TWN Info Service
on Finance and Development (May10/02)
The Star (
In the past developing
counties including in
The global economy
is slipping into a new crisis, with
It is quite surprising
The developing countries affected had always been accused of causing their own problems, with the faults variously attributed corruption, mismanagement, bad governance and crony capitalism.
But it is increasingly difficult to ignore structural factors that contributed to the financial crises through the years.
If the lessons had
been learnt from the Asian crisis that started in 1997, perhaps this
European crisis would not have happened. On the other hand, it is also
vital to learn from Europe's crisis so that
In Africa and
These crises exploded the myth that foreign loans to governments were safe as they could not default. The pendulum then swung and it was thought to be safe to lend to the private sector as it would use the loans for profitable ventures.
The Asian crisis arose
when too much foreign funds went to local companies. This was made
possible by financial liberalisation and deregulation.
The relaxation of rules
also enabled foreign funds and firms to engage in currency speculation
and manipulation. The resulting collapse of the Thai baht had contagion
The Asian crisis exploded the myth that foreign loans to companies were safe because the private sector will make correct loan calculations and invest in profitable projects.
Now the European crisis is exploding the myths that European countries are well governed economically, that there is no or little risk in loans to their governments, and that countries within the Eurozone are especially safe as any nation in trouble will be helped by the others.
Many European governments have built up large debts and the loans have to be rolled over or new bonds have to be issued to service old loans and fund new budget deficits.
Speculators have been blamed, including by some European governments, for making the situation worse by accentuating the increase in risk premium on Greek debt and the decline in the Euro.
Last week the credit rating agency Standard and Poor downgraded Greek government debt (to junk status) as well as the debt of Portugal and Spain This triggered panic until moves for a final Eurozone-IMF package calmed the situation at the week's end.
The package is now
expected to be Euro 120 billion to cover three years' needs. Even then
a number of economists have concluded that eventually
The fallout of a Greek
default can be serious as European banks have $189 billion exposure
to Greek loans. They also have claims of $240 billion on
There are concerns
that the crisis may spread to other countries through contagion. According
to OECD data, in 2010 the public debt to GDP ratios are 95% for
Meanwhile these countries
are preparing austerity measures that are bound to cause a lot of pain.
In return for the loan package,
The angry reaction
to this news in violent street demonstrations over the weekend shows
how difficult it will be for
Governments have to be disciplined in managing public finances and in limiting deficits and debts. There also has to be the re-regulation of finance to avoid excessive leverage, speculation and unethical practices.