The financial crisis that started in the US has spread to Europe and the rest of the world. Some critics fear that the present financial and economic downturn may be a result of politicians having failed to learn the lessons of history or having ignored them. This has led to a situation wherein, as a result to today’s greatly enhanced economic integration, the global economy has fewer defensive mechanisms.

As former Austrian Finance Minister Hannes Androsch put it, “...not since the time of the industrial revolution have the geo-political and economic changes of the past quarter century been more rapid and of greater consequence”.

Almost every country’s financial system has been hit by three interrelated problems. Having taken huge losses, the banks need capital but, since they cannot borrow in the longer-term paper markets, they are short of the funds they need to finance the share of their assets not covered by their deposits. Furthermore, because the short-term markets are closed, the banks are cut off from their main source of liquidity.

European governments have been drawn into taking ever larger steps to try to fend off the economic meltdown. In Spain, the government has set up a e50 billion fund to buy bank assets while Germany, despite at first denouncing Ireland’s decision to guarantee the liabilities of its banks, later guaranteed retail deposits. Denmark has also issued a complete guarantee of deposits while France will take stakes in failing banks through a purposely created body.

One of the worst hit economic systems in Europe has been that of Iceland. The country’s recent growth had been remarkable. Iceland has low unemployment and its income per capita is above the EU average. Foreign investment has been attracted by huge investments in green energy and aluminium smelting.

Parallel to this we witnessed the growth of the country’s banks, which however was not built on very solid grounds. Many of the banks’ assets were funded by lenders in unsure wholesale markets. In 2006, only a very small fraction of every loan issued was backed up by deposits while Iceland’s households racked up debts amounting to 213 per cent of disposable income.

After 2006, when the banks struggled to finance themselves, both the banks and the country have been trying to save the situation but in the end the banks did not make it. Thwarted by the frozen credit markets, they were unable to recover their debts.

The government stepped in and, in so doing, induced the country’s currency to tumble and the cost of insuring its national debt against default to soar. The government soon found itself having to seize other banks. Iceland also announced efforts to peg the currency to the euro despite lacking the reserves to defend it.

Hungary is the latest country to hit the headlines in the ongoing turmoil. While the immediate trigger seems to have been a liquidity squeeze prompted by the global financial problems, the country has a number of vulnerabilities that contributed to the recent Hungarian downfall.

Foreign currency lending in Hungary has increased dramatically in recent years. While these types of loans, particularly in euro and Swiss franc may appear attractive to households and companies because of their lower interest rates, this type of lending is particularly risky because it leaves unhedged borrowers exposed to currency fluctuations.

The key problem for Hungary is an exceptionally high ratio of foreign currency loans to foreign currency deposits. This, combined with Hungary’s high loan-to-deposit ratio of over 140 per cent suggest a heavy reliance on non-deposit foreign funding, which tends to be volatile especially in the context of the current credit crunch.

In recent weeks, the stock market has fallen sharply, interest rates have increased, the currency has weakened and financial institutions have suffered shortages of liquidity.

In Malta, the situation so far has been different. There is no doubt that one of the main reasons behind this is the government’s decision to adopt the euro as our national currency. This does not mean that the euro is the solution to all problems or the super buffer that guards against all prospective crises. However it is a fact that the European currency is a market heavyweight, performing very well against the US dollar, the Japanese yen and other major currencies. It is also pleasing to note that Euro-dominated bond trading now rivals the US market in size.

Every country is trying its best to save its banks and the economy. However every country’s measures by themselves are unlikely to be enough to end the financial crisis. Michael Saunders, an economist at Citigroup, states that, “...it is unlikely that the actions of any one country can return financial conditions in that country to normal”. It is crystal clear that a concerted effort is needed to lessen the impact of the crisis.

The eurozone governments agreed that the governments, central banks and supervisors should embark on a coordinated approach aiming at six goals. These are ensuring appropriate liquidity conditions for financial institutions, facilitating the funding of banks, which is currently constrained, providing financial institutions with additional capital resources so as to continue to ensure the proper financing of the economy, allowing for an efficient recapitalisation of distressed banks, ensuring sufficient flexibility in the implementation of accounting rules given current exceptional market circumstances, and enhancing cooperation procedures among European countries.

The EU Finance Ministers agreed to an EU wide deposit guarantee of e50,000 for European savers. We have gone a step further and increased the deposit guarantee of Maltese depositors to e100,000.

The astuteness and prudence exercised by our banks have also played a major role in safeguarding the soundness of the Maltese financial sector. There’s full agreement that Maltese banks are not suffering from such liquidity or solvency problems and they are well above the 30 per cent minimum liquidity threshold. There are around e8.5 billion deposited in Maltese financial institutions, invested in stocks and bonds in very sound institutions.

The portfolios of Maltese institutions are highly diversified in order to avert risks. Institutions in Malta have also kept at bay from investing in the subprime market, preferring holding stocks and bonds in highly rated financial institutions. In addition, they prefer investing in European institutions than American ones. An important aspect that is in part shielding our economy from direct shocks emanating from the devastating credit crisis refers to our manageable amount of external debt. This is a big plus to our benefit since it automatically limits our exposure and vulnerability.

This is not to say that we can somehow predict the forthcoming future or declare that our economy is risk-proof but our safer situation is mainly attributable to calculated risk and cautious decisions taken by our decision makers coming from both private and public spheres.

Dr Chris Said is Parliamentary Secretary in the Office of the

Prime Minister