Tuesday, 15 January 2013

In spite of government

This article was published in The Malta Independent on Sunday - 13.01.2013

 A false economic argument is being made with increasingly annoying  frequency since the start of the election campaign.   It involves government claiming glory for achievements registered in spite of rather than because of  government.

The Prime Minister repeatedly seeks credit for the fact that Malta did not suffer the same fate as Greece, Ireland, Portugal and Spain that had to be bailed out by the EU when their fiscal budget went out of control.   Recently he started adding Cyprus to the list of victims as the country is on the verge of asking for a bailout given that its banking system had been crushed by its exposure to Greece.

This very argument makes mockery of previous claims that our membership in the Euro monetary system saved us from the financial crisis.   All these countries are Euro members and were not saved.  So why should anyone claim that our Euro membership has saved us?

Countries within the Euro were scarred by the financial crisis just as much as countries outside it.    On the contrary countries outside the Euro, like Norway, Switzerland, Czech Republic and Poland have sailed through the financial crisis fairly undamaged if not outright strengthened.

The evidence shows that it is not being in or out of the Euro that matters.   It is the macro stability of the overall country that matters.   Unfortunately with hind-sight it is now accepted that the Euro rules, even had they been rigidly applied and observed, were meant to make severe restrictions on government fiscal operations but were blind to the much more relevant macro stability factors like balance of payments deficits, competitiveness and employment.

Before the crisis hit Ireland and Spain were the posters boys of sound economic management when measured by the Euro criteria.   Their governments ran surpluses, and their debt levels were very low in comparison to their GDP.   No attention was however given to the fact that the country as whole was suffering excessive balance of payments deficits, that their banks were lending for construction investment far more than domestic savings could finance, and that the economy was building undue reliance towards construction, real estate and housing financed by excessive credit.

When the crisis hit the property bubble burst, borrowers could not honour their loan repayment to  banks just as the value of their mortgaged property fell below the amount borrowed and banks were rendered illiquid and insolvent as they had to write off or make provisions for non recovery of loans that could not be serviced.

To salvage the banking system the governments of Spain and Ireland had to intervene in support and take on the public sector severe financial strains in a desperate effort to protect the whole economy from the mess created by excessive and irresponsible lending by private banks.   The banks’ failure would have ruined the economy as depositors and bondholders would have been forced to suffer severe losses in the absence of  governments’ intervention.

The same fate was suffered by non-Euro Iceland which however has shown greater capacity to restructure and grow through its flexibility to devalue its own currency, an economic tool not available to Euro members in distress.

In spite of the Gonzi government claiming credit for steering our country away from the misfortunes suffered by countries forced to seek bailout, the simple truth was that our fiscal deficit and our debt levels before the crisis of 2008 were worse than those of Ireland, Spain and Cyprus and not much better than that of Portugal.   Greece was a basket case in its own right.

What has saved us is that the country as a whole, rather than the government, was a creditor to the outside world.    Our banks never indulged in excessive lending beyond what could be financed by domestic savings.   Our banks did not need to access foreign lines of credit on the international wholesale market to finance their lending.   On the contrary our banks only lent around 70% of their stable domestic deposit base and had sufficient extra liquidity to buy government bonds whenever government needed to finance its deficits on the local capital markets.   Consequently even the government had no need to tap foreign sources to finance its borrowings and could rely on local savings to finance itself at moderate rates and on a well structured maturity profile avoiding  frequent debt rollovers.
I reiterate that the credit for avoiding the crisis does not belong to the government but to the private sector whose high propensity to save has financed all our borrowing requirements internally.   We have avoided the crisis in spite of the government’s massive borrowing requirement not because of it.

Now to add insult to injury the Gonzi government is resorting to atrocious scaremongering.  They are claiming repeatedly that if a PL government is elected on 9th March than as if by magic the country would be forced to seek a bailout.

Even if there were any truth in such claims it is utter irresponsibility to make them so explicitly.   Business and economic management is built on confidence and the PN, as a major political party which if not in government is in opposition, should be more careful in making any claims that could hurt confidence in the country, prejudice our stability and damage our growth potential.

There is nothing, absolutely nothing, to suggest that Malta, whoever is governing it after 9th March, will be forced to seek a bailout from the EU.   Why should we seek any bailout when our economy is over-liquid and the government has no problems in financing its borrowing requirements on the local markets at competitive rates and for stretched maturities?     Countries that were forced to seek bailout only did so reluctantly when they could no longer finance themselves normally on the market except at prohibitively high rates.

On the contrary there is ample scope to continue to make better use of domestic financial resources.  Rather than having pseudo-banks indulging in deposit taking to the exclusion of all other banking functions, and ‘abuse’ the local deposit insurance scheme regulations to gain unfair and unintended access to the low cost discount windows of the ECB, we had better give better regard to the counsels emanating from the Central Bank Governor for the setting up of a Development Bank to fund major productive infrastructure projects without putting strain on government’s fiscal position.

If such a Development Bank initiative were in place Labour’s proposal for financing the LPG power station and its infrastructure could be financed or co-financed using such development funding without undue reliance on international investors, given that the payback period is relatively short and its commercial feasibility has been depicted with attractive rate of return for prospective investors.

Rather than saving us during the last legislature the Gonzi government should account to us why they have continued to operate the Marsa and the first phase of the Delimara power station when they are so inefficient.    Their cost of operations was so high that economies thereon over the last legislature would have on their own more than financed the full capital cost of what Labour is proposing.


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