This crisis calls for global cooperation
AFTER too much foot-dragging, uncertainty and mixed signals, we appear to have at last arrived at a coherent and credible approach to, at least, preventing the collapse of the major banks of the US and Europe. The solution, which was the brainchild of British Prime Minister Gordon Brown and his Chancellor of the Exchequer, Alastair Darling, focuses on a direct recapitalisation of big troubled banks with taxpayer funds injected in return for preferred shares - effectively a partial nationalisation.
It is the most direct solution and, ideology aside, the most practical. It appears that both the US and European countries are also now going down the recapitalisation route. In addition, the UK has pledged to provide government guarantees on interbank credits, which would help unclog the interbank market. European governments are expected to follow suit, although there may be variations of the scheme in different countries.
Whereas previous rescue plans - such as the original Paulson plan to buy back toxic assets from US banks - were greeted with a thumbs-down by the markets, the latest plan appears, so far, to have got a better reception. On Monday, most Asian markets closed sharply higher and European markets opened strong.
But while the risks of a systemic failure of the banking system have receded, there remain many unknowns. Although the basic principles are in place, the details of the US and European rescue plans are still unclear. How effectively - and how fast - the plans will be implemented is also an open question. So is the fate of hedge funds; a major collapse in this sector could also trigger a systemic shock. The rescue of the US investment bank Morgan Stanley - whether by the Japanese bank UFJ-Mitsubishi, or by the US government, or both - is also up in the air. Big liabilities in the credit-default swap market are also capable of triggering a financial accident.
Thus while regulators and policymakers will have to remain on red alert, they should be able to breathe slightly easier now that one major hurdle - that of preventing large-scale bank collapses - has been negotiated.
But even while they are still in fire-fighting mode, it is not too early to start focusing attention on the next phase of this financial crisis - which is its impact on the real economy. Signs of slowing economic activity have already started showing up in the numbers, including here in Singapore, where the third-quarter flash estimates confirmed the arrival of a recession. Similar confirmation is likely to soon appear in several economies around the world.
The damage from this crisis will be immense - not only for financial institutions, but also for companies and households. Minimising it will require concerted action on the part of governments. This is a global crisis, and dealing with it calls for global cooperation on an unprecedented scale.
Source : Business Times - 14 Oct 2008
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