Alessandro Plateroti

Liquidity Fattens, Reforms Protect

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Alessandro Plateroti

America24, 27 gennaio 2014, 04:40

A few days, a “Il Sole 24 Ore” investigation by Morya Longo and Andrea Franceschi quantified the capital that international investors extracted from emergent countries: more than 500 billion euros in less than three weeks. If measured over the past six months, the figure is tripled, and if American investors are also included, the outpouring of money from Asian and Latin American countries to Western countries is in the trillions.

Compared to this financial tsunami, the fall of American and European stock exchanges in the past 48 hours could seem insignificant. With Wall Street’s new records still fresh, European financial indexes still close to maximums from the past five years and with the state bonds of the most critical euro zone countries relatively far from the risk levels of two years ago, a reflection break for the investors was rather predictable. In fact, it was almost expected. Despite geopolitical tensions, the tapering nightmare and the unknowns regarding growth, the performance of listings over the past three years has been the best of the past 16 years, and there had not been a 10 percent drop in stock exchange indexes since June 2012.

In a certain way, the geopolitical and financial tensions on emergent markets could be attributed to the more technical factors, like the hyperevaluation reached by the stock market compared with the bond market, and business profits’ low-key performance seem to have provided investors with the concrete and credible motive necessary for a decisive change of direction. The real question, then, is not whether this is the change of direction, but how heavy this change will be. In the current phase, the only thing that can be said with certainty is that the money that left emergent countries to be parked on the exchanges returned to its shelters in the German bunds and on American, English and Japanese bonds.

And that, consequently, the Italian and Spanish spread and rates are now back in tension, alongside Latin American and Asian currencies. No one can state with certainty what damages this global repositioning of capital will cause, but the phenomenon should definitely not be underrated. European Central Bank President Mario Draghi knows this well and did not miss any opportunities last week to restate a key concept: the ECB will do “everything necessary” to defend the weaker euro zone countries, but structural reforms and development policies are necessary to win the battle against the markets. Easy come, easy go, they say in America: easy money always has a short life. The real preoccupation, both in Frankfurt as well as on the markets, is not the withdrawal of liquidity by the Fed, or eventually by the ECB, but the crosscutting effects that this process may cause on a global scale. It is one thing to take money away from a country, market or system that used the opportunity to restore itself and resume sustainable growth; it is quite another to do so in a context characterized by strong economies that interact with countries that are still fragile for not having passed reforms. Investors are also keenly aware of this situation, and the events currently unfolding confirm it. The worry is not caused by the drop on Asian stock exchanges or Latin American currencies—an amply predicted and anticipated phenomenon—but the extreme fragility of politics, economics and finance that has emerged in a part of the world that worked for four years as the driving force for global growth. And now, precisely because of the failure to pass reforms, that area risks becoming a threat to global growth. In this sense, stating that the tensions and imbalances currently present in Europe resemble those of emergent countries is not hasty: the spread and the BTP rates, which had decreased riding the liquidity wave (as was the case in emergent countries), are now increasing because Italy cannot prove that it has tackled and resolved its structural problems: debt, unemployment, industrial crisis, bureaucracy and taxes. With this scenario in front of their eyes, and on their computer screens, it is not surprising that the rule of prudence has returned to dominating investment choices. Taking it out on a bad market, comparing the stock exchange with a broken watch or cursing speculators only means refusing to accept reality and providing new alibis to the policy of not doing. It is now clear that we all move within a scenario in which globalization impedes unilateral measures, but divergent interests sentence us to a paralysis. The old system of rules and certainties is crumbling, and no one can foresee what the new system will look like, no one is trying to build it, because everything intertwines into the crisis and the threat of an aggravation of the financial system or the real economy. Everyone lives day to day—operators, governments, supranational institutions—and is afraid of designing the future. But this is not all. Europe—and Italy in particular—should think well and quickly about the tensions arising from Latin America to the Ukraine. In the total absence of plans that are geared toward economic growth through the support of industrial policies, not only do doubts arise regarding the ability of politics to answer the current challenges, but we become completely dependent on the liquidity of central banks and the choices of monetary policy, on which we have no possibility of intervention. This is what worries Draghi, and this is why the ECB keeps on asking us for reforms. But in order to revive Europe, and to calm the markets, key words are not enough. We need for someone to stand up and talk about growth.

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