Storm clouds

The storm clouds are back, and global economy is threatened by global credit crisis likely to hit sovereign debt.

Excuse me for interrupting this very important moment of lucidity, I know it’s not everyday that an opportunity comes by to hold our armed forces and their ancillary apparatus for covert war accountable for their countless crimes. But we have a serious problem on our hands. It looks like the Great Financial Crisis of 2008 is coming back.

And it doesn’t end there — this time it looks even uglier than it did back then. It appears more and more so that the three or so years that have gone by since that fateful autumn of 2008, signalled by the collapse of Lehman Brothers and the frantic bailout of AIG, were nothing but a short interlude, a very short interlude, in a single crisis that is shaping up to be everything that 2008 was feared to be: Another Great Depression, a crisis that marks a comprehensive rupture between one era and the next.

All the bailouts and all the stimuli that were administered at the time to first shore up, then clean out bank balance sheets and to get banks to start lending again have had one major consequence: They have transferred the problem from private hands into government hands. What was a banking crisis has now returned as a sovereign debt crisis, with far bigger implications and no bailout options available.

What is clear is that the recovery that the stimulus spending of 2009 brought about was strong enough to arrest the slide of advanced economies into a catastrophic depression, but never gathered enough momentum to pay off the debts that had been incurred in the process. That leaves the advanced economies in a terrible bind now, either borrow more and continue spending to save the economy, or abandon the stimulus and retrench spending to save the government. That’s literally the choice now, try and rescue the economy, or rescue the government.

When the financial crisis of 2008 arrived, it caught us in our favourite posture: Happily in denial. ‘No impact on Pakistan’ was the refrain doing the rounds throughout 2008. Of course, everybody who subscribed to this thinking was sorely mistaken, and for a variety of reasons. Topping the list of these reasons is sheer mental incapacity to understand anything about the economy, ours or any other.

Our businessmen, who were on screen after screen happily reciting the ‘no impact’ line, know little about anything beyond the very narrow and specific vested interests of their racket. The go-to economists for the media in those days were the diminutive tribe of rent-a-hack that populated the brokerages and their ‘research’ divisions. None of them had the permission to say that Pakistan has important vulnerabilities in the event of a global credit crunch, and none wanted the permission either.

Nothing exemplified this state of denial better than the budget announced in June 2008. The budget saw outlays increased by almost 30 per cent, revenue receipts projected to increase by almost 25 per cent and the development budget hiked by 20 per cent. It was as if there is no storm gathering on the world economy, no ability to see that serious economic challenges were coming our way. Total denial; even the budget speech made no mention of the dangers stalking global markets.

Today, the storm clouds are back, and the global economy is threatened by a global credit crisis that is likely to hit sovereign debt in the advanced economies and then ripple outwards. Like in 2008, we are extremely vulnerable. Our levels of government debt are unsustainable already, avenues for foreign bailouts are even more limited than they were in 2008, the fiscal situation is more precarious than it was then, relations with great powers are in tatters and international goodwill and credibility are non-existent. And one more time, we’ve announced an unrealistic budget in the middle of it all, whose revenue needs will push us deeper into the crisis by forcing us to borrow more.

We do not know the extent of the coming crisis and how far it can carry us. What is that they say about those who don’t learn from history?

Published in The Express Tribune, June 23^rd, 2011.