Adresa
Piaţa Montreal, Nr. 10
Cladirea World Trade Center, Etaj 2
Bucureşti, Sector 1
Telefon
+40-21-202.04.00
Fax
+40-21-319.11.69
Website
www.rbsbank.com
The current financial-economic crisis is one of the deepest since 1929 episode and definitely the most synchronised. Globalisation caused the effects of the fast spreading US subprime credit crisis to be felt across the world. In comparison to the Great Depression of 1929-1933, when the negative effects were exacerbated by trade protectionism, the reaction of authorities has been more appropriate, based on fiscal and monetary policies. Keynesianism has resurfaced, and interventionism of authorities has become the central pillar of policy decisions.
In its Global Financial Stability Report released in April 2009, the IMF estimates that banks and other financial institutions will face aggregate losses of USD 4.1 tn between 2007 and 2010 (7% of total assets originated in US, Europe, Japan) - comprising USD 2.7 tn losses from the United States, USD 1.2 tn from Europe and USD 149 bn from Japan. For the banking sector only the losses are estimated at 2/3 of total amount of USD 4.1 tn (i.e. USD 2.8 tn). The IMF report says that banks have already taken USD 1 tn of write-downs since the crisis began (out of which USD 550 bn in United States, 154 bn in Euro zone, 110 bn in Great Britain by the end of 2008). During this period, USD 0.9 tn of fresh capital has been raised.
The fiscal stimulus packages, monetary easing (even quantitative easing - such as the purchase of T-bonds by the central banks), liquidityinjection, and interbank loan guarantees have softened the impact of this recession. The anti-crisis measures are similar in case of emerging markets and developed countries, but some differences can be observed. In case of emerging markets the measures imply foreign exchange support as the exposure to this risk is high (FX intervention, and FX swap lines), and less bank recapitalisation and company bailout programmes which are much more common in developed countries. In the emerging markets the banking systems look healthier as no significant volume of toxic assets appeared in balance sheets. But the risk of bailout remains as the deterioration of quality in emerging markets financial assets lags behind the economic slowdown; rising unemployment and bankruptcies are causing nonperforming loans to increase and the need to recapitalise. On a regional level, emerging markets are faring better in Asia and Latin America than in Central and Eastern Europe the former having learned from their previous episodes of crises, limiting their FX exposure and maintaining an adequate level of credit/domestic deposit ratio. The CEE countries are worse hit by the recession as their economic expansion relied more on external funding that has dried up as the effects are felt in more developed economies. Hence there have been more multilateral financial agreements (led by the IMF) in Europe than in the other two regions.
The recession is less aggressive in countries that can implement more flexible fiscal and monetary policies, but the initial conditions at the time of the crisis are important. Countries whose governments have followed counter-cyclical policies and saved during boom periods are having a greater chance of getting through the crisis more easily by increasing spending. The additional public spending should be mostly oriented towards infrastructure investments as the sustainability of an increasing deficit in the short term becomes feasible, the value added created in the future by these investments reversing pressure on the public debt. Depending on how long this crisis could last, governments need to carefully calibrate their current expenses with their current and future financing needs.
The central banks have slashed interest rates to ease monetary/credit conditions; these actions have been more aggressive in developed countries (close to 0%) than in emerging markets which faced higher inflation at the time. However, expansionary monetary policy and too much liquidity injected into the market in the long run will induce inflationary risks if they are not reversed once the recovery begins. One trap is the increasing unemployment rate that could keep authorities in a waiting stance, delaying their tightening cycle (analysts have already warned that this could occur in the US). But it is normal to see lowering unemployment lagging behind a recovery, as employers wait until they are certain that the recession has ended before starting hiring again.
The initial conditions of Romania's road towards the crisis epicentre were not supportive. Large current account deficits increasingly financed through short term debt sustained internal demand (consumption and investments) at a level much higher than the capacity of internal production. Moreover, governments continued to postpone public sector reforms, and pursue pro-cyclical fiscal policies (spending more in a growing economy). In 2008 the government "succeeded" in enlarging the fiscal deficit to almost 5% of GDP while economic expansion was of 7.1%. Even worse was the fact that such a high deficit was created by accelerating current spending (wages, pensions) that is inducing certain rigidity in future public expenditures. No savings were made by Romanian government, and the ratio of fiscal revenues to GDP (32%) is the lowest level in Europe. The fiscal evasion is already high, being a weak point of administrative body in collecting revenues in a stressed economy. Romania's economic strengths at the beginning of this crisis were its relatively high international reserves, low level of public debt and a well capitalised banking sector (although exposure to external financing was high as the credit/deposit ratio, at 1.30, was fairly high by the end of 2008).
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