Caught in a storm without an umbrella
Mint makes a very important point in today’s editorial:
We have often said in these columns that the UPA government made a cardinal mistake during its term: buoyant tax revenues should have been used to fix the fiscal problem. The money that flowed into the kitty was frittered away, even as the promise to restructure government spending was not followed up on. India is in a fiscal mess at precisely the point when it needs fiscal muscle to support weakening demand. The blame for this has to be laid squarely at the door of the Manmohan Singh government.
The overall tone of ministerial statements is one of innocent helplessness: The domestic slowdown is because of the global economic crisis. That is technically correct. But then the domestic acceleration, too, was partly because of the global boom between 2003 and 2007. The UPA government can’t have it both ways: claiming credit in good times and blaming others during bad times.[Mint]
V Anantha Nageswaran
TN Ninan’s weekend rumination on Manmohan Singh’s purported successes on the external front is disappointing for two reasons: it does not make any useful point and it is misleading. The ongoing global financial and economic crisis is neither about global financial regulation nor its architecture.
In all fairness—whether or not Dr Singh was and is a great economist is beside the point—his tenure this time around, even after the Communists left the alliance, has not exactly been inspiring. He might not have been able to carry the day with his proposals. But he could have, at least, articulated the change, the vision and the blueprint that India needs, thus helping whoever comes after him (or himself) when conditions turn more propitious. The only thing we know is that he missed the Communists in his coalition. Continue reading By invitation: How can we be sure Dr Singh has answers?
Don’t abandon the Tiger
A Sinhala-dominated Sri Lanka is not in India’s interests
T S Gopi Rethinaraj
The moment of truth on the LTTE
The decimation of the Tamil Tigers is a good thing
Tuning a new balance
China’s military transformation and the implications for India
Looking back at Amarnath
India must seize the opportunity that has come in the wake of the crisis
Raja Karthikeya Gundu
The strategic imprint of India’s presence
A discussion on strategic affairs with Jaswant Singh
Nitin Pai & Prashant Kumar Singh
In tandem: military and civil bureaucracy
Differentiating military advisors and military commanders
Sushant K Singh & Rohit Pradhan
Faith in the system
The state must not restrict religious freedoms
Rohit Pradhan & Harsh Gupta
Rajiv Gandhi’s last manifesto
The Congress Party must rediscover its 1991 vision
V Anantha Nageswaran
The end of financial capitalism: what now?
Competent economic management has become all the more important
Mukul G Asher
Not a moment of boredom
Reviews of Pallavi Aiyar’s Smoke and Mirrors and Praveen Swami’s India, Pakistan and the Secret Jihad
Download it from here
And your daily dose of unconventional wisdom
Pakistan’s negotiations with the IMF for a bailout package might have been held up due to bitterness of the pill even as the spectre of sovereign default looms. So when Pakistan’s policymakers are trying to stave off the default, Mosharraf Zaidi stands in front of the oncoming traffic with a stop sign in his hand. “Sovereign default” he writes, “is simply a country not making its loan repayments on time. It has happened to plenty of countries. They are all still around.”
In short, governments choose not to default because it is the politically expedient thing to do. The actual economic costs of defaulting, Borenzstein and Panizza conclude, are simply not that high. Moreover, another paper earlier this year (by yet another IMF economist, Ali Alichi), suggests that the only real reason that countries repay the sovereign debt that they owe is to continue to be able to borrow money.
In short, Pakistan is trying to avoid defaulting so that the PPP government can stay in power, and so that while it stays in power, it can continue to borrow money. The real question here is: where is all the money going and why does Pakistan need to keep borrowing it? [Mosharraf Zaidi/The News]
For today’s dose of good writing read his piece on why Pakistan must default.
It looks like Pakistan will have to go in for an IMF rescue package to stave off a sovereign default. The countries who used to historically come to its aid—the United States, Saudi Arabia, China and the UAE—might even prefer it this way. In fact, according to one (rather inspired) news report, the United States made its support for even an IMF package conditional on Pakistan staying on the course in the war against the Taliban and al-Qaeda. The United States and Saudi Arabia are co-chairing the Friends of Pakistan club—but judging by the Richard Boucher’s comments, this forum will kick in to support the Pakistani economy after it is rescued by the IMF.
The Pakistani government is left with little choice but to negotiate an arrangement with the IMF (and such is the state of affairs that the IMF team has refused to travel to Islamabad due to fears over its security, choosing to meet in Dubai instead). After the post-rescue condition of the economies it rescued in the 1990s, the IMF’s rescues are something that economies, and most certainly their leaders, shudder to even think about.
Now it is possible that the IMF might have learnt from its previous mistakes and is today more sensitive to the political side-effects of its economy policy prescriptions. But beyond the hyperventilations of the Pakistani media about the ignominy of it, the Pakistani government is unlikely to want the IMF’s straitjacket—or any straitjacket—to constrain their hand, so that they could go about business as they have always done. But the straitjacket might hurt Pakistan in other ways:
A commitment to economic reform is the precondition for more money; Pakistan has been asked to reduce its fiscal and trade deficits, reduce its current and development expenditure, reduce its subsidies, and increase its tax-to-GDP ratio. These are all good, sensible measures that Pakistan needs to achieve stable medium-term growth. However, they are not enough. Pakistan must think long and hard about economic reforms that will incur the displeasure of western governments and the IFIs. Consider the case for capital controls. Dismantling barriers to the entry and exit of capital made Pakistan an attractive investment destination in the 21st century. While the world was awash in liquidity and investors were looking far and wide for opportunities to earn money on their capital, Pakistan basked in the glow of foreign money. However, the same mechanism that made it easy to quickly attract money has become a millstone around our necks now that the economic tide has reversed. So while reform is certainly needed, the government must avoid the temptation to simply follow foreign dictates once again. [Dawn]
Related Link: Simon Cameron-Moore explains the situation; Mosharraf Zaidi has an interesting op-ed on the role of bankers and bureaucrats in this context. And Ikram Sehgal calls for capital controls…on the hawala channel.
Whose wealth was kept out of the financial system?
Sunday Levity. Yes, this joke is on the rest of us)
The Associated Press reports that
Al-Qaida, which gets its money from the drug trade in Afghanistan and sympathizers in the oil-rich Gulf states, is likely to escape the effects of the global financial crisis.
One reason is that al-Qaida and other Islamic terrorists have been forced to avoid using banks, relying instead on less-efficient ways to move their cash around the world, analysts said. [AP]
Because it was forced to keep its money under mattresses (okay, carpets) it might have escaped the dramatic losses due to the global financial crisis. Not entirely though. Unless they managed to cash out in time, terrorist financiers must have lost some money in the stock market, which they were alleged to be milking.
On the virtues of making haste slowly
V Anantha Nageswaran would smile when he sees the Economist Intelligence Unit concede that:
Ironically, the current global situation is also making India’s measured pace of economic reform look wiser than before. At a time when Western countries are frantically nationalising banking assets, the Indian government’s reluctance to sell more than 49% in its state-owned banks—which control some 70% of banking assets—now seems reassuring. In addition, India has not yet introduced full capital-account convertibility, which protects its currency, while its careful control of foreign borrowings by domestic companies limits dependence on the global financial system. Regulators have also periodically introduced curbs to slow the formation of potential asset bubbles, such as higher provisioning and prudential requirements on real-estate lending.
The EIU believes that while there would be some short-term worries, Indian companies are likely to use the crisis to make overseas acquisitions.
And the risks of a hard landing for India
Nouriel Roubini issues a dire warning (linkthanks Ananth)
The US and advanced economies’ financial system is now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.
On the real economic side all the advanced economies representing 55% of global GDP (US, Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies…
Countries with large current account deficit and/or large fiscal deficits and with large short term foreign currency liabilities and borrowings have been the most fragile. But even the better performing ones – like the BRICs club of Brazil, Russia, India and China – are now at risk of a hard landing. Trade and financial and currency and confidence channels are now leading to a massive slowdown of growth in emerging markets with many of them now at risk not only of a recession but also of a severe financial crisis. [RGE]
Offering a list of policy measures and calling for “radical and coordinated actions” he argues that
central banks that are usually supposed to be the “lenders of last resort” need to become the “lenders of first and only resort” as, under conditions of panic and total loss of confidence, no one in the private sector is lending to anyone else since counterparty risk is extreme. And fiscal authorities that usually are spenders and insurers of last resort need to temporarily become the spenders and insurers of first resort. The fiscal costs of these actions will be large but the economic and fiscal costs of inaction would be of a much larger and severe magnitude. [RGE]
And on the kindness of friends
Pakistan’s effective foreign exchange resources are down to US$3 billion—sufficient to cover about a month’s worth of essential imports. And other than a tranche of US$500m from the Asian Development Bank, it has received few firm promises. After Standard & Poor’s cut the country’s sovereign long-term foreign-currency rating to CCC+, with a negative outlook, it has become “the world’s riskiest borrower according to credit-default swap prices from CMA Datavision.”
The Friends of Pakistan, perhaps too preoccupied with the global financial crisis, have postponed this month’s scheduled meeting. Pakistan is sending a team to the United States, seeking US$10 billion of emergency assistance—at a particularly inopportune time. Even the Saudis—Pakistan’s traditional bailors—have stalled announcing the US$6 billion oil credit facility. The Saudis are very likely trying to teach the PPP government a lesson (even as they remain thick with Nawaz Sharif). There are no reports of China providing direct financial assistance. It is a member of the Friends of Pakistan group, and might lend through that channel.
The Pakistani government is attempting measures like securitising future remittances, but given its credit rating and the mood of the global financial markets, the success and the efficacy of such moes is likely to be limited. That leaves approaching the International Monetary Fund. But an IMF loan will come with the condition of an “intensive economic reform programme”. In Pakistan’s current political climate, trying to implement the kind of programme that the IMF will demand is a recipe for disaster.