Quantum of Solace in global markets

Take the U.S. economy. I maintain my view, stated in this column at the beginning of February, that the U.S. will not start recovering before inventories are worked down, household savings rise or house prices stabilize and banks get rid of their toxic assets. Last week’s housing data were mixed at best. As for the toxic assets, I cannot help but wonder how the banks would be willing to sell those (the essence of the Geithner plan) unless they are coerced by the stick of mark-to-market accounting.

In a similar fashion, I do not believe that much came out of the G20 meeting. The summit fell short of a global stimulus package towards correcting global imbalances or concrete action against protectionism, Moreover, as I had feared, the gathering was diluted by measures towards tightening financial regulation; definitely important matters, but totally irrelevant to the problem of containing the global recession. But, as I had stated in a special piece for this paper last Tuesday, the smaller the expectations, the greater the bliss, so the 1.1 trillion package and the five-trillion stimulus (U.S. dollars) were more than enough to lift markets.

In fact, a closer look shatters this rosy picture: For one thing, the stimulus is nothing but the IMF estimate of the rise in G20 government deficit from 2007 to 2010. Moreover, at most a third of the package is new commitments, the rest being simply shinier wrapping. Finally, the bill is not as emerging-market friendly as you’d think. For example, only about a third of the $250 billion of special drawing rights (SDRs, IMF money that can be used as foreign exchange reserves) will be available for middle-income or poorer countries. Still, even the word of half a trillion dollars of new provisional IMF money, along with the announcement that the Fund was easing loan payments for borrowers, provided yet another boost for emerging markets. While Turkey’s external debt payments were reduced by $2.1 billion (18 percent of total) this year, it was the news that Turkey and the IMF had reached an agreement that buoyed markets.

In fact, Turkey could not have asked for better conditions: A good global environment, yet a better one for emerging markets and the best for this particular emerging market. In this setting, domestic data were unsurprisingly overlooked. But these quanta were nevertheless hiding bad omens. For example, economists concentrated on the 2008 GDP figures and March inflation, which they took as non-negative. But more important than these were the trade statistics: Official February turnout and preliminary March exports. Both pointed to a near-double digit yearly contraction in growth in the first quarter, which will probably confirmed by Wednesday’s February industrial production data. As for the IMF deal, call me a skeptic, but with the primary balance set to fall into deficit territory, I will have to see the ink on the agreement before I become convinced.

In the global tunnel, there is definitely some light. But for one thing, we do not know how far that light is- or whether it is the sunshine or the lights of an approaching train. As for Turkish assets, I know I am in the minority, but I kind of feel like Jack Nicholson walking into his shrink’s office and lamenting upon seeing the other patients: What if this is as good as it gets?


Emre Deliveli is an independent consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.