Friday, May 7, 2010

Sober reminder of fragile recovery

HOW quickly sentiment sours. Just weeks ago, the broad consensus of expert opinion was that the international economy was well on the road to recovery from the financial meltdown of 2008-9. In Singapore, the official growth forecast range for 2010 was hiked 2.5 points to 7-9 per cent, on the back of very strong first-quarter estimates. The US economy appeared to be on the mend, even if employment creation remained weak. There was concern over the unwieldy sovereign debt of European nations like Greece, Portugal and Spain, certainly; but financial markets continued to rise in tacit belief that the system would resolve the problems.

Not any more. The system did intervene; the European Union and the International Monetary Fund (IMF) responded to rescue pleas from Greece, the worst-hit of the indebted countries, with a 110 billion euro (S$197 billion) bailout package.

But investors have not been reassured. After a brief upsurge following the announcement of the rescue offer, markets everywhere have tumbled on fears of a Greek default and, worse, the spreading of the debt crisis to other economies.

Even Asian bourses, including Singapore's, have got the jitters: a sober testimony of how intimately linked today's financial markets are.

Inevitably, the situation raises the spectre of a 'double dip' - a repeat of the recent financial holocaust. That crash was triggered by the infamous sub-prime debt crisis in the US mortgage industry. Could it be an avalanche of European sovereign debt that takes the system down this time?

That concern, while genuine, should not be overblown. Certainly, it is a crisis for the eurozone, but its financial and political leaders will surely have learned from the lessons of just a year ago. The EU and IMF are working together on the Greek debacle, and stand ready to stanch the bleeding should Spain or Italy start haemorrhaging. German Chancellor Angela Merkel is fronting an important initiative to bind euro-states to a strict debt regime to prevent such crises from developing, and if they do, to allow orderly defaults by the errant states.

It is possible, even likely, that major European banks will be hit by the crisis and, in a worst-case scenario, drag Europe into another recession. If that happens, other regions (notably the United States and Asia) could be affected, given the size of the European economy and its extensive trade and investment ties. All these possibilities need to be faced and dealt with rationally, with firm policies implemented to ensure that problems are resolved at source. Where possible, they should be cauterised to keep the contagion from spreading.

It might not even come to this. The US economy is showing encouraging signs of strength, while in Asia, China has moved quickly to stop property and finance bubbles from building up. There is a clear resolve on all fronts to keep the recovery going. If Europe can get its act together, the feared second dip could turn out to be no more than a blip.

Source: Business Times, 7 May 2010

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