As an emerging economy within an enlarged eurozone, Malta has enjoyed rapid growth in 2007. This is commendable. But this year the island ‘s progress is dented by the spreading global credit crunch and a possible recession in the US and in the UK. Will our banks need bailing out? Not likely as they rank 10th soundest in the list published by World Economic Forum.
This conviction obviates the need of a bailout fund which has been de riguer in many economies. On a positive note, with prudence, our banks may attract millions of foreign deposits from eurozone countries suffering chaos in banking circles.
Such opportunity reflects the resilience and prudent lending policies of our banks. It does help that the extra effort being made to supervise financial institutions are better communicated so that public confidence is maintained even during these times of financial mayhem. Buffeted by unprecedented financial turmoil, emerging economies such as ours face the daunting challenge of fighting the twin evils of high inflation and slower economic activity - although a possible softening of oil prices could moderate such pressures. Oil hit a low of $77 per barrel. To balance our budget and trim energy tariffs lower oil prices are crucial. Will the global drop in energy demand slow down oil prices back to $50 from a record-high of $147 a barrel which it peaked in early July? Nobody can tell.
The vagaries of the oil market are devious yet a number of analysts predict much lower prices this winter.
Food prices will drop as well.
There is renewed hope after a larger-than-expected build-up in US crude stocks and growing fears of a US recession.
The Organization of the Petroleum Exporting Countries (OPEC) could even start cutting output levels at their next meeting if there is no reversal in the downward trend but the signs are rosy for cash-strapped oil importing countries. There seems a consensus not to let a widespread recession to flower. Finance ministers of G7 countries meeting last week urged for a consolidated approach to help calm the waters and typically, Britain favoured the remedy of partly nationalising ailing banks.
But there was no agreement on a one size fits all solution that with hindsight would have avoided the Icelandic systemic crush.
The turmoil and volatility in stock markets does not seem to be a temporary phenomenon but that it would rather persist. Economists state that the liquidity shortcomings triggered by the sub-prime lending that started last summer would get worse this winter.
The obvious question readers may well ask is if our banks can avoid feeling the chill from an impending US and European slowdown.
Will local banks see a severe drop in profits and start to impose heavier charges on consumers as a ploy not to lay off workers?
Something must give to make up for the precipitous drop on fair values of massive overseas portfolios.
As stated earlier, local banks can ride the storm much better since their lending ratios are lower than others.
But it is not wise to ignore the global reach of such a tidal wave that sunk triple rated institutions worldwide.
In Britain, taxpayers complain their money is being mortgaged to heal solvency problems in failed institutions that were greedy and not properly supervised - aggressively abusing of their liquidity obligations managed by fat cats riding high on bonuses. No generals fell on their swords in banks bailed out by governments, so one may ask what can the small saver do to weather the looming storm.
Shoring cash under mattresses is not an option. Paradoxically, in times of acute uncertainty, real estate did serve as a shelter but this sector has also devalued.
Back to Malta, government announced it is confident that economic meltdown in the US is not expected to have any significant impact on our banks. Depositors are protected up to €100,000.
As members of the eurozone, we are in the same boat as the other 15 members who individually have taken remedies to solve their banking problems.
Typically, Ireland whose banks rank 9th in the World Forum issued a blanket unlimited cover which immediately sucked millions from British savers who switched over accounts much to the chagrin of Mr Brown. Concurrently Germany bailed out one of its fourth largest mortgage banks.
Here one can admit that effective tools within monetary armoury are limited in securing quick fixes and restoring lost confidence so governments act in panic mode.
The British government decided to nationalise Northern Rock and Bradford & Brindley within days. British Prime Minister Gordon Brown, has been widely criticised over the demise of two of Britain’s biggest mortgage lenders. In turn, he blames the rapid spread of the credit crisis on US sub-prime mortgages and points to failings in global financial supervision which in his opinion must be overhauled.
It is felt that in spite of the huge default of the Northern Rock bank few expected that the spectre of nationalisation to be used as the most appropriate antidote. Party cronies blame this mess on poorly supervised and unregulated financial system – as regulators were caught asleep at the wheel. Concurrently, some analysts feel that the frenzied bid to cut interest rates to avoid a global recession is sending out the wrong signals. ECB have cut interest rates by 50 points from 4.25% to 3.75%. And yet the stock market does not seem convinced that these rate cuts on their own will be enough to avoid a recession. The recovery package of $700bn approved by the US senate is not enough to kick start the sluggish economy.
Once the massive interest rate cuts have worked their way through the US economy, one can only hope that the healing process will not take unduly long.
Politicians were caught with their pants down and did not anticipate the severity of the banking debacle.
Stoically, the US rescue fund offers no less than €140 billion in the form of reduced taxation and subsidies to the poorest households in an unprecedented effort to boost the SMEs. It may also be relevant here to give some background explaining how the US crisis began due to an inflated property market.
The bubble burst because of defaults on loans given at high interest rates to property buyers without adequate collateral and dubious repayment prospects.
So is there a solution in sight to stem the tide of this global tsunami?
Cynics retort that IMF should make as its main focus the surveillance of the global economic and financial system. Refocusing its role should result in this institution to help prevent crises and not simply to react to resolve them as in the past. In Europe we expect a tough time ahead this winter unless the credit crunch is resolved by a concerted effort of all members using the best monetary tools available.
Suddenly it looks like a nasty walk in a Willy-Wonka surreal factory tour. Back to reality and we must take hold of our senses if Malta wants to cut its deficit by 2010.
Let us all pray that President Bush leads us away from a recession.
As for tiny Malta in our budget proposals we must improve our productivity and pull our socks up in order to buttress the drop in tax revenues due to lower bank profits and the inevitable slide in British tourists.
Partner at PKF – an audit and business advisory firm