'Governments failed to anticipate the crisis,' UK Economics professor says

BuenosAiresHerald.com Staff

As stock traders across the world went through agony over the past week with the recent financial fluctuations of the global economic market, BuenosAiresHerald.com spoke with Economics professor, Dr Renatas Kizys from the University of Portsmouth in England, to get an expert outlook on the current economic climate and where financial progression could stem to in the near future in the US and Europe.

What is your analysis of the current debt situation for euro zone members?

Sovereign debt is currently one and a half times greater than the GDP, killing the economy of Greece. In addition, Greece features a huge budget deficit, which may be as high as 30% of GDP. In the other periphery Euro zone countries the situation concerning the sovereign debt is similar but less severe. Ireland, Italy, Portugal and Spain repetitively failed to meet the Maastricht criteria that establish a 3% budget deficit and a 60% sovereign debt (over GDP) ceilings. The situation in more prosperous Euro zone countries is better.

Do you believe that Italy and Spain will need the same debt rescue plan as Greece?

The problem with Italy and Spain is similar to that of Greece, in that during the global economic and financial crisis both income and tax income went down. Governments failed to anticipate the crisis, and also failed to adjust government spending to a decreasing tax income when the crisis began. Structural reforms, if any, are being implemented sloppily and without much enthusiasm. Thus, a similar rescue plan may be necessary for Italy and Spain.

Do you consider the measures taken by the IMF and the European Union, with regard to spending cuts, to be adequate?

Unfortunately, the bail-out plans implemented by the IMF and the European Union may not be adequate, provided that the Greek sovereign debt matures relatively soon; in around 6 years. Therefore, the restructuring of its debt may soon become necessary. The Greek government may be obliged to convince its creditors to cut down its debt, increase its maturity or reduce interest rates. However, the restructuring of the sovereign debt may be perceived by bond and stock markets as an indication of default. This implies that if such a plan already exists, it will take a while until it goes public.

What’s your assessment of the English economy compared with the rest of Europe?

Great Britain, although featuring similar structural problems as peripheral Euro zone countries, is not a Euro zone country, and this gives them a great advantage at present. For example, the big budget deficit that Greece is currently experiencing may lead to a depreciation of the sovereign currency. A depreciation, in turn, may lead to higher income earned by a country's exporters, thus boosting exports and driving the economy to an equilibrium. This is not the case with Greece, which does not have its own currency; however it is a member of the European Monetary Union. This could be the case with Great Britain, where a depreciation of the Pound could contribute to a higher economic growth in the medium run through increased exports.

Do you believe that the ECB’s debt purchasing plan will suffice to calm the debt crisis in Europe?

The ECB's debt purchasing plan will hardly suffice to calm the debt crisis, because the ECB is made up also from central banks of the Euro zone countries that are precisely experiencing the sovereign debt crisis. Involvement of external institutions, such as the IMF (repetitively) and central banks, may become necessary in the near future.

Given the current situation, investors are probably restructuring their portfolios toward the currencies that are considered a "safe haven", such as the Dollar (despite the structural problems in the United States) and Swiss Franc. Investors will sell bonds and stocks denominated in euros and will buy bond and stocks denominated in dollars. The resulting increase in supply of euros should lead to a depreciation of the Euro. There is a chance that the Great Britain will see the Pound depreciate as well, but on a smaller scale.

How is the US crisis seen in England? What is your assessment on the dollar’s future?

There is no really alternative for the Dollar. Although the United States is an over-indebted country, investors still use the Dollar as a reserve currency for commercial and financial transactions. Several years ago the Euro was among the candidates to end up with the Dollar monopoly, but because of the sovereign debt crisis in a number of the Euro zone countries, it has now become quite unlikely, at least in the nearest future.

Dr Renatas Kizys is a finance expert, and currently teaches Economics at the University of Portsmouth in the UK.