Unprecedented hard times have come for banking sector! According to agency Bloomberg nationalization process of 18 leading banks in USA is starting at the end of April.
Bush’s administration assigned funds to these banks by the rescue plan of US former minister of finances Paulson in 2008. By that time the aid had the form of participation in capital of the government, more precisely in preferred stocks. Preferred stocks represent part of the capital issued by a company and entitling their holders to priority with respect to both net profit and net assets. Preferred stocks pay warranted dividends and thus banks’ situation would have been improved. However, government decided to transform these stocks into equities. This means that Obama administration is nationalizing these banks. This is historical era not only for USA, but for world market economy and capitalism. One should take into account that we are dealing with world’s leading banks.
At the same time, laws and approaches toward business and investments are changing in Europe. Germany adopted a law that simplifies the process of property and share confiscation. This law concerns foreign investors either. State got the direct right to intervene in the activities of financial institutions and banks. According to 14th article of German constitution in case of “public need” state already had the right to confiscate the property. However, with the newly adopted law this right is spread on shares and stocks. This German law might be unique because of such approach. For such country as Germany it is unacceptable that as the experts claim the law was initiated because of one corporative conflict between German government and investor Christopher Flowers. The last was the owner of 24.9% shares in one of the major banks Hypo Real Estate (HRE). Government emanded to sell the stocks bought in summer 2008 (22.5€ per share). Investor had no desire to sell stocks at current rate – €0.8 per share as in order to avoid colossal loss he was waiting for increase of the rate. You would agree that this is pure commercial operation and government has no right to intervene. There are significant parallels with the history of Georgian “People’s Bank” that was sold under government pressure almost in the same situation. German government assigned €87 billion to Hypo Real Estate Bank in autumn 2008 and additionally €15 billion to other German banks. The bank that lost more than €110 billion couldn’t be rescued even with huge subsidies. Government decided that the only way out was to nationalize the bank. That is why the law about simplified rules of share confiscation has been adopted in Germany. Such shapes are appearing in modern capitalism and this is a fact. Afterwards, government offered €1.39 per share to English investor who had no right to refuse. How these methods differ from Putin’s state monopoly creation and private-state capitalism management symbiosis? Is market free? Why are they injecting money of German pr European taxpayers into bankrupted mortgage bank? Didn’t its management received bonuses from banks’ €110 billion loss? Did they return the money? Is this fair society? If this were not Germany’s case we wouldn’t use it for an example. However, we are dealing with world’s leading economy and this tendency might spread. According to the data given by Guardian’s analytic Martin Walker (at present he is working as editor-in-chief of USA agency UPI either), stock market lost $33 trillion during the crisis. In addition, losses from real estate in amount of $45-50 trillion, $78-83 trillion loss due to price reduction on the land that equals to world annual GDP. In order to revive initial state of economy of such scales stimuli of similar size are required.
According to the same calculation and elementary method of Pareto effectiveness principle aggregate loss of Georgia amounts $500 million. These are direct losses of the banks, construction business and population from investment-mortgage operations. This sum doesn’t include depreciated properties and lands, construction semi-finished products and unpaid debts. To follow simple logic, stimulus of same size in the capacity of governmental program is required in order to improve situation.
World doesn’t believe in pure capitalism. Why should Georgia become blind citadel of liberalism? Or this is acceptable position at this stage? Banking-construction-crediting crisis is starting in Georgia simultaneously. If one believes Obama’s statement, peak of the crisis in USA is shifted to the end of 2009. Maybe this means that debts in the world exceeded the prognosis of Monetary Fund and crisis is warranted for is in 2010-2011 years. Crisis in Georgia will reach its peak in spring 2010 and we have the chance to go through this period with less pain, create $500 million rescue plan. First of all, our task is to stimulate market and consumption. $2.5 billion construction and consumer credit should be restructured. At present, this will be enough to stimulate consumption market and banking sector.
Today Georgian banking sector is in warm situation, but tomorrow it will sink in its own transaction costs. We shouldn’t be optimists in our prognosis. Increase of blacklisted payers doesn’t solve the problem. Soon whole Georgia will be blacklisted together with bankers and politicians. Banking and trading statistics of first quarter 2009 looks interesting. These tendencies are apparently appearing there. The key to salvation is financing of construction business.
It is noteworthy that leading economic experts reckon (same Martin Walker), global banking system is standing at the new phase of crisis. First phase (See “Sakartvelos Ekonomika No 2) was started in 2007 with mortgage substandard credit system failure and with unprecedented deficit of liquidity. Second phase took a start in autumn 2008: blowing of synthetic derivative market (SDC swap credit default), bankruptcy of Lehman Brothers and problems of AIG. Georgian banking system had problems in this period either. This was accompanies by August war and price slump on world markets. Here comes the third phase of crisis that is characterized by toxic assets and banking crisis in Eastern Europe that creates serious problems for Eastern European banks. Huge wave of nationalization is a sign of third phase. Georgian banking sector is attracting funds at the expense of selling shares, stakeholders are changing in banking sector, and there is no activity. This tendency is continued even by Kazakh banks and world giant HSCB. Experts reckon that banking crisis will enter fourth phase this year and its epicenter will be Asia. As the base of Asian leading countries’ economies is export they will incur losses due to export volume decrease in 2009. We can see by the example of China economy that export slump and banks’ failure is inevitable. Chinese banks are often called technically bankrupted. They are managed by governmental decisions. Georgian banks are awaiting fourth phase of crisis too, when the prices of base assets and construction market will fall and the norm of existence becomes nonpayment. The time has come to restructure population’s and construction-mortgage credit! This requires more arguments or calculations rather than empirical evaluation and devotion to liberalism. We shouldn’t be more Catholics than pope.