As global stock markets continued tumbling, Kurt Sansone spoke to leading economists and asked them where the crisis is heading.
Stock markets have been on a roller coaster after the shock announcement on Friday that the US credit rating was reduced by one notch as analysts attributed the decline to lack of trust.
“The root cause would seem to be lack of fiscal prudence in the US and a number of EU countries, which led to lack of confidence in sovereign bonds,” economist Lino Briguglio, from the University of Malta’s Faculty of Economics, said.
According to Edward Rizzo, director at Rizzo Farrugia Stockbrokers, the MSE share index yesterday registered its worst daily performance since March 1999. He said the market had declined by 18.8 per cent since this year’s high on January 27. (It recovered 1.2% today)
Investors continued deserting the share market for safer havens such as gold, which saw its price soar to a new record of $1,771 an ounce.
Prof. Briguglio said uncertainty still prevailed in the eurozone over whether the bailouts given to Ireland, Portugal and Greece would solve the problem as Italy and Spain also tottered on the brink of collapse.
The European Central Bank on Monday intervened directly by buying bonds to ease the pressure on Italy and Spain, which were experiencing increasing interest rates on their 10-year bonds that would stifle their ability to borrow.
Uncertainty was also fuelled by lack of trust in the US, Prof. Briguglio said, which intensified following the downgrading of the country’s credit rating despite the political agreement reached to increase the debt ceiling.
Although the turmoil is limited to the financial markets, talk of a second recession is starting to gain ground amid fears that economies will start to bear the brunt of uncertainty.
“The financial turmoil will not necessarily lead to a recession but if the uncertainty leads to lower demand in the larger economies it may cause ripples in many economies across the globe,” Prof. Briguglio said, adding it was difficult to say where all this would lead to.
It also depended on whether the turmoil was driven by speculators, he said. “It may be possible that once shares reach a certain level, the nosedive could cease and share prices could pick up.”
The decision by Standard & Poor’s to downgrade the US was heavily criticised by veteran economist Karm Farrugia. “Standard & Poor’s are irresponsible people and their decision has created the market panic we are witnessing.”
He said the downgrading was unwarranted because the US still had the world’s largest economy that was in much better shape than most European economies.
A recession would loom heavily on the horizon if markets maintained their current level of scepticism and continued to believe the rating agencies rather than the politicians, he said. “We will have a second recession that will overshadow the great recession we experienced two and a half years ago.”
To get out of the turmoil, economies have to grow significantly in a sustained way, something which has eluded the Western world ever since governments ran up mountains of debt to bail out the financial systems and come out of the deep worldwide recession that struck in 2008.
Economist Gordon Cordina believes the global economy is still “quite far” from solving the fundamental problem of achieving a sufficient level of real output to sustain the debt levels it has run into.
“The only genuine hope appears to be through the growth of the emerging markets,” he said.
Stock markets crashed in 2008, he added, but recovered “remarkably” since then, even though the fundamental problems were not tackled in a sufficient manner.
“What we are experiencing at this stage may be a correction to excessive price increases of stocks in recent months and such volatility can be expected to continue over the coming years, until there is reassurance that world output has increased sufficiently and debt levels have been brought under control,” Dr Cordina said.
Prof. Briguglio believes fiscal prudence, especially by the developed world, is important for global financial stability.
The turmoil would hopefully serve as a major lesson to the developed world that there was a limit to how long a country could keep on spending and ignoring its debt levels, he said. “This applies also to the US, which, in the past, found it rather easier than other countries to print dollars to meet its debt obligations.”
It is a sentiment shared by newly-appointed Central Bank Governor Josef Bonnici, who insisted on prudence as the main driver for fiscal policy.
Increased volatility in the international market was not “a very good situation” because the economy depended on the ability to export, he said.
“We can’t be isolated from all this, which obviously means we have to be even more cautious than we were before both in terms of fiscal policy, the deficit and competitiveness,” Prof. Bonnici said.
While the Maltese economy continued to grow this year, leading to a drop in unemployment, debt levels continued to increase. The government is targeting a reduction of the deficit to below three per cent by year’s end in a bid to reverse the higher expenditure sustained over the past three years.
“The government has to ensure Malta’s fiscal position is sufficiently prudent and competiveness is maintained while businesses and unions have to ensure the right environment for increased productivity and greater flexibility in the labour market,” Prof. Bonnici said.
The big question mark remains whether the uncertainty in the financial markets will persist long enough to create an economic problem in what could possibly be a re-run of the 2008 worldwide debacle.
But as politicians try to grapple with markets driven by perception the answer remains elusive for the time being.