Tough time for policymakers

That these are dramatic times could be felt and seen through the multilateral meetings being held in the global financial and political arenas. These are times that are causing structural changes in the financial sectors and also changes in world views that will impact us for years to come. It must not, however, be only seen as negative but also a time of opportunity.

The globalisation of financial markets is posing big challenges to the policy makers. The speed with which money can be swapped around the world has shortened the time in which policymakers can respond to emerging crises. Over the last few days we have seen a flurry of activity at the highest level like the G7 meeting of the most industrialised countries, meeting of heads of state and of government within the eurozone, meetings at the IMF and World Bank in Washington DC, among others, to intervene with collaborative plans of action that will bail out the banks and other financial institutions in order to avoid that this financial crisis also becomes an economic crisis. I had the privilege to head the Maltese delegations to the IMF and World Bank meetings to participate in the discussions that tackled issues that, up to some days ago, were unpredictable in their wide-ranging impact.

It has become common knowledge what sparked off this shock wave of events, starting from the bubble burst in the US household market where the accumulated debts were beyond sustainability. This spread to other credit markets and financial institutions all over the world. The large banks lost the confidence in each other and stopped lending to each other. The rescue plans that are being launched to mitigate these problems are dealing with the issues of solvency, liquidity and funding of the global financial sector. People are not talking of return on capital but return of capital.

But what has led to this crisis? Were there early warning systems in place to enable countries to avoid such a disaster? This is definitely a systems failure with weaknesses and negligence to be found at different levels of the system. The fundamental process of risk management, surveillance and regulatory measures has failed to avert this crisis. Once the first intervention of injecting enough funds to stabilise the situation is completed it is hoped that the players will regain confidence and lending between banks will be reinstated.

However, the taxpayers are emotionally upset and want justice done with those who had the responsibility to ensure the proper running of business so one has to be careful of avoiding the privatisation of gains and socialising the losses.

Is Malta immune from all that is happening in the world? Are we only passive observers and need not worry? In a recent press conference, Finance Minister Tonio Fenech rightly said that our banking system and financial institutions are adequately capitalised and supported by enough liquidity through several savings accounts of Maltese investors. Therefore, our banking is resilient and conforms to the conservative criteria of our regulatory regime. Moreover, our local banks have not exposed themselves significantly to financial instruments and derivatives that are interconnected to the conglomerates that are experiencing the present problems. However, we still need to be vigilant and monitor the situation on a daily basis to avoid any indirect impact adversely hitting our economy.

We, as a country, need to heighten our awareness and be aware of the developments that may morph into an economic crisis. Participating countries at the IMF and World Bank meetings held over the last few days are assuming that the crisis will take considerable time to stabilise and every country will have to do its utmost to avoid global recession. When confidence is lacking and the economy experiences a slowdown, it is inevitable that those elements that are not essential are the first to be sacrificed. We need to ensure that our economy retains its resilience to confront recession by controlling public expenditure while at the same time continuing to enhance growth.

It is a tough time for the policy maker as the immediate task is to ensure that there is stability without losing innovation. Once the present psychological reactions of fear, anxiety and confusion are subdued one has to be careful that a new regulatory regime, the supervisory and risk management systems are not so rigid that they will stifle growth and investment. These difficult times require effective governance to lessen our vulnerability to the effects of a global recession.

Dr Azzopardi is Parliamentary Secretary for Revenues and Land within the Ministry of Finance, the Economy and Investment.