We are living in a very volatile world. Most of the developed markets are under stress and are going through major structural changes.
The US is yet to recover from the worst financial crisis it saw in 2008. The unemployment rates are still very high in the US and economic growth has been anaemic. The country, which is known for taking quick, bold decisions on economic matters, is struggling to provide a political consensus to fix its economic problems. It is looking more like a third-world country today.
Europe is in a much bigger mess. High fiscal deficit, huge government borrowing and high inflation combined with low growth have put its economies in a vulnerable situation. The very idea of the European Union is being questioned now and there are already talks about some of the countries exiting the European Union.
At the same time, the emerging economies are not in great shape. They cannot insulate themselves from what is happening in the rest of the world. Their dependencies on the developed markets for capital and exports have impacted their economic growth too.
The world today is divided into two sets of countries?debtor countries like the US, Spain, Greece, Italy, etc, and creditor countries like China, Germany, Japan, etc. The creditor countries thinks that the global crisis is a result of the excesses committed by the debtor countries. They take a high moral stand of not supporting these vulnerable countries and are preaching them to get back to fiscal stability sooner. Germany, which is one of the strongest credit countries within Europe, is refusing to take leadership in fixing the problems in Europe. Germany wants countries like Greece, Spain and Italy to tighten their belts, cut government expenditure and restore financial stability even though it may be more painful for the citizens in those countries. Their logic is that those countries enjoyed all the prosperity and indulged in fiscal profligacy and it is time for them to pay for it.
But does the problem only lie with the debtor countries? What happens to all the creditor countries that funded all these debtor countries without worrying about their fiscal condition? Why did China keep funding the US when it clearly knew it was funding consumer consumption with little ability to repay. Anybody with a little knowledge about banking will realise that there is no free lunch and such profligacy in funding will come and haunt the lenders at some point of time. The US sub-prime mortgage crisis is all about that.
So, my view is that the global financial crisis is a result of indiscriminate lending by countries like China, Japan and Germany to fund the short-term consumption spending of borrowing countries like the US, Greece, Italy, etc. Both the parties should realise their part of the mistake and put their minds together to address this issue. If the debtor countries default then it is catastrophic even for the creditor countries. The sooner the creditor countries realise this, that much better it is for the world.
The other aspect of the game is who is going to take global leadership to fix this issue? In the past, whenever the world was in trouble, the US came as the ultimate rescuer. It had the financial wherewithal to help countries that were in crisis. Today, the US had taken a backseat as its own economy is struggling for growth. The rich countries like Germany, France, China, etc, are taking the backseat as there is no political consensus internally for them to rescue the troubled economies. With the lack of a put option from any country, the world will only slowly drift towards a much bigger financial crisis.
Ultimately, the borrowing countries are going to ask the lending countries to share their pain. If the world has to come back to growth, the de-leveraging has to happen quickly. This may mean the creditor countries taking a very big haircut on their lending and giving breathing space for the debtor countries to come back to growth. This may be a win-win for all the countries. Probably, the central banks of four countries?the US, Japan, Germany and China?should lock themselves in a room and come to a conclusion on this, instead of having meetings like G20, which is becoming more ceremonial now-a-days. Will this happen? Only time will tell.
The author is CFO, Infosys