Unprepared for the worst
London/Frankfurt - With financial markets in turmoil and
economic growth slowing, olicymakers around the world may once again be forced
to cooperate to try to head off a crisis, as they did successfully in
2008-2009. But this time, they have fewer good options.
Central banks have less room to ease monetary policy than
they did three years ago; cash-strapped governments cannot afford to boost
spending as much and political disarray in some countries may make concerted
global policymaking harder.
"What can you do? On monetary policy, clearly no one
agrees with anyone. On fiscal policy, everyone is blocked," said Deutsche
Bank economist Gilles Moec.
By some measures, the global situation is not nearly as bad
as it was in 2008. Banks have strengthened themselves since the collapse of
Lehman Brothers and the world is still far from a recession.
JPMorgan may have cut its forecast for 2012 US growth this
week but it still expects an expansion of 1%.
Global stocks have dropped nearly 10% in the last month, but
MSCI's world equity index is still 90% above its 2009 low.
"I know people are saying that this feels very much
like 2008 but I don't think we are there. In 2008, you could point at the
problem in the banking sector and there were failed banks," said Nomura
economist Jens Sondergaard.
Still, the trends have clearly turned negative. National
purchasing managers' indexes around the world have dropped near or below the
"boom or bust" threshold separating economic growth from contraction.
This week's slide of British government bond yields to
record lows underlines both investor nervousness and a grim growth outlook.
In some ways, the situation is more worrying than it was in
2008: there is widespread concern about the risk of a downgrade of the US
sovereign credit rating, and a bond market attack on Italy, the eurozone's
third-biggest economy, has called into question the area's long-term viability.
Valuations of US and European bank shares are back around
levels hit at the time of Lehman's collapse.
"The difference (between 2008 and now) is that this is
not only a currency and banking crisis - you have now a currency, banking and
sovereign crisis," said Sylvain Broyer, analyst at European financial firm
The Swiss central bank’s shock decision to cut interest
rates on Wednesday to fight the rapid appreciation of the Swiss franc was seen
by some analysts as a possible precursor to concerted efforts by central banks
in the Group of 20 nations to stabilise markets.
Steen Jakobsen, chief economist at European investment bank
Saxo Bank, said the G20 nations were likely for now to leave it up to their
central banks, which can act relatively flexibly and quickly, to handle market
But if the economic climate keeps worsening, perhaps with
another 10% fall by global stocks, G20 governments may be pushed into making a
concerted pledge of action to protect markets and growth as they did at a
London summit in April 2009, he said.
G20 trouble spots
By displaying solidarity among world leaders and promising
$1.1 trillion for global lending institutions and trade financing, the London
summit succeeded in reassuring investors enough to support a recovery in
markets and economic growth.
Now, however, it may be harder for governments to show such
solidarity. President Barack Obama has been weakened politically and his
economic policy options narrowed by his battle to push up the US debt ceiling.
Some big countries are further along in their election
cycles, complicating decisions. Important elections are due in the United
States, Germany and France over the next couple of years, as well as a
leadership change in China.
"The manoeuvrability of governments is much less than
it was in the last crisis. A lot of people want to be seen not to be caving in
to pressure," Jakobsen said.
During the 2008-2009 crisis, the International Monetary Fund
(IMF) played a major role in coordinating the global response, but there are
now signs of internal division, with powerful emerging economies criticising
the policies of Western governments.
Last month, Brazilian and Indian IMF directors warned the
fund's management against pouring more large sums of aid into the eurozone debt
crisis, while official Chinese media have denounced US politicians as globally
irresponsible over the debt ceiling dispute.
These tensions may complicate G20 agreements on action in
Joint currency intervention
This is the most likely initial form of G20 cooperation
because well-tried mechanisms for it already exist; central banks could send a
message that they want stability in markets by intervening massively to stop
appreciation of the Swiss franc or Japanese yen.
But China and the rest of the world are still far from
agreeing on a more fundamental problem in the global currency system - the
value of the Chinese yuan.
Coordinated interest rate cuts
In October 2008, six Western central banks cut interest
rates in a coordinated move, while China also eased policy.
Global central bankers may signal an easier policy bias when
they meet in Jackson Hole in the United States on August 25 to 27. But
coordinated rate cuts look unlikely in the foreseeable future because some
central banks such as the US Federal Reserve have very little room left to cut,
and central banks are also at different stages in their monetary cycles.
The European Central Bank began tightening this year,
criticising Fed policy as too loose; China may still be in tightening mode. A
weakening economy might eventually push the Fed and the Bank of England into
printing more money through "quantitative easing".
But this would almost certainly not be part of any
coordinated G20 move; China and other emerging economies sharply criticised
U.S. quantitative easing last year as destabilising for markets.
Expansionary fiscal policy
During the 2008-2009 crisis, the G20 did not resolve
differences over fiscal policy; Germany resisted US pressure to boost
government spending more. But the London summit in 2009 still produced a pledge
of "an unprecedented and concerted fiscal expansion" by G20 states,
which cheered markets.
Such a pledge is extremely unlikely now, with the eurozone
and the United States desperate to reassure investors that they can bring
sovereign debt down to manageable levels. Markets are hoping fiscally strong
G20 members may spend more to help weak ones.
Germany could change tack and support a major expansion of
the eurozone's €440bn bailout fund in order to provide a precautionary credit
line to Italy. China might invest more of its $3.2 trillion foreign exchange
reserves in eurozone sovereign debt.
Both these measures might be discussed by the
G20 and could have a quick, dramatic effect on markets. But they would face
some political opposition within the contributing governments, and would not
necessarily change the long-term outlook for economies.