"Are we about to enter a third, and this time fatal, leg of the financial crisis? The problems of euroland which have so unsettled markets this week – and in particular those of Portugal, Ireland, Greece and Spain (the "pigs", as they have become known in financial circles) – are worrying enough in themselves.
But they are also a proxy for much wider concern about how national governments extract themselves from the fiscal and monetary mire they have created in fighting the downturn. It's proving messy, though, and they are running the risk of provoking an even worse crisis in the process.
Think of the three phases of the economic implosion like this. The first was a fairly conventional, if extreme, banking crisis where a cyclical overexpansion of credit and lending suddenly, and violently, corrects itself in a great outpouring of risk aversion.
In the second phase, governments and central banks attempt to counter the economic consequences of this crunch with unprecedented levels of fiscal and monetary support. Temporarily, at least, it seemed to work.
Until now, investors have been happy to finance the resulting deficits, in part because government bonds have seemed the only safe place to put your funds, but also because central banks have, in effect, been creating money to compensate for the paucity of private-sector credit. The mechanism varies from region to region, but much of this new money has found its way into deficit financing.
We are now entering the third, inevitable phase of the crisis where markets question the ability of even sovereign nations to repay their debts. Unnerved by this loss of fiscal and monetary credibility, governments and central banks are being forced, much sooner than they would have wished, to start withdrawing their support..."
No comments:
Post a Comment