Friday, October 07, 2011

Global economy risks : The time for coordinated leadershipRecent weeks have shown how vulnerable is global economy to risk perceptions. The complicated situation of debtor countries and the risk of defaulting their debts, has made market volatility something rather usual. Any positive signals(even weak), might be enough to recover the mood, but apparently for not too long.
World public opinion wonder how come that the recovery has not gained momentum to be sustainable, after fiscal and monetary expansionary policies at global scale. I do not think that the stimulus program applied at the beginning of the crisis were too weak, but the real problem to be solved, was more complex than expected. More so, when there was not a recession proof institutional framework(EU debt and the euro ), to cope with global implications. Each decision was made as specific requirement(whether it was Ireland, Greece or Portugal) came along, which exacerbate risk aversion of global economy.
Thus ,there are two problems strongly connected which might explain current risk.
a.-The sustainability of rescue packages for debtors countries to avoid default
b.- The strategy to get back on the track of economic growth, for those countries which needed it most .
The overall scenario of a global recession is still hanging on, as long as one of those, or both previous conditions, are not fully satisfied. After all, both are strongly related. Without economic growth, the higher the chance of debt default, and the more urgent the necessity, to make sure there is enough financial support to deal with it. If this financial support availability, is made up day by day, markets bets go on to the negative territory .
Banks recapitalization goes in the right direction, Euro bonds purchases helps to clarify doubts. The Tobin tax on financial flows ,do not seem to be the proper tool, as long as it confuses the factors which explain the situation . Besides, speculative forces arises not because of lacking taxes ,by because of wrong economic policies, specially the ones which creates disequilibrium(debt, deficit, inflation ), which is when speculative forces benefit the most.
What About Latin America?.Latin America is for the first time , in a crisis not of its own. Sure ,It might be affected, but it has a basic framework to deal with it. Latin American countries are working together to confront the crisis. Perhaps ,it might go further on with the future implementation of rescue fund in case it is necessary, or better policies coordination, specially to deal with local currency appreciation implications. These efforts would get better control of risk perception.