Archive for July, 2010
In the days following publication by the European Union of the long-awaited stress tests of its banking sector, the market reaction—judged by the evolution of the euro, bank stocks, and peripheral spreads—has looked positive. This makes sense. The hundreds of pages of analysis of the impact of the stress tests have focused on individual banks, criticized the scenarios used in the stress test as overly harsh or not harsh enough, and as more or less adequate or stressful.
Have we not heard it all before? The bank stress tests are not sufficiently transparent, the conditions are too soft, and nobody knows who will put up the financing for necessary recapitalization of weak banks. But after the US bank stress tests were published on May 7, 2009, the Wall Street Journal announced: “Worst-Case Capital Shortfall of $75 Billion at 10 Banks Is Less than Many Feared; Some Shares Rise on Hopes Crisis Is Easing.” A massive stock rally started that lasted for months.
This week Ireland became the latest “eurozone peripheral economy” to see its sovereign credit rating downgraded by the credit rating agencies. This follows similar earlier downgrades of Portugal, Spain, and of course Greece. But this downgrading trend is actually good news for the European economy as a whole and truly excellent news for Germany. When money is tight—as it will be in Europe for the foreseeable future—the credit provider (Germany in this case) is strengthened. Its leadership role in Europe is becoming entrenched.
Michael Mussa assesses the pledge by G-20 countries in Toronto to move toward fiscal consolidation, despite pressure from the United States not to withdraw stimulus too quickly.
Edited transcript, recorded June 28, 2010. © Peterson Institute for International Economics.
Steve Weisman: A notable outcome of the Toronto G-20 Economic Summit is the apparently unanimous view that it’s time for the world’s leading economies to undertake fiscal consolidation. Michael Mussa, senior fellow here at the Peterson Institute for International Economics, is that a good idea?
Op-ed in the Moscow Times June 23, 2010 The most striking thing about this year’s St. Petersburg International Economic Forum was Russia’s new, pragmatic consensus. President Dmitry Medvedev put it succinctly in the title of his introductory speech: “We have changed.” The pretexts of building state capitalism are gone and replaced by pragmatic problem solving. […]
Op-ed in Eurointelligence June 22, 2010
Twelve years ago, the Asian Financial Crisis hit. The International Monetary Fund took a common approach across the crisis countries, prioritizing fiscal austerity. In retrospect, outside observers and the Fund itself came to the conclusion this was a mistake—while appropriate for Indonesia, the “It’s Mostly Fiscal” approach made the situation worse than it needed to be in South Korea, with negative spillovers for the rest of the region. The euro area governments, under pressure from Berlin and Brussels, are repeating this mistake.
European politicians, particularly in Germany, are visibly sick of Americans and others telling them that imposing uniform austerity beyond Greece and Portugal is in error. But facts are facts, and it is an error. The experience of the Asian Financial Crisis is directly relevant, and the willingness of the IMF to reconsider its position in the time since would be a good example to follow. What matters is getting policies right, not adhering to a foolish consistency, either in policy recommendations across countries or in publicly taken positions.
Op-ed in the Wall Street Journal
June 23, 2010
Among the most widespread criticisms of China’s stimulus program is that it is financed not with increased budgetary outlays but rather with a massive increase in bank lending. The increase in loans outstanding in 2009 was a historic high of 9.6 trillion yuan ($1.4 trillion), almost twice as great as 2008. The critics charge that inevitably the quality of lending must have declined and that Chinese banks are likely to face a growing mountain of nonperforming loans. In this view, dealing with this glut of bad debt ultimately will require another central government injection of public funds into the banks, setting back China’s transition to a commercially oriented financial system.