Dr. Alexander Mirtchev assesses the implications for government intervention in the banking system in an interview with Mergermarket, a Financial Times company. He notes that the crisis which has led governments to accept the transfer of private sector debt onto state balance sheets exposes both developed and developing economies to sovereign debt and deficit imbalances. Such transfers are likely to have far-reaching repercussions, deepening some economies’ exposure to the impact of the financial crisis and possibly prolonging the advent of recovery, ultimately threatening some of the pillars of global economic security.
Burgeoning Sovereign Debt Could Sink Global Economic Stability
Alexander Mirtchev, Washington-based economic strategist and expert, reviewed the actions of governments in the emerging markets in support of the beleaguered financial sector and their potential effects with Mergermarket, the partner publication of the Financial Times.
Dr. Mirtchev explained that governments had little choice in taking urgent measures to the financial crisis. “With the crisis looming, it was not possible to stick to ideological positions or specific doctrines — you do not consider the price of the carpet you are using to put out the fire in your house,” said Mirtchev. However, he believes that it is high time to look beyond the immediate short-term pressures, and devise a broader policy response that would address the long-term needs to encourage productivity, competitiveness and growth. He is of the view that, when devising such strategies, governments have to take into account the truly global nature of today’s financial system.
“The world financial system has evolved to the point where no economy functions as a closed circuit. Economic interaction in a specific market cannot be considered a zero-sum game.” In the case of emerging markets such as India, China, Mexico, Indonesia and others, “participation and integration in the global financial system makes sense,” in particular with a view to the productivity and growth-generating role that these markets have in the world economy.
He considers that in the short-term direct government support and recapitalization can help banks and institutions continue their function as the mechanism that pumps capital throughout the global economy, and it seems already unavoidable. However, the key is, at the end of the day, to face the reality of the newly emerging global financial system of the XXI century, not to try and “put the genie back in the bottle” by returning to the model of the 1990s, and jumpstart the new, inclusive financial order that could accelerate the recovery and sustain growth.
Some emerging market governments have introduced “special enforcement and monitoring bodies to supervise the use of the funding by the banks, to ensure that the funds are spent exactly for the purposes required by the government, i.e. alleviation of the fallout from the credit crunch on businesses and the population.” In particular, his view is that “the banks’ shareholders and management will have to share the responsibility and the burden — there should be no rewards for failure.” In the case of Kazakhstan, he noted that “the State refrained from direct nationalization of the banks; rather the government is only offering to buy stakes in banks leaving them with the choice to accept or decline additional capital infusion in return for equity stakes.”
Government financial packages to “ensure the stability of the financial system by propping up the banks for the duration of the crisis will need to be complemented with comprehensive strategies to support growth,” Dr. Mirtchev told Mergermarket. “The financial sector’s malaise cannot be realistically resolved just on the basis of government funding. The market and private investors would need to be engaged.”
At the same time, Dr. Mirtchev argues that a number of the rapidly developing economies have better chances of pulling out of the crisis than some of the mature economies. He said that “due to numerous factors, emerging markets are much easier to micro-manage. With the right political vision and will, they should be able to move past the short-term tactics to the long-term necessity of modernization, productivity and competitiveness.” He notes that unlike for example U.S. and Japan, many of the emerging markets enjoy the recent hard-won experience of successful privatizations.
Therefore, their governments know quite well when and how to exit the companies. He considers that emerging markets would also be better served by preserving their openness to the global economy. “They know that being part of the international financial system exposes them to global shocks. However, they should not forget that this same openness brought them ten years of booming foreign direct investments that generated an unprecedented level of economic growth,” Mirtchev indicated.
Dr. Mirtchev is President of Krull Corp., a Washington-based consultancy.
He is also an independent director of Samruk-Kazyna National Welfare Fund of Kazakhstan, and serves as senior economic adviser to the country’s Prime Minister.
To read the entire interview with Dr. Mirtchev in Mergermarket, visit www.mergermarket.com.