Wednesday, July 28, 2010

When fiscal stimulus turns into fiscal drag

Analysts in panel give their take on the state of the world economy

PEOPLE wondering whether the economy is out of the woods still have reason to seek refuge in the trees.

Experts on the third NUS Business School-The Business Times CEO Luncheon Panel yesterday warned that the recovery of developed nations' economies was slated to lose momentum after the fiscal stimulus runs out.

'The best part of the recovery is over. Fiscal stimulus is going to turn into fiscal drag for most of the developed economies by the end of this year,' said Manu Bhaskaran, director and chief executive officer of Centennial Asia Advisors, at the luncheon.

Mr Bhaskaran pointed out that in the United States, housebuilders' confidence levels have plunged.

In July, the National Association of Home Builders/ Wells Fargo Housing Market Index (HMI) fell to its lowest level since April last year, as the federal home buyer tax credit programme expired.

Fixed mortgage rates in the US also declined to all-time record lows while housing starts in June fell to 5 per cent.

The outlook, while not abysmal, is turning out to be a cautious one, according to Mr Bhaskaran.

'Going forward, the cost of capital is going to be higher and fiscal tightening is going to be here to stay for many years to come,' he said.

On a more controversial note, Duan Jin-Chuan, director of NUS's Risk Management Institute, recommended during his talk yesterday that Greece default on its enormous debt.

'Greece can stay in the eurozone and massively deflate its economy or leave the eurozone to regain control of its monetary policy,' said Professor Duan.

Neither would be likely, which meant that defaulting on its debt would be the most probable outcome.

'Greece should consider the third option, which is to exercise its sovereign immunity, default on its debt and stay in the eurozone,' said Prof Duan.

'Default is a legitimate option, morally and legally, and should be exercised from time to time. Otherwise, why did the issuer pay the premium in the first place?'

He stressed, however, that he was not advocating a disorderly default of Greece's debt, but rather one involving negotiations and coming to reasonable terms like coupon payments after the declaration of default.

The euro, however, should continue to shuffle along for a while, according to him.

'The statistics give me no reason to think that the euro can't survive another 10 years or more, even if it may not look pretty.'

Source: Business Times, 28 Jul 2010

No comments:

Post a Comment