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South Africa: Crisis and Response

13 October 2008

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editorial

Johannesburg — IT SEEMS an immense irony that the country that caused all the trouble should be the one whose currency should benefit from the "flight to safety".

As risk aversion reigned in global markets last week, investors raced to get out of high- yielding currencies and into the dollar and the yen, with US treasury bills seen as the ultimate safe haven . As the dollar gained against the pound and the euro, the currencies of emerging markets and of big commodity producers dived. It's little comfort that if the rand did badly, losing nearly 10% in the week, other commodity currencies such as the Australian, New Zealand and Canadian dollars did as badly or worse, particularly against the yen.

It's particularly hard to stomach investors' romance with US treasury bills now that US financial leaders have conceded, at least implicitly, that they didn't get it quite right with their first, $700bn rescue plan. Uncertainty about whether that plan would go through caused huge damage to world markets, and to the world's banks, setting off a slide that's got worse with each passing day. But now, not two weeks later, the US administration has another idea -- instead of buying up toxic loans in terms of the Tarp (troubled asset recovery plan) in a bid to inject capital into financial institutions and get them lending again, it's now looking to recapitalise ailing banks directly by buying equity stakes in them.

That's what some commentators suggested all along. And it's precisely the approach that the UK authorities have taken, as part of a package to rescue their banks that also includes guarantees for interbank lending -- a measure the US and other countries are also now considering.

But the US authorities have often seemed in these past few months of crisis to be running around like headless chickens, bailing out one bank but not another, forced to come up with ever more rescue plans as they fail in their efforts to stabilise their own financial markets or the world's.

It is no wonder that markets have been panicking. And the fact that Europe's governments all went off in different directions as they tried to rescue their own financial systems has simply amplified the panic.

The question now is whether unified and concerted efforts by the world's financial leaders will help, finally, to bring back the confidence the markets so desperately need. Everyone recognises it's a global crisis that requires global solutions.

But it's too early to tell whether the action plans announced over the weekend by the International Monetary and Financial Committee (IMFC), or the specifics that were being hammered out by the eurozone countries yesterday, amount to solutions.

There was much talk coming out of Washington over the weekend of bold action plans and "no tools being spared". But details of the actions or the tools remain sparse. The IMFC, which represents the International Monetary Fund's 185 member countries, endorsed a four-point plan proposed by the Group of Seven leading economies that seemed to include a bit of everything that has been suggested so far. It has temporary government guarantees of liabilities, as well as government action to take out troubled assets and provide capital to banks. It envisages a high degree of international co-operation.

What that all means in practice is as yet unclear. The 15 members of the euro currency union were meeting late yesterday to try put something more specific in place.

The hope is that all will help to settle markets today. Whether international co-operation will in the end amount to much remains to be seen, but at least the financial leaders of advanced and emerging markets, working together, have a chance to put something together that is better thought out than the US, on its own, has produced so far.

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