The sub-prime mess in the US followed by the economic downturn battered many economies across the globe. Canada, like India, did not confront as many problems as others. This is despite its strong bilateral trade ties with the US. Canada's finance minister Jim Flaherty, however, says that no country is an island, but is clear that tax payers in Canada will not bail out banks in the US and Europe.
“The Canadian economy did go into recession, but we managed to contain the impact of the crisis by paying down substantial amounts of public debt in 2006, 2007 and 2008”.
The economy ran deficits for two years to stimulate growth, but ensured that there were no long-term implications on the fisc. The strategy will help Canada exit from its deficit spending without any dramatic action.
“However, there are concerns over a fragile recovery in the global economy. European sovereign debt issues are a concern. We need an effective resolution of the difficulties in Europe.
It's necessary that the countries requiring fiscal consolidation, do so now,” said the minister who was recently in India.Canada could well show the way.
A recent report by the CIBC World Markets says that the relatively lower government and corporate debt, immigration and trade balances mean it is Canada's time to shine.
What will his advice be to other economies?
“Governments have to be responsible. The markets have sent the message to certain governments in the world that just like investment banks, governments can be vulnerable”.He argues that they (markets) can buy their excessive spending, deficits, accumulated debt and place themselves in a vulnerable position. Then the price the government has to pay to borrow money becomes prohibitive, if they can borrow at all.
Fiscal consolidation is, therefore, set to top the agenda at the G20 summit in Toronto this month end. Will the crisis in the eurozone hurt economies a second time round?
The crisis in the eurozone may not have snowballed like the US subprime market mess. The euro still plays the second fiddle to the dollar. But that does not undermine the importance of euro. “The debt of some of the vulnerable countries are held in euros. The challenge with the European area is political decision-making. There is a European Central Bank. But there is no central decisionmaking body on fiscal matters. That creates difficulties in decisions being made on timely basis”, he says.
What is the way out?
The monetary authority and the fiscal authority can act in unison. In Canada, for example, if there is an overall challenge in the economy that involves both monetary and fiscal policies, then the central bank governor and the minister of finance can act together. But it is not as simple as that in Europe. “I imagine that Europeans are working on that now, that is how they can make decisions more effectively and quickly,” says Flaherty.
How do you tackle such a crisis in future? Should there be a global bank tax — an international levy on banks across all markets — endorsed by the IMF and countries such as the UK?
However, Canada like India and other BRIC policymakers is opposed to such a levy. Both India and China have strong financial systems and they need not pay such a tax, he said. Countries that have promoted the concept reckon that the proceeds can be used to create a fund that would come in handy in times of a crisis. “However, our argument is that if a financial institution is the cause for a crisis then, the institution should bear the cost and not the taxpayer”, he says.
Canada is proposing a contingent capital requirement where financial institutions will have to hold some extra capital that will help convert debt into equity when a crisis is triggered. And then, the debt-holders and the shareholders of the banks will bear the cost of the crisis and not the taxpayers. “We have written to governments and we are providing analytical inputs to other governments. We hope they support the concept.” says Flaherty.
Posted by Jawahar Rakshit | 07 Jun, 2010
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