For those who do not know, this evening the Minister of Finance will read his budget speech. With his speech, he will also present the budget estimates and the economic survey. These two documents have more substance than the speech itself. The speech will be characterised with rhetoric and also full of excuses due to the international scene. The tone in this budget speech is expected to be less triumphalistic than last year’s budget, the one which preceded the March general election.
Yes, this time round it will be the international financial crisis the excuse for not delivering the promises made just eight months ago. The Minister will not mention that since in the first three months of this year the government spent much more than predicted, the deficit ran out of control. Now we are in the same situation of 2004 where the finances were also in bad shape. This of course is not due to the financial crisis but due to the bad management or illicit use of public finance before the last general election and I bet that you know why the Nationalist Party in government did so.
But allow me to comment on the current financial crisis which for those who do follow what happens in the international scene was not a surprise but was expected sooner or later. It is surprising that the Minister of Finance and his Prime Minister appears to have been surprised by the financial crisis. It is shocking to hear them say that it all happened in September of this year. One would imagine that the Minister of Finance of the country which – according to the Prime Minister – is Europe’s top financial services centre and the world’s fourth largest (as quoted by the Independent on 6 October), did not have the benefit of expert advice well before September 2008. Didn’t the Minister of Finance of Europe’s top financial services centre know what all Central Banks have been fearing since 9 August 2007.
Early in the morning of 9 August, BNP Paribas announced that it was stopping investors from withdrawing money from three funds because it could not determine the market for their holdings. The French bank was reacting to the crisis of the so-called sub-prime market in the United States. This crisis had already begun in February of last year. The exaggerated granting of loans to people who could not afford them in the US (but also elsewhere, such as in Britain) and the funding of these loans through the method known as securitisation (whereby the lending bank mixes a lot of poor-quality mortgages with a few good quality ones and sells the debt as one package), was a dangerous game. As long as the property market is strong and strong demand keeps prices high, everything looks OK but as soon as property prices fall, the whole system is bound to fall like a castle made of playing cards.
Central Bankers were not surprised. There had been plenty of warnings; they came from the International Monetary Fund, the Bank for International Settlements, the Bank of England and others. And then in the summer of last year it happened. Prices in the US property market fell and securities backed by mortgages turned out to have a much lower value than was imagined by those holding them. Banks stopped lending to each other and then stopped lending money to their clients altogether.
It became difficult to get credit... that is why we speak of a “credit crunch”. The US and the UK economy had grown fast in the past few years because credit was easy to find and cheap. As soon as this change and liquidity dried up, these two economies were bound to jam.
BNP Paribas explained its decision with this statement: “The complete evaporation of liquidity in certain market segments of the US securitizsation market has made it impossible to value certain assets fairly regardless of their quality or credit rating.” This statement frightened all European stock markets and the value of stocks began to fall. Adam Applegarth, who was at that time the CEO of the British mortgage bank Northern Rock, said “This is the day the world changed”. Only a few days later the Bank of England had to rescue Northern Rock to prevent it from collapsing. On the same day the European Central Bank pumped $US 147 billion into the Euro markets to encourage banks to continue lending to each other.
Now, that the government is panicking and needs to justify increased prices for water and electricity for the domestic consumer and for industry and commerce – which increases will only make matters worse and accelerate the coming of the crisis in our country – the Minister of Finance and his Prime Minister discover the credit-crunch crisis!
Carmelo Abela is Deputy Speaker & Labour main spokesperson for industry and foreign investment
Email: [email protected]