30/11/2011 - 10:12

Are EU’s technocrats the right people to solve crisis?

30/11/2011 - 10:12

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The eurozone debt crisis has become the major risk to the global economy and it is already starting to affect Australia.

The eurozone debt crisis has become the major risk to the global economy and it is already starting to affect Australia.

MARKETS worldwide continue to falter over global debt fears stemming from the eurozone crisis and an impasse due to the collapse of the congressional budget savings super-committee in the US. 

Signs of the European crisis spilling into the global economy are everywhere.

As a result, European banks have started to cut lending, which is already being felt by companies in Africa, Australia and Latin America, making borrowing harder and more expensive.

It was reported last week that French lender BNP Paribas may have reneged on a commitment to provide as much as $300 million to a $1.95 billion syndicated loan for Australia’s Seven West Media, leaving the rest of the syndicate, mostly Australian banks, to fill the gap.

Continental banks are faced with rebuilding their ‘tier 1’ capital to 9 per cent of assets by June 30 2012, which is 2 per cent higher and seven years earlier than the rules recently agreed in the Basel III Accord of banking supervision.

ANZ chief executive Mike Smith has renewed his call for global regulators to slow the pace of banking reforms, saying they could choke the world’s economic recovery while Europe is in the midst of a financial crisis.

Mr Smith confirmed the new bank capital requirements could curb lending by institutions such as ANZ to borrowers in developing economies across Asia, making the cost of such lending more expensive.

NAB chief Cameron Clyne has issued a similar warning for Australian borrowers.
Mr Clyne told a business lunch in Brisbane last week that: “Money is very tight out there at the moment”, and that the threat of a new credit squeeze was “increasingly real”, impacting on future interest rate cuts. 

And in Europe, the political fallout continues, with Spain now the third eurozone member in as many weeks to change government.

Spain’s socialists became the fifth government to be toppled by the euro debt crisis this year, following Portugal, Ireland, Italy and Greece.

However the profoundly undemocratic nature of the euro project was further exposed with the appointment of two new prime ministers to head both Greece and Italy.
Neither leader was elected to parliament.
Former European central banker Lucas Papademos, 64, has been installed as the prime min-ister of Greece.

Mr Papademos was an econ-o-mist at the Fed-eral Reserve Bank of Boston, a vis-iting pro-fessor of public policy at the Kennedy School of Gov-ern-ment at Har-vard Uni-ver-sity, a vice-pres-i-dent of the Euro-pean Cen-tral Bank and a Tri-lat-eral Com-mis-sion member since 1998.

An equally stunning outcome has been the swearing in of Mario Monti as the new Italian prime minister.
Mr Monti com-pleted grad-uate studies at Yale Uni-ver-sity, where he studied under James Tobin, of global Tobin transaction tax fame. 

He is also a member of the Euro-pean Com-mis-sion and Euro-pean chairman of the Tri-lat-eral Com-mis-sion.

Like his Greek counterpart, Mr Monti is a technocrat, and chose a non-elected cabinet of 12 technocrats.

The official line is that Silvio Berlusconi’s successor will implement drastic spending cuts and necessary structural reforms to nurse the Italian economy back to health. 

A similar story is being told about Mr Papademos in Greece.

One cannot fail to see the irony of banking technocrats being appointed to lead these two governments when the current debt crisis was fuelled by poor central banking decisions and a collapse of the banking system.

Both have a track record of demanding austerity reforms, while mismanaging the very financial policies they had responsibility for. In the financial world, bankers face a number of risks in order to conduct their business.

How well these risks are managed and understood is a key driver behind profitability.

The very first duty of a banker is to identify credit risk and the risk of loss arising from a borrower who fails to make repayments.

One looming default risk the technocrats permitted is the Greek government debt, now standing at about €300 billion ($A500 billion).

Unfortunately, if the Greek government, its creditors, and the European Union are hoping to prevent Greece from defaulting on its debt, they should know that history isn’t on their side.

While a European sovereign debt default has appeared inconceivable in recent history, defaults and rescheduled debts were actually a common feature of the 19th century European financial landscape up until the end of World War II.

According to a 2008 paper entitled ‘The Forgotten History of Domestic Debt’ by economists Carmen Reinhart and Kenneth Rogoff, Greece has spent 50 of the past 200 years in default.

Greece has defaulted or rescheduled its debt five times since gaining independence in 1829.
The once great imperial Spain has the lead in Europe, at 13 times since 1476.
Germany has done it at least four times and France defaulted at least eight times. 

Amazingly, Italy has no history of peacetime sovereign default.

Reinhart and Rogoff state that Greece and a few other European countries have escaped their status as serial defaulters by integrating into Europe.

When Greece embraced the euro in 2001, it borrowed more at lower rates, enabling its government to boost spending.
Terrible accounting and deception continued unchecked until former PM George Papandreou took office in 2009, and reported that Greece was essentially broke.

The authors concluded: “Given the apparent large historical role of domestic public debt in helping to precipitate developing country external debt and inflation cries, it is a great curiosity indeed that today’s multilateral financial institutions have never fully taken up the task of systematically publishing the data.  

“This failure, especially in light of these agencies’ supposed role at the vanguard of warning policymakers and investors about crisis risks, is stunning.

“Instead the system has seemed to forget about the history of domestic debt entirely, thinking that today’s blossoming of internal public debt markets is something new and different.”

The banking technocrats made the dangerous assumption that Greece would never default again because this time is different due to the European Union.

This also begs the question of why investors were willing to continue lending money to Greece by purchasing the country’s bonds?
The simple answer is that most people who have been making the decision to buy Greek debt were using other people’s money to do so.

With the technocrats failing to properly vet their defaulters, one wonders how successful they will now be in their newly unelected role of cutting and spending taxpayers’ money.  

• Steve Blizard is an authorised representative of Roxburgh Securities.


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