Reuters reported that, it took USD 5 trillion and an unprecedented global coalition of G20 countries to stabilize the economy after investment bank Lehman Brothers collapsed in 2008, but quelling the next phase of the financial crisis may be even harder.
To stop the panic that erupted nearly two years ago, governments transferred a mountain of debt from private to public accounts. Now, those government debts are distressing financial markets and there is nowhere left to shift the burden. The Lehman panic subsided only after the Group of 20 rich and emerging economies showed they had the finances and the political commitment to stop the freefall. Governments from G20 countries pledged USD 5 trillion in stimulus and loan guarantees, even though it triggered a political backlash that is costing some elected officials their jobs.
Europe’s clumsy response to Greece’s debt woes highlighted the economic and political headaches that await debt laden countries and those who finance their borrowing. European leaders have yet to convince investors that they have a credible short term plan to contain government deficits and a long-term answer to the region’s slow growth. Until they do, financial markets will remain volatile, and the hard-fought economic recovery is in jeopardy.
Europe took what it thought was a big step earlier this month with a nearly USD 1 trillion rescue package, but within days investors’ nerves were frayed again and markets tumbled.
Mr Domenico Lombardi president of the Oxford Institute for Economic Policy said “Europe is trying to solve a debt problem with further debt. Fixing the problem will require money and political will. One cannot work without the other, and both are lacking. A way, but no will.”
Mr Raghuram Rajan, a former International Monetary Fund chief economist, said the missing ingredient was political will. He said “Countries that cannot muster the will to cut spending and raise taxes have two other options inflation or default. Inflation is not of much use in Europe’s case because a large portion of the debt is short term, and inflating it away takes time. That leaves default as the likely path. Somebody has to pay for this, and you either pay by imposing costs on the taxpayer, or you pay by imposing it on the debt holder. Neither option is nice.”
The European debt hot spots Greece, Ireland, Portugal and Spain account for just 4% of the global economy, yet their troubles have cast doubt on the global recovery. Part of that has to do with concerns that lending will dry up as banks holding European debt brace for heavy losses. US bank exposure to the European Union as a whole was USD 1.5 trillion.