New face of Crisis

Aleksandra Laliashvili

Experts reckon that three waves of global financial recession are awaiting world economy.

It might be said that world has already went through first wave of global financial crisis. Gradually increasing level of unemployment will be followed by the second wave of crisis. Increase of unemployment logically defines decrease of incomes, while reduced incomes are the ground for fall of trade turnover. In whole, everything will have negative influence on economic development in the world. Third wave of crisis is anticipated in II-III quarter of 2010 as soon as central banks stop stimulation programs of economy.
More bold statements are made in whole world recently concerning possible completion of global financial crisis. Anyway, positive tendencies have been already noticed. For instance, if compared with the figures of previous three months, 0.4 percent growth of economy was observed in Euro zone in the third quarter of this year. However, in comparison with the third quarter of previous year 4.3 percent reduction of GDP is noticed in 27 EU member countries. At the same time, GDP growth in III quarter of this year made up 0.3 percent. Positive changes are felt in USA. One of such positive aspects is slowdown of unemployment rate growth that was observed before.
However, many experts opinion is that all these improvements are ostentatious and this is just faзade optimism, as global financial system and world economy are facing new challenges. Experts doubt that it’s too early to think of end of the crisis and optimistic statistical data are only initial effects of stimulation plans carried out by the governments. Today, we can boldly declare that world is preparing for new challenges. But, this time, we will have to deal with new face of crisis. If USA is considered as a lighthouse of current global financial crisis, Dubai and its possible default might become spring of new crisis.
Dubai collapse
The second emirate of United Emirate of Arabia in size became unpleasant surprise for markets and investors. Economy of Dubai is still under influence of crisis affects caused by default announced by Dubai World. Dubai concerned world market with the declaration that state fund Dubai World and developer Nakheel were not able to pay the debt in time. Indebtedness of Dubai World made up $59 billion in August. Aggregate debt of Dubai amounts $80 billion. The statement appeared to be a big surprise for world investors.
Economic experts reckon that default danger of state holding Dubai World and developer Nakheel will have negative effect on world economy. The biggest strike is anticipated on USA commercial real estate market. Developer Company Nakheel of Dubai world is the owner of several American projects and hotels. Nonpayment of mortgage bonds made up 4.8 percent in November. The figure is six times more than that of last year. USA real estate market is not the only victim of Dubai World and Nakheel problems. Dubai Investment Fund is the owner of stock of several companies and banks in Canada. Agency Standard & Poor’s assigned BBB rating to six companies of Dubai emirate and biggest port operator in the world DP World among them. Besides this, rating of four Dubai banks was decreased also. S&P explained its decision by the fact that support of government provided to these organizations is decreased. Moreover, rating agency declared that the rating of the mentioned banks and companies is under watch and it might be downgraded in the future. After receiving information concerning default dangers market players started the process of freeing construction companies and banks of stocks. Emirate’s debts have proved once again presence of interrelation between developed and developing economies. Fear of investors was aggravated after the government refused to be a guarantor for Dubai World. Minister of Finances of Emirates declared that government is not planning to sell any assets in order to support Investment Company to pay debts. This caused confusion of investors, who were considering Dubai World as a state company and were sure that government would have become a guarantor for investments. Despite the fact that Dubai emirate Abu Dhabi appropriated $10 billion for covering the debts of Dubai World, this won’t make big changes against the background of chain reaction that has already started after Dubai default in world economy.
New face of crisis – national debts
Investors are puzzling over the question – how to assess Dubai default – as isolated event or herald of new wave of bankruptcies. The New York Times says that big banks are concerned with potential weakness of corporations and governments for colossal debts. Expenses of anti crisis programs cause deficit of state budgets. National debt is increasing even in Germany that was considered as a bastion of carful fiscal policy. National debts of Bulgaria and Baltic Sea countries have even exceeded GDP.
Major part of analytics does not expect default of big countries in the nearest future. Though, the newspapers say that initial refusal of Dubai government to support state investment fund in payment of liabilities might create precedent: state will leave in the lurch the companies that were considered to be protected by state guarantee.
Default wave is anticipated within next few years, in the times when states are emphasizing economic problems of their citizens. According to Harvard University economist Kenneth Rogoff, states grown heavy with their own debts will refuse to support developing market. The last one might need $65 billion for paying the debts in 2010. As regards corporations, they will have to pay $200 billion in 2009-2010 years. Half of the sum is of Russia and United Emirates of Arabia. According to data of JPMorgan Chase, Russian companies took loans from banks and by means of emitted bonds in amount of $220 billion that is 13 percent of the country’s GDP. Indebtedness of Emirates made up $135,6 billion that is 53 percent of GDP.
Monitoring of national debt of Georgia
Reduction tendency of national debt of Georgia was observed in 2005-2006 years. There were two reasons of this. First increasing budgetary incomes and second, changes in currency exchange.
We can see from the above given table that the volume of national debt considerably increased over last two years that is the result of Aug-2008 war with Russia. However, increase in national debt is seen in 2007 also.
Indebtedness to Euro Union has decreased over three years, but at the same time liabilities to World Bank, IMF and Asia Development Bank have increased;
Besides this, Georgia’s indebtedness to Germany and France was considerably increased. Liabilities in emission of public securities (Euro bonds) amounts GEL 831 million according to the data of 2009 state budget. Public securities were emitted in 2008 with the term of five years. Paying off of the mentioned public securities is planned in 2013.
As we already mentioned, governments will face the problem of nonpayment of national debts within next few years. What is the situation in Georgia? Allow me to discuss forecasted figures of foreign debt service within the next years (2010-2030).
2013 year will be quite heavy for paying off the debt. $771,76 million (GEL 1293 million) is required for paying off the debt. This is about 25.2 percent of 2009 budget incomes. Supposedly, these liabilities will be covered from funds gained by emission of other securities.
Prognosticated figures of foreign debt paying off are quite high within next years, especially 2019-2025. The volume of interest rates to be paid for foreign debt service is quite high also in 2010-2013 years. The main reason of this is liabilities in Euro Bonds. State has to pay 7.5 percent every year that is quite high rate under the conditions of economic slump.
· 2010 – 71,34 million USD
· 2011 – 70,06 million USD
· 2012 – 68,16 million USD
· 2013 – 45,72 million USD
There is an approach that limit above which the volume of foreign debt impedes economic development is 50 percent of Gross Domestic Product. If considering this limit, it amounts 100-105 percent in relation with export. According to the data of National Bank, foreign debt makes up 72,6 percent of export in Georgia. Forecast of National Bank says that 4 percent reduction of GDP is anticipated in 2009Y. Besides this the volume of foreign debt considerably increases in 2009 and this under conditions when increase in export volume is not anticipated this year. If considering current tendencies in the world, state budget of Georgia might face hard times. Meanwhile, Europe is boldly discussing danger of state defaults.
“Dubai” in Europe
The problem created in United Emirates of Arabia turned into big danger for whole world. In the times, when financial markets shows concern in United Emirates of Arabia, western press is emphasizing that dangerous time-bomb is located in Europe, specifically in Greece, instead of Arabia Peninsula.
It might happen so that Greece becomes the second country after Germany tin 1948 that declares default. Financial situation in this country is critical and without membership of European Union the default would have been inevitable. Default of whole country is much dangerous than default of one state holding. Analytics reckon that the reason of this are incurred debts over many years and mild fiscal policy. In their opinion, the way out of this situation is reduction of 2010 budget deficit from 12.7 to 9.1 percent. Greek government cannot find actual ways of decreasing expenses and it only takes stringent measures against those persons who evade taxes. Experts reckon that it is necessary to increase export production, but Greek production is uncompetitive in Euro Zone. Greece is the first country that appeared at the verge of bankruptcy.
If European Union supports Greece with multi billion financial aid this mainly happens at the expense of Germany, reckon experts. Despite the fact that Greece violated Maastricht agreement that implies that country’s budget deficit must not exceed 3 percent of GDP, no serious sanctions were taken against Athens.
Rating agencies that assess creditor’s solvency were notifying investors that Greece creditworthiness was rather weakened. But by that time, such assumptions were considered as exaggerated. Fitch rating agency significantly downgraded the country solvency rating. In other words, the possibility that Greece might be unable to pay debts is quite high and this is a recognized fact. After economic policy carried out by Greek socialist government the current degradation is not surprising. Even, before Greek currency was replaced with Euro, Bundesbank management was talking about dangers of Southern-European countries membership, but by those times, political ideas outweighed economic risks and despite its accounting machination Greece became the EU member country. Today, supporters of Greece membership have to recognize that arguments of German specialists were quite grounded. Official Athens declares that there are no risks of default in the country, but experts have other opinion. Economic and Monetary Affairs Commissioner Joaquin Almunia declared in his interview with rating agency Bloomberg that the EU government is ready to support Greece in its budget deficit problems.
Fitch Rating agency downgraded Greece rating to BBB+ with negative outlook. Standard & poor’s declared that the country’s sovereign rating might be downgraded due to problems in foreign debt service.
Moreover, many experts go further – Standard Expert Steve Berou made prognosis in his interview with Bloomberg that Greece and Ireland might left the EU in the end of 2010Y. The reason of this might become the economic situation of these countries that contradicts with Euro Zone legislation. “We have doubts whether the countries such as Ireland and Greece might manage to overcome crisis” – declared he.
Until these countries are member of EU, they cannot weaken currency exchange rate and carry out taxation-budgetary support of economy. Therefore, they might leave Euro Zone in 2010, say the analytics.
Despite the fact that theoretically Maastricht Agreement denies to support the country that is at the verge of bankruptcy, but it’s hard to imagine that Northern-European countries and EU Central Bank will leave these countries in the lurch. In this case, confidence in EURO might be weakened. However, another question is what might be the reaction of German, Dutch and French taxpayers when the taxes will be increased in order to support Greeks and Portuguese.
One this is obvious, common European currency will have to pass serious “examination”. Its perfection and ability to face serious challenges are put on scales. Experts are forecasting the same fate to Ireland, Spain and Europe and other European countries.
New wave of crisis is anticipated in Germany. Politicians and financiers are afraid that new wave of banking crisis might strike Germany in 2010. Experts reckon that volume of banks’ capital might decrease by 100-120 Euros due to writing off the “bad assets”. Politicians reckon that initiative of Deutsche Bank Josef Ackermann to establish special fund for SMEs support is not enough. In their opinion best solution is the nationalization of the banks. Budesbank representatives fear that bad assets might negatively influence financial institution. Load on banks in 2010 might reach 90 billion Euros. The situation is not better in the EU new member countries. Development of Eastern Europe was mainly based on inflow of foreign capital and cheap credits, but both sources at present are unavailable. Ukraine, Kazakhstan and Baltic Sea countries are in grave situation. Latvian Seim approved budget with all-time deficit. Budget deficit makes up 10% of GDP. London-based company, Credit Market Analyst has published the list of 63 countries with highest perceived default risk. Ukraine is listed among countries with the highest perceived default risk with 53,7 percent of risk over five years, according to the Company. Other countries with the highest perceived default risk include the, Argentina, Venezuela, Latvia, Iceland, Lithuania, Kazakhstan, Lebanon and Russia.
Arabian default arose panic in Russia. Russian companies are sitting on a time-bomb due to hundreds millions of debts. Russian bankers declare that under conditions of absence of strictly planned restructuring process dangers of default are increasing. The situation has been improving at Russian monetary markets since June of this year and it created the sense that financial problems were drawing backward. Nevertheless, Dubai default reminded Russia that multimillion-indebtedness remains actual danger for the country.
It is already clear that possible Dubai default might have the same influence on global economy as bankruptcy of American giant Lehman Brothers in Sep-2008. However, if until now, the state were fighting crisis by means of stimulation plans of private sector, one might wonder who will help these states now when dangers of state default are upcoming? Maybe we are dealing with new face of crisis that endangers Europe first of all. Correspondingly, once again a question arises – how far common currency and united Europe is justified in this Old Continent?