Global financial markets can brace for the worst on Monday with the euro zone brushing off pressures to come up with a new specific bailout plan for the region to prevent a sovereign default at the end of the two-day annual meetings of the International Monetary Fund (IMF) and the World Bank in Washington, DC.
The two-page press release instead preferred to merely reiterate, in a generic manner, that the euro zone, along with other member nations, was committed to fixing the problem.
Over the weekend, euro zone countries continued to argue that they were aware of the problem and had a solution (alluding to the 21 July agreement) to fix it. More importantly, they made it clear they did not appreciate the pressure that was being brought upon them, especially since it would be seen by their domestic constituencies as succumbing to external suasion (the growing street protests in Greece clearly indicate as to how difficult it will be to politically manage the pain induced by structural adjustment programmes).
Action will now shift to individual member states such as Germany, which are scheduled to take their support for the bailout of Greece to their elected representatives for their approval. This process is to pan out over the next three weeks, and will inevitably go to the wire.
The big question is whether the jittery financial markets will invest equal faith in governments as they do in themselves. Or, will their panic precipitate a crisis? On Friday, the volatility in global financial markets signalled thumbs down and an anticipation of the onset of a fresh contagion—which is very likely to plunge the world into a recession.
Arvind Virmani, India’s executive director on the IMF board, maintained that global financial markets are unlikely to trigger a meltdown over the next three weeks. Instead, they would prefer to wait out the action that will begin in individual elected assemblies. He may well be right, but nonetheless matters are on the edge.
Addressing the closing press conference, World Bank president Robert Zoellick said as much: “We are moving closer to the edge.”
His counterpart in IMF, Christine Lagarde, the newly appointed managing director, spent the run-up to the weekend meetings emphasizing the need for the world to forge a collective stance to stave off another contagion.
Addressing the annual meetings of the boards of governors of IMF and the World Bank group on Saturday, Lagarde reiterated her warning as to how the global economy was dangerously poised, and said: “We are by no means strangers, and we are linked by a common destiny. And these turbulent times must bind us ever closer together. Depending on the choice we make today, and in the weeks and months ahead, our collective economic fortunes will advance or fall back.”
Another global contagion at this stage could be disastrous for emerging markets, particularly India. Not only has it, like other countries in Asia, exhausted most of its fire-power in battling the last crisis in 2008, the macroeconomic outlook of the country has deteriorated—while inflation is nearly double-digit, growth is likely to slow to under 8%, and, most worryingly, the fiscal deficit targets are likely to be missed (spin doctors in North Block may say otherwise; if nothing, the hole caused by the promise of raising Rs 40,000 crore from disinvestment of public sector share holdings will be impossible to make up in the current climes).
The policy rigor mortis over the last two years will only worsen the circumstances and could potentially throw the Indian economy off track. To put it in context, high growth is particularly important for the country to generate resources to fund its various social sector programmes.
The two-step recovery of the global economy, where the emerging economies climbed out of the trough faster than developed countries, may have induced a sense of a complacency—especially from those who have argued that India has decoupled from the world. If true, this would be a big mistake.
The next contagion will severely impact all countries. Obviously, some more than others. India, with its social obligations to around 400 million poor, is particularly vulnerable.
It is ironical that what transpired at the annual meetings this weekend have strong parallels in India. Just as everyone knows what is wrong with the world and what needs to be done, the policy matrix for India is obvious and well established—there is no quick and easy fix available in either context. But the lack of political will has stymied a timely global response, just as it has in the Indian context.
The issue is whether the Congress-led United Progressive Alliance will wake up, exhibit statesmanship and reach across the political divide, and act immediately. Or, will it be that six months from now we will look back at this as another missed moment—like the last decade?
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org