27.8.2007 by Lupo.

Is a global crisis in the offing?

27/08/2007

The conditions are ripe for financial turbulence, but skillful policy co-ordination can help avert a severe disruption to the world economy, writes economist and former Romanian Finance Minister Daniel Daianu.

By Daniel Daianu for Southeast European Times in Bucharest – 27/08/07

More than a few voices are saying all is not well in financial markets. Even some leading central bankers have expressed worry. Financial turbulence has the potential to trigger a global economic recession or slowdown, delivering severe shocks to business, industry and services in numerous countries. A crisis could erupt in the financial markets themselves, or it could be triggered indirectly by a major shock – such as the dramatic rise in the price of oil several decades ago.

History provides illuminating lessons. For example, during the Vietnam War, the United States relaxed its monetary policy in order to finance large, war-driven budget deficits. The result was double-digit inflation. The additional liquidity injected into the US economy meant surplus liquidity for the world economy and falling interest rates on world capital markets.

Many developing economies were then able to finance large external deficits cheaply, and even at negative real interest rates. However, once Paul Volcker took over the helm at the Fed, monetary policy changed drastically. His mission was to subdue inflation, and this goal implied a severe tightening of monetary policy – specifically, a sharp rise in interest rates. With that rise came tighter credit conditions on international markets.

Many countries, especially in Latin America, had borrowed at floating rates. The turnaround in US monetary policy caught them off guard, and not a few countries proved incapable of honouring their external debts. Brady bonds are a legacy of that period. In brief, the episode demonstrates the impact policy turnarounds in the United States can have on the rest of the world. US policy moves produce big externalities worldwide. When these externalities are positive, almost everybody is happy; when they are negative, plenty of people are unhappy.

Another case study is the crisis in Southeast Asia during the second half of the past decade. Southeast Asian economies were prodded by international financial institutions and private creditors, such as major banks, to open their capital accounts as a way to finance growing consumption and investment needs. However, this opening was done prematurely, at a time when most local currencies were pegged to the US dollar.

Current account deficits surged under the drive of expanding non-governmental credit, and over-borrowing became a norm of conduct. Once market sentiment turned sour, massive capital flight occurred and financial havoc engulfed the region. Asian economies learned the hard way that they have to rely more on themselves and build up reserves as a cushion against future trouble. Compared to Latin America, Asia has proved more resilient and capable of economic rebound. Arguably, this has been due to stronger manufacturing capabilities, budget policy discipline and diversified export orientation.

In 1998, another financial meltdown occurred – this time in Russia. The culprit was high short-term borrowing by the government and exchange rate pegging. Ironically, the fall of the ruble has allowed the economy to recover since then. Russia has also benefited from the rise in the price of oil, which has tremendously boosted the chances for sustained economic growth.

Yet another pertinent example is the Long-term Credit Management episode, involving a hedge fund with very high exposure to emerging economies. The fall of this hedge fund (in 1998) alarmed many people on Wall Street and prompted the Fed to mount a discreet, indirect rescue operation.

The above-mentioned cases, and others like them, are linked with specific developments on world financial markets, with globalization as the backdrop. When imbalances grow and national policies become less prudent, when lending criteria are loosened excessively, local crises can become amplified and spill over. Are there any signs that suggest another period of turbulence may be in the offing?

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http://setimes.com/cocoon/setimes/xhtml/en_GB/features/setimes/articles/2007/08/27/reportage-01

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27.8.2007 by admin.

Croatia, Slovenia pledge to solve open issues

27/08/2007

Croatia and Slovenia agreed Sunday to seek a settlement to their border dispute through international arbitration and to try to resolve all other open issues bilaterally.

(Reuters, Hina, Javno, Xinhua, Makfax - 26/08/07; Hina - 22/08/07)

Slovenian Prime Minister Janez Jansa (right) and his Croatian counterpart, Ivo Sanader, hold a press conference after their meeting at Lake Bled on Sunday. [Getty Images]

Croatia and Slovenia will refer their long-standing border disagreements to the International Court of Justice (ICJ) in The Hague, the prime ministers of the two countries said Sunday (August 26th). ”

We have reached a consensus in principle to present for arbitration our disputes over the land as well as sea borders at the court,” Slovenian Prime Minister Janez Jansa said following talks with his Croatian counterpart, Ivo Sanader.

Croatia and Slovenia have been unable to agree on a number of territorial issues since they declared their independence from the former Yugoslavia in 1991. As a result, numerous border incidents have occurred in the past years, including at Piran Bay in the northern Adriatic Sea and in the area of the Mura River.

Slovenia, whose Adriatic coastline is less than 50km long, is seeking a solution that would allow it to have direct access to international waters, without having to pass through Italian or Croatian territorial waters.

The two countries signed an accord on the access to international waters in 2001, but it ran into opposition from the Croatian public and was never ratified by parliament.

In 2003, Croatia announced plans to proclaim an exclusive economic zone in the Adriatic, saying this would improve control over fishing and pollution. The measure, which would have left Slovenia without direct access to international shipping waters, prompted strong protests from Ljubljana, which threatened to withdraw its support for the neighbouring country’s EU bid. Croatia eventually put the idea on hold.

In 2005, however, the Slovenian government endorsed a bill establishing an ecological zone and an epicontinental shelf in the contested Piran Bay. Croatia reacted angrily, accusing its western neighbour of harbouring “territorial aspirations”. ………..

Setimes

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