Banking system to remain intact but economy will suffer, experts warn
There was a general consensus among business experts quizzed by Business Today this week that the Maltese banking system will remain intact despite the financial turmoil that has hit the global financial system.
However, they disagreed as to whether Malta could be spared from the throes of the global financial crisis, and whether the country would be facing a recession soon.
Business Today spoke to four economic experts – veteran economist Karm Farrugia, senior economist Lawrence Zammit, former Labour Finance Minister Lino Spiteri and former banker and University lecturer John A. Consiglio.
Veteran economist Karm Farrugia said that “on the whole” he agreed with Finance Minister Tonio Fenech’s prognosis that Malta’s financial system would not be affected by the financial turmoil that has hit the global economy.
“Except that our financial system might well be affected by the aftermath of the current crisis when this – and sadly very soon – develops into an economic recession in the ‘real’ economy, of which the financial sector (as distinct from its credit crisis) forms an important real wealth generator for Malta and elsewhere,” Farrugia told Business Today.
On the issue whether the Maltese banking system was indeed as safe as the bankers would like us to believe, Farrugia was positive in this respect.
“Yes, depositors with our banks - at least the main ones comprising around 90 per cent - should feel safe in that the latter have perennially adopted a conservative lending philosophy,” he told Business Today.
This was chiefly done in two ways: restricting credit to local citizens, with prudence and generally also with sound security; and a non-speculative lending-to-deposit ratio which should overcome most crises.
“Banks were allowed total freedom by MFSA to overcharge for their services, resulting in super-profits which obviated the need for them to lend speculatively overseas,” Farrugia complained.
Asked as to how the Government should make the local banking system more resilient to international shocks, Farrugia was telegraphic in his response: “There is no need to change anything.”
Farrugia disagreed with the suggestion that the Maltese Government should extend the guarantee on deposits to cover inter-bank transactions of Maltese banks as well - as the British Government is proposing - to help local banks in their inter-bank transactions abroad.
“Government’s guarantee to local depositors is supremely psychological: no risk to taxpayers’ money.
“It would be foolish to extend this guarantee to lending abroad in whatever form, or to encourage foreign-owned money to our banks which might tempt some of them to go the Icelandic way,”
Speaking to Business Today two weeks ago, BOV CEO Tonio Depasquale said: “As soon as the crisis in ‘Wall Street starts hitting Main Street’, then all economies around the world will be affected and the Maltese economy is no exception since we are operating in a global market.”
Asked whether he agreed with this assessment, and whether Wall Street had started hitting Main Street, as the adage goes, Farrugia said that he agreed with Depasquale’s assessment. “Yes, I do. Not yet, but very soon.
“Its intensity will depend on what the authorities do to mitigate. On Sunday, eurozone heads of Government met specifically to agree a joint course of action, for instance,” the veteran economist said.
“It is not possible to ‘spare’ the Maltese economy: the most we can, and should, do is to cushion the inevitable blow,” he said. “In my opinion, Government should seek the Opposition’s consensus on a wage-and-price freeze for at least a year, entailing, among other things, suspension of all Government’s declared intentions on power tariffs, postpone negotiations on collective agreements with anyone, only COLA awards, no increments to public sector employees, and no price increases by anyone except with the clearance of a specially-appointed board.”
Farrugia said that even if the Opposition’s consensus was not forthcoming, “the situation demands it. No room for bravados, lame excuses, past electoral pledges and suchlike ‘luxuries’.
“What about the potential unemployment?” he asked.
On the issue of whether a recession in Malta was more possible now than ever before in view of the global panic that has hit the financial markets, Farrugia was equally clear. “Yes, certainly. We are an integral part of the global economic system, and undoubtedly of EU and eurozone.”
As featured on sister paper Illum two weeks ago, government stated its intentions to keep the same deficit levels reached last year, that is of €86.6 million.
Commenting on this statement, Farrugia said: “It will be a foolish Government to keep on insisting on deficit reduction next year or budget balancing the year after. Let’s concentrate on the imminent, and very serious, problems.”
On his part, senior economist Lawrence Zammit said: “I tend to agree with Minister Fenech on this point, as our financial system has developed on lines that are totally different from those of the US and UK systems.
“One must remember that the reference has been to Malta’s financial system and not to the economy as a whole,” Zammit told Business Today.
“Until someone does a thorough inspection and analysis, one cannot make any conclusive statements.
“However given the obligations of commercial banks operating in Malta, if there was a problem, they should have already highlighted it,” he said.
As to the resilience of the local banking system, Zammit said: “There is a limit to the resilience of our local banking system, given the openness of our economy. I think that all players need to be committed to apply all the rules all the time,” he insisted.
Zammit did not commit himself on the issue of whether the Maltese Government should extend the guarantee on deposits to cover inter-bank transactions of Maltese banks.
“I think one cannot answer this question until one knows the figures well,” he said.
Zammit expressed his agreement with the BOV CEO’s assessment about the financial crisis and its impact on the Maltese economy when the “crisis in Wall Street stats hitting Main Street”.
“Yes I agree with Depasquale’s statement. Wall Street has started hitting Main Street. It is the extent to which this has happened that is unclear,” he said.
“The government’s policy options in this regard are limited because none of the problems that we are talking about are of its making. However we need to ensure that firms operating here maintain their competitiveness to be able to exploit any market opportunity,” he insisted.
“What has happened in the international economy since that target was set can be described as very exceptional circumstances,” he explained.
“If we can maintain that target given these new set of circumstances, then that would be a very good result. If not, no one in his right senses would criticise Government for not having met the target,” Zammit told Business Today.
“Obviously this does not mean that Government should go on a spending spree,” he warned.
Likewise, former Labour Finance Minister and economist Lino Spiteri was in agreement with the Finance Minister’ assessment of the local banking system.
“The Minister said the banking system will not be affected in its operations. He was right. Our system is supported by a very broad local deposit base. It has no reliance on inter-bank borrowing,” he told Business Today.
Asked whether the Maltese banking system was as safe as the bankers would like us to believe that it was or not, Spiteri said telegraphically: “It is. For the reasons stated above. It would be irresponsible of the media implicitly to cast doubt on that.”
Spiteri said that the Government could not make the local banking system more resilient to international shocks than it was at present. “The only effect is on foreign assets held as part of the systems asset deployment. No one can do anything about any decline in the value of such assets,” he told Business Today.
Spiteri claimed that the question as to whether the Maltese Government should extend the guarantee on deposits to cover inter-bank transactions of Maltese banks as well “betrays a lack of understanding of our system. The system rests on its broad local deposit base. The local banks should not need any help as suggested by you. This question is groundless,” the former Labour Minister told Business Today.
Spiteri agreed the BOV CEO’s assessment about the financial crisis and its impact on the Maltese economy when the “crisis in Wall Street stats hitting Main Street”.
“That was a correct comment, understood by anybody who understands economics. The decline in asset values will lead to a decline in aggregate demand and so in consumption. That will affect all exporting economies, Malta included,” Spiteri told Business Today.
On the question of whether a recession in Malta was more possible now than ever, Spiteri said: “A slowdown should be expected, as explained previously.”
Speaking about whether the Government will be able to keep with its stated intentions of keeping the same deficit levels reached last year or not, Spiteri was equally telegraphic in his response: “It will not. The deficit will rise.”
Finally, former banker and University lecturer John Consiglio said of the Finance Minister’s assessment on the local banking system: “To be categorical and say that Malta’s financial system will in no way be affected is a mistake.
“It is all - as always in economic matters - a question of quantums. To equate the small impact on BOV from the Lehman fallout to some national crisis is absolutely ridiculous.
“That same impact could have well been handled in the course of any normal operations that any bank would be doing as a matter of normal business during any time of the year in normal times,” Consiglio said.
The veteran banker said that Fenech –“no doubt being kept well informed by the people in the profession – spoke in a comparative context in the sense that he can see what went wrong elsewhere and, from the knowledge and information available to him, can deduce that comparative lacunae situations do not exist in Malta.
“To quote a simple example: many of Maltese advances exposures are not to the outside world but to Malta’s environmentally harming building and real estate sector,” he told Business Today.
Commenting about the safety of the Maltese banking system, the former banker did not mince his words: “Yes it is! The honest bankers, and the vast majority of Maltese bankers are honest people -- and I am very proud to have for 42 years formed part of that profession -- will not say flies to anyone, even to their superiors and at their own personal expense. And I know what I am talking about.
“So why should we lie to the small Maltese population which is with us and around us all the time?” Consiglio insisted.
Asked whether, in his view, the Government should make the local banking system more resilient to international shocks than it is at present, Consiglio said that the Government should “carry on doing what it is doing. And the list of what is factually being done is endless.
“Daily monitoring of the local institutions’ operations, on-site and off-site supervision, reviewing regulations and regulatory practices regularly, keeping abreast of markets, institutional developments, and political developments elsewhere regularly, daily consultations with top bankers here and overseas,” he explained.
On the extension of the guarantee on deposits to cover inter-bank transactions of Maltese banks as well, Consiglio said: “Deposit protection and/or guarantee schemes can only have the structures and operate in terms of what is allowed by the EU’s Deposit Protection Directives. Malta’s schemes, run under the aegis of the MFSA, follow rigidly what these Directives say,” he explained.
Commenting about the BOV CEO’s remarks on the effects on the Maltese economy once “Wall Street starts hitting Main Street,” Consiglio said: “With globalisation - a process of which Malta is also an integral part – yes, Malta is already being well-hit by the crisis which is hitting Main Street.
“So consider, among other things, the oil price hike, the rise in foodstuff prices, shortages due to increased consumption patterns and demand elsewhere, climate change consequences, wars and tense political situations elsewhere, migration shifts.
“Well, all of these, and more, are part of “Main Street”/s elsewhere....and we know these are all hitting us hard already,” the veteran banker told Business Today.
Consiglio insisted that the Maltese economy “cannot be completely spared from the global financial crisis. To think so would be a chimera, an illusion”.
“What the people who manage and operate in the economy can, and must, do is to watch events very attentively, being anticipatory in their analysis, being creative in coming up with solutions, seeking ways of being more productive.
“There has to be much more brave thinking ‘outside the box’, such as, no longer continuing to repeat certain beguiling falsities because we have been saying them for donkeys’ years, and refuse to be brave enough to attack the problems that such attitudes have placed the economy in.
He asked whether with 53,000 empty buildings – “factually, national assets that are not productive – shouldn’t MEPA simply put a stop to all permits for more of such building, thus forcing the monetary, and human resources in that sector to be used elsewhere?”.
“Another example, start giving cash grants to all those families having an annual income below, say, €7,000, which they would be obliged to spend on solar water heaters,” he told Business Today.
On the question of a recession in Malta being more possible now than ever before, Consiglio asked: “Are you using the word ‘recession’ in its correct economic technical sense – that is, two successive quarters of negative real GDP growth?
“Or are you using the word ‘recession’ in the bandying manner that most journalists and newspaper scribblers, both Maltese and foreign, are always using it, that is, simply ‘bad times’?
“If Malta has economic problems they are only 20 per cent caused by what I suspect you are meaning by ‘recession’, as the other problems have been with us for a much longer time,” he told Business Today.
On the issue whether the Government will be able to keep with its stated intentions of keeping the same deficit levels reached last year, Consiglio told Business Today: “No. Our budget deficit to GDP, and our public debt to GDP targets, as announced in, say, the last budget for the end of this year will obviously not be achieved.
“I do not expect a happier or more settled economic conjuncture on the international scenario before mid-2009 at the earliest, and that would probably mean that our present targets for end 2009 will also be missed.
“But after December 2009 – how politically convenient isn’t it? – the national and perhaps European stars should start shining, or at least ‘blinking’ again in some way,” Consiglio told Business Today.