Enjoy this guest blog from colleague Mike Reid, deputy managing editor of the Dow Jones News Service:
Here’s some fresh evidence from Europe and the U.K. that governments, when confronted with a significant structural problem in their economy, will simply kick the can down the road. The Conservative Party in the U.K. is talking of disbanding the FSA, the financial industry’s super-regulator; in Europe, Germany is talking about a bailout for Greece. Worse, at least with the Greek situation, the markets actually applauded this short-termism.
This isn’t just about moral hazard, it’s about policies which weaken a trading bloc. Allowing Greece off the hook from its needed fiscal austerity discourages others – Portugal, Spain etc – from taking politically unpalatable decisions to get their economies in order. Allowing your fiscal discipline to be dictated by the weakest links won’t create a stronger trading bloc and currency. Forcing citizens of more productive E.U. countries to subsidize the laggards isn’t smart economics.
In the U.K., the Tories want to give more of the FSA’s power to the Bank of England (probably further politicizing an already put-upon central bank) – and a new consumer agency (which sounds vaguely populist). The FSA’s rationale was to better regulate risk than the nine self-regulating bodies previously overseeing the City. Britain’s pension mis-selling scandal partly prompted its creation though the poor grasp of risk revealed by excessive lending practices of recent years showed its limitations. Still, the FSA alone wasn’t to blame for the U.K.’s problems. Redistributing regulatory powers to new agencies solves nothing…it just moves the problem to another entity some time in the future. Again, it’s short-termist and negligent.
Global stock markets went pear-shaped last week, as you know; this week could prove just as abysmal, given there don’t seem to be any obvious cues to spur a pick-up. At least Fed Chairman Ben Bernanke looks likely to stay in office now that the Democratic and Republican party leaders have gotten their acts together. Any instability atop the U.S.’s central bank would only have aggravated already fragile investor sentiment. I’m going to be keeping an eye on emerging stock markets, particularly those in economies that are fundamentally robust, with every prospect of continued development (such as Brazil, China, India and Indonesia – the latter being on an economic and policy upswing little noticed by the BRIC-obsessed.) On a related note, here’s an interesting piece by colleague Riva Froymovich about investors snapping up riskier emerging market credits. Continue reading…
Posted by Gabriella Stern
on December 07, 2009
, European Union
If there’s one thing Portugal’s government has to do soon, it’s to show it will take steps to trim its bloated budget deficit. The country’s finance minister delivered this message today during a visit to our newsroom, shortly after Standard & Poor’s placed Portugal’s credit rating on “negative” outlook. Fernando Teixeira Dos Santos - with white hair, black eyebrows and an affable, open style – made it plain that the center-left government will take careful yet deliberate steps to tamp down the deficit. It will have a high-profile opportunity to signal its intentions in late January when the prime minister presents a budget proposal to Parliament. It’ll be a tricky exercise in reassuring financial markets by showing “prudence, responsibility and discipline” (as Teixeira Dos Santos put it) while not hindering Portugal’s stimulus-spending-assisted progress toward economic recovery. Also, the ruling Socialist Party lost its Parliamentary majority during September elections and so has to navigate tricky political waters comprising political allies and a feisty opposition. As of this moment, Portugal’s deficit is on track to exceed 8% this year with public debt hitting 75% of gross domestic product. Teixeira Dos Santos contends this is about “average” for Europe on a size-weighted basis; even so, it’s not pretty and stands in contrast with Portugal’s pre-crisis 2007 fiscal deficit of 2.6%. “We were in a good path before the crisis,” he says, noting that his government brought the deficit down from 6.1% in 2005. This track record gives the government of Prime Minister Jose Socrates a modicum of credibility with financial markets, Teixeira says. Yet it also puts pressure on Portugal to get back on track ASAP and show it hasn’t abandoned the self-discipline it acquired before the economic crisis. Continue reading…