Friday, October 17, 2008

World is Flat

IMF’s Strauss-Kahn this week has called for Bretton Woods 2 ! (Bretton Woods – the hotel incidentally was sold a couple of years ago, but has now been turned around and restored). Many countries dependant on capital inflows have been facing tremendous pressure. Repatriation of private capital by foreign investors or the reduction of credit lines from foreign banks is pushing these countries on the brink of bankruptcy.

1. Hungary’s problems stem from foreign currency loans and big budget deficits.
2. Ukraine’s banks face difficulties repaying foreign credits as the current account is widening.
3. Pakistan is seeking $4 billion in assistance. It is facing a financing gap of $10 billion this year – a crisis in its balance of payments. The Pakistani Rupee has crashed to record lows and its foreign reserves can pay for only two months of imports. Its sovereign rating is a couple of notches above the default level.

Some governments in emerging economies may be looking smug a little too soon. They are after all not that safe and far away from the chaos happening on American shores. This is only one way of diverting attention away from their own domestic problems of inflation, supply side mismanagement, lack luster growth in industrial production, stalled reforms among others. Economic weaknesses will not disappear – intrinsic problems within the economy will continue even as fundamentals remain strong.

Funny That - Central banks across the world are facing unusual activity – but in India its worse. Read an amusing story in the FT – “Industrial action at central banks is rare even in calmer times.” That’s right employees at the Reserve Bank of India are going on strike on pension issues! Not surprising – India badly need pension reforms, sooner than later the unfunded pension liability will blow up in the most unlikeliest of times.

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