucial difficulties.
Political leaders in Europe must now confront the eurozone crisis with the boldness and realism that leaders in successful emerging markets did in the past. Further fence-sitting is unacceptable: financial market confidence in the ability of Europe’s political leaders to act is deteriorating at an accelerating tempo. Illustrating this point is what has been happening recently to yields of Spanish and Italian government bonds – as of May 1, 10-year yields had widened to 5.77 per cent in Spain and 5.54 per cent in Italy, from 4.9 per cent in early March for both countries.
The seriousness of the euro area’s problems is manifest in the European Central Bank’s recently published monetary statistics showing the annual rate of bank credit growth has slowed down from a lacklustre 2.7 per cent last October to 0.7 per cent in February; consumer credit has contracted for 35 consecutive months, since early 2009.
What really concerns the markets is the broad sense that political leaders in the major industrialised economies are failing to set confidence-building policies to deal with profound fiscal difficulties, or recognise that their current approaches to financial sector regulation are damaging the outlook for sustainable growth.
Successful crisis-management leaders in emerging markets, from then Finance Minister Fernando Henrique Cardoso’s Real Plan in Brazil in 1994, and South Korea’s Kim Dae-jung in 1998, to Turkish economics finance minister Kermal Dervis just a decade ago, crucially understood how important regaining market confidence was to their economies. They all put in place bold programmes that restored market access – programmes that combined pro-growth actions that secured domestic public support; structural reforms that enhanced competitiveness; and medium-term budget plans to expunge formidable excesses.
Today, such forthright and comprehensive policy approaches are lacking on both sides of the Atlantic. The dangers of a protracted economic malaise seem lost on our political leaders. They seem almost as oblivious to the risks to the global economy now as they were, for example, in early 2007 when a number of us warned of the rising dangers of the US housing bubble.
Irrespective of election pressures, European policymakers need to have the courage to change course with regard to both fiscal policies and financial regulation. They need to focus squarely on supporting policies that offer a path to sustainable growth, while pushing on structural reforms to promote competitiveness and on medium-term fiscal consolidation. Current pressure by the EU’s Commission and the eurogroup on Spain, Italy, Portugal and Greece, to keep slashing public spending has been overdone. It is a course that leads to recession, further weakens Europe’s financial sector and increases domestic political opposition.
Meanwhile, in the US, fresh attempts to secure a constructive consensus over fiscal policies are also essential, including tax reform. It would be reckless to have a repeat performance this year of the debt-ceiling farce that we saw in Washington last year.
Every emerging market sovereign debt crisis was accompanied by a banking crisis. This lesson has largely been lost on the European politicians and officials who are forging ahead with new regulations, plus increases in capital requirements ahead of the Basel III implementation schedule, while ignoring the impact of the European sovereign debt crisis and the soft economic conditions on bank balance sheets. Policies need to be rapidly assembled to strengthen the ability of eurozone banks to power credit growth at this time. Matters are certainly not helped when some political leaders continue to support the introduction of a new tax on financial transactions. In the US, the contribution by the financial sector to growth is less than it should be because of continuous uncertainties about how Dodd-Frank will be implemented.
Two important lessons from emerging market sovereign debt crises are that contagion is always greater than policymakers anticipate, and time is the enemy. Financial markets are now signaling that the clock is running fast and that the impact of further delay in acting resolutely, especially in the eurozone, will be to deepen Europe’s problems and to spread the pain to a still greater degree far beyond Europe’s borders.
William R. Rhodes is President and CEO of William R. Rhodes Global Advisors and author of Banker to the World – Leadership Lessons from the Front Lines of Global Finance
Emily Vogl, Frank Vogl