Wednesday, 22 October 2008

Libor continues to fall - but strain spreads into whole countries' financial systems

Interbank lending rates continued the downward trend noted this morning during today - as shown in the graph below. Three month dollar libor fell from 3.84 per cent to 3.54 per cent, and one month dollar libor from 3.53 per cent to 3.28 per cent.
But while the situation in the banks in the central core of the international financial system was, at least for the present, being stabilised the financial shocks waves were spreading outwards taking some more acute forms as they went.
Iceland's crisis is well known. An International Monetary Fund team has been sent to attempt to stabilise the Ukraine and Pakistan is also discussing a deal with the IMF. In Argentina the government has announced that it is taking over pension funds and there is fear among financial institutions of a state debt default - the interest rate on government bonds has risen to 31 per cent. Hungary today raised interest rates by three per cent following a 13 per cent fall this month in the forint's exchange rate - given that 66 per cent of Hungary's domestic debt is denominated in foreign currencies such devaluation places great strain on debt repayment.
The financial crisis is therefore logically, spreading from banks, to insurance companies, hedge funds and other financial institutions to now threaten countries.
While breakdown, although not recession, is at least for the present being contained in the central core of the global economy it remains to be seen if this can be achieved on its periphery.

A Note. In light of the importance of the position that China takes on the international financial crisis it is of some interesting to note that the New York Times reports that it refused to bail out Pakistan. The paper notes: 'The thin results from the China trip [by the Pakistan government] were of little surprise to Western donors. Asked about the likelihood of Pakistan winning the direct cash infusion it was seeking, a senior Chinese diplomat was reported by Western officials to have said, “We have done our due diligence, and it isn’t happening.”'

1 comment:

gavin said...

The effects of the international financial crisis in the ‘periphery’ of Europe are beginning to be felt here in Poland. At first the government and media put out the idea that the crisis would not be felt here. It was ironic to see neo-liberal commentators say that this was due to the fact that the Polish banks were still relatively regulated (despite their best efforts over the past two decades) or that the banks investments were less ‘sophisticated’ than in the West. No Polish banks had collapsed , mainly due to the fact that most of them are subsidiaries of Western banks. However, in the past couple of weeks this idea of Poland surviving the crisis untouched has become untenable.

Firstly, the crisis has begun to hit some of Poland’s neighbouring countries. Ukraine is in particular trouble now. Since January its stock market has lost about ¾ of its value and there is a serious liquidity crisis that has caused some factories to even stop production. People are pulling money out of their bank accounts and the government has been promised $15bn in credit by the IMF. Such a situation is also causing political chaos in the country. Another country close to Poland suffering acute problems is Hungary. The Hungarian stock market has fallen by over 42% since the beginning of September and its currency, the Forint, has declined by more than 15.5% in relation to the euro during this time. As noted in the above article this led to the Hungarian government to raise interest rates by 3% yesterday!

The situation in Poland, although not as immediately drastic, is following a similar path. Its stock prices have declined by nearly 40% since September (it fell by 7% yesterday – 22/10) and the price of the Złoty to the euro has declined by 13% since September. The real problem for Hungary and Poland is that they are heavily dependent on foreign capital, with, for example, 1,2 million people in Poland owning credit in foreign currencies (primarily the Swiss franc and the euro.)

It seems to me that the governments in the richest states have pumped billions into their financial systems, which is not possible in the periphery countries, thus leading to a capital flight from the periphery to the core.

Since the period of economic stagnation at the turn of the century Poland’s economy has picked up significantly since joining the EU. It has enjoyed growth of over 5% in the last year or so and unemployment has fallen from around 20% to 10% since 2004 (obviously spurred by the huge emigration of labour). This has been helped by a) a growth in neighbouring economies, particularly Germany and Russia b) and increase in the inflow of private capital since joining the EU c), and very importantly, large amounts of direct funds coming into Poland from the EU, which has acted as a kind of EuroKeynsian protection and d) the advantages for exporters of being able to operate freely within the European market.

It seems that these conditions are now in danger. The EU has not had a coordinated response to this problem and therefore the poorer states are not being protected from the crisis and in fact are suffering because they cannot intervene in a way the richer states have done. Whilst Gordon Brown was receiving plaudits at the recent EU summit for saving the world, he was also rejecting the idea of European-wide rescue package.

The positive effects of Poland’s entry into the EU has meant that its population has become one of the most pro-EU in the continent. This is despite the presence of strong anti-EU political forces in the country, including the President and the main opposition party. The danger is that the present situation could be used by these forces to build anti-EU sentiment in the country. There are a number of areas where this could happen. Firstly, the present government is keen to take Poland into the eurozone as quickly as possible. While there are many attractions and advantages to this, it would be disastrous for the government to meet the strict budget requirements at the moment (i.e. budget deficit of 3% of GDP.) The government is using this as an excuse to cut social spending and at present is pushing through a bill to commercialise (read: privatise) some hospitals. Secondly, the European commission has demanded that the Polish shipyards in Gdańsk and Szczecin return the 2.3bn euro that it has received in subsidies from the government. This would lead to tens of thousands of people losing their jobs and have huge knock on effects in the region. Remember it was in the Gdańsk shipyards that the Solidarność strikes started in the early 1980s. Already people are beginning to say, how is it that banks can be bailed out but industries cannot be supported.

It should be remembered that although the 1930s depression started in the richest states of the world, the recession in Eastern Europe was far greater than that in Western Europe. Its effect meant that by the mid-1930s governments had begun intervening directly into the economy as foreign capital dried up, whilst politically there was the establishment of authoritarian governments: e.g. the pro-Fascist Horthy regime in Hungary, and Piłsudksi’s authoritarian government in Poland. Therefore the current crisis may not just have some serious economic effects in Eastern Europe but also have some very negative political effects, in what is already an unstable region and area of geo-political manoeuvring. In order to strengthen progressive pro-European political sentiment in the region, it is imperative that there is a European wide response to this crisis.