Home' Trinidad and Tobago Guardian : September 12th 2013 Contents SEPTEMBER 2013 • WEEK TWO www.guardian.co.tt BUSINESS GUARDIAN
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The bankruptcy of Lehman
Brothers, an American
investment bank, in 2008
turned a nasty credit crunch
into the worst financial crisis
in 80 years.
Massive bailouts from governments and
central banks staved off a second Depression
but failed to prevent a deep recession from
which many rich economies have yet fully
to recover. Five years after that calamity,
two big questions need to be answered. Is
global finance safer? And are more crises
on the horizon?
The quick answers are yes, and yes. Global
finance looks less vulnerable because reforms
to the financial industry have made it more
resilient and because America, the country
at the heart of the Lehman mess, has gotten
rid of much of the excess debt and righted
many of the imbalances in its economy.
Today s danger zones are elsewhere. They
are unlikely to spawn a collapse on the scale
of 2008. But they could produce enough
turmoil to hit growth hard.
The disaster of September 2008 had many
causes. But, put crudely, Lehman s demise
spawned catastrophe because it combined
three separate vulnerabilities. The underlying
one was a surge in debt, particularly in the
financial sector, brought on by a housing
The ensuing bust was made more dan-
gerous because of the second weakness: the
complex interconnections of securitized
finance meant that no one understood what
assets were worth or who owed what.
Lehman s failure added a third devastating
dimension: confusion about whether gov-
ernments could, or would, step in as finance
failed. A rule of thumb for spotting future
disaster is how far those weaknesses---a debt
surge, ill-understood interconnections and
uncertainty about a safety net---are repeat-
ed.The overhaul of financial regulation since
2008 has made the most progress on the
first two. Under the new Basel capital stan-
dards, banks are being compelled to hold
more, and better, capital relative to their
assets; the biggest "systemic" banks even
more than others.
Another strand of reforms, such as push-
ing derivatives trading onto clearing houses,
has tried to improve transparency. The least
progress has been made on what to do when
big banks fail -- though new efforts to write
global rules that would force banks to issue
bonds that can be "bailed in" in the event
of failure is a promising step.
American finance has become safer. The
country s big banks have raised more capital
and written off more dud assets than most
others. At around 13 per cent, their risk-
weighted capital ratio is far above the new
global norms and some 60 per cent higher
than before the crisis.
American property prices have adjusted,
and households have cut their debt. Gov-
ernment debt has risen, but most of that
rise is the sensible mirror image of efforts
by households to reduce theirs. Now that
the economy is recovering, the budget deficit
is tumbling. You can find bubbliness in bits
of American finance, including the corpo-
rate-bond market, and some nasty off-bal-
ance-sheet liabilities like student loans and
public-sector pensions, but America does
not look like a source of imminent trouble.
Britain and Japan have changed less. Abe-
nomics has improved Japan s prospects, but
government debt is still close to 250 percent
of gross domestic product. In Britain, the
combination of budget cuts and weak private
investment has produced a recovery that is
built on the same ingredients---particularly
rising house prices---that caused the last
bust. Britain is not about to topple the world
economy, but growth that is based more on
investment, both public and private, would
be an awful lot safer.
What about emerging economies, many
of which have seen a big run-up in debt?
China is often dubbed a Lehman-in-the-
making. Since 2008, credit growth in the
Middle Kingdom, now the world s second-
largest economy, has exploded, and by some
estimates it is over 200 per cent of GDP.
China s financial system has few interna-
But, as in America in 2008, there is uncer-
tainty about the true size of its debts and
how much of them will be repaid. The dan-
ger China poses depends on the third ingre-
dient of the Lehman conflagration: how the
government behaves when trouble strikes.
The country is a big net saver, the banking
system is still largely deposit-funded and
the government has the fiscal capacity to
underwrite troubled loans. Provided it does
so, the odds of a sudden collapse with global
ramifications are low.
From Brazil to Thailand, many of the
other emerging economies that are now
wobbling have also seen credit booms. The
difference with China is their vulnerability
to global financial flows.
Today s drought in foreign capital is push-
ing down currencies like India s rupee and
making current-account deficits harder to
finance. In the 1990s that dynamic caused
crises. But this time around most countries
defenses are more powerful.
Exchange rates float, far more debt is
denominated in domestic currency and
reserves are fatter. Some places may be over-
whelmed. Most are likely to suffer slower
If there is one part of the world that could
still bring about another global meltdown,
it is the euro area. Though less Lehman-
like than a year ago, it remains a worry. Its
debt problems are growing, not shrinking:
European banks have thinner equity buffers
than their American counterparts, and they
have written down far fewer debts. In the
troubled economies on Europe s periphery,
recession has made it hard to reduce debt
burdens of all sorts.
Too much austerity has proved counter-
productive. A destabilising political backlash
remains a danger, given Europe s sky-high
jobless rates. Its sleepwalking leaders cannot
agree on how to complete necessary reforms,
such as a proper banking union, while the
European Central Bank s ability to live up
to its brave pledge to do whatever it takes"
to save the euro remains untested.
There may be no new Lehman-sized
catastrophes on the near horizon. But plenty
of smaller crises-in-the-making dot the
landscape; and a potentially big one con-
tinues to threaten Europe. Five years on,
global finance is a long way from safe.
@2013 Economist Newspaper Ltd. (Dis-
tributed by the New York Times Syndi-
Leaders of the Brics group of nations---
Brazil, Russia, India, China and South
Africa---have said they will set up a US$100
billion fund to guard against financial
The move comes as emerging economies
across the world have been hit by specula-
tion that US may scale back its key eco-
nomic stimulus programme soon.
That has seen investors pull out money,
hurting currencies of emerging nations.
The BRICS leaders said the details of the
fund were still being worked out.
"The initiative to establish a Brics cur-
rency reserve pool is at its final stage,"
Russian President Vladimir Putin said dur-
ing the G20 summit in St Petersburg.
"Its capital volume has been agreed at
US$100 billion," he added.
The chairman of the US Federal Reserve,
Ben Bernanke, said in May that the US
might start to rein back on its US$85 bil-
lion-a-month bond-buying programme.
The programme was introduced with the
aim of increasing liquidity in the markets
after the global financial crisis. Part of the
increased cash has flowed into emerging
markets, helping to lift asset prices there.
But Bernanke's statement, coupled with a
recovery in the US economy, has seen in-
vestors pull out money from these
They have been rushing to buy dollars in
anticipation of higher returns.
That has resulted in volatility in the stock
markets and currencies of these nations;
triggering concerns about the impact of
such moves on the overall growth.
Against the US dollar, the Indian rupee
has weakened 24 per cent, South Africa's
rand nearly 17 per cent, Brazilian's real 15
per cent and Russia's rouble eight per cent
China's yuan---which is traded within one
per cent of the daily rate set by the coun-
try's central bank---has strengthened
The latest move to establish the fund is
being seen an attempt by Brics nations to
tackle any potential volatile movements in
China will contribute US$41 billion to the
pool, with Brazil, India and Russia putting in
US$18 billion each and South Africa US$5
Earlier this year, Brics nations discussed
the formation of a new development bank
to fund infrastructure and development
projects throughout the developing na-
Where's the next Lehman?
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