Written on Thursday, 1 September 2011
After battling the world credit crunch three years ago, the indicators seem to be pointing at a rebound of another world economic crisis but now in the form of insurmountable sovereign debt.
Greek has been a classical example of this. It had to take the intervention of the EU led by German and France to bailout the Hellenistic economy when its philosophies could not salvage it from sinking in the economic sea mess.
German and France were not just interested because Greece is a member of the EU family but that they all use the same currency, the Euro. A default by Greece could have destabilized the Euro and its strength against the dollar could have weakened.
If Greece was still using the Drachma and Germany the Deutschemark, several options were available for Greece like to print more of Drachmas and devalue its currency. However, with the Euro this is not viable.
Apart from protecting the Euro, Germany and France were also interested because their banks are the biggest lenders to the Greece government. A default could have led the French and German banks writing off some assets thereby posting losses which meant a shrunk on the economies of the two countries.
In a technical way, it can be said that by bailing out the Greek government, France and Germany were bailing out their own banks and protecting their economies.
At least for now Greece’s operation was successful but the problem is that it is not alone, there are several developed countries that are in this trail. The Italian, Spaniard and Irish economies are under intensive watch on a likelihood of defaulting on their sovereign debts.
The President of America, Barrak Obama is just having a sigh of relief after striking a deal with the Republicans to extend the world’s biggest economy debt limit by $2.4 trillion so that the country does not default on its sovereign debt. Lucky America needed not bailout from anyone; no country or international financial institution to bail it out.
Although these measures are helping solve the problems at the moment, they are not a deterrent a recurrence; they are just pushing the debt responsibilities into the future or they are just cope up mechanisms. Any time sooner than later these problems will rebound and even in bigger magnitude tat will overwhelm the think tanks.
The saying is that when America sneezes the whole world catches the cold. What has begun in EU and America is definitely going to affect the whole world and it has already started spreading.
A warning from European Commission President, Jose Manuel Barroso that the eurodebt crisis is spreading beyond the Eurozone is very true and should be given fullest attention.
South Africa has just agreed for a financial bailout to Swaziland despite calls from its opposition not to do so because of the human rights and bad governance record of the country. The 2.4billion rand loan to the kingdom country is just a quarter of what Swaziland had asked for. King Mswati has told the press that they had approached a number of institutions including the IMF for a financial bailout but there was no response.
Although South Africa’s officials said the bailout was in the interest of stabilizing the economy of the country and the region (SADC), their interests might be the same as of German and France; its companies and business people have a lot of investments in Africa’s last absolute monarchy and the country stands to lose a lot if the Swazi economy plunges in chaos. It is apparent that a colossal sum of this loan amount will see its way back to the South Africa’s economy.
Swaziland might be fortunate this time around because at least South Africa has offered a hand, how many countries will be able to find a neighgbour to bail them out in the event they need it?
It is likely that there are more “Greeces” in Africa, who will soon sound an SOS, than there are Germans who will respond with deep pockets. South Africa might have played “German” over Swaziland this time around but does it have the capacity to help all “African Greeces”?
Apart from South Africa another country that could have taken pride in bailing out fellow African countries is Libya.
In his quest to fast-track the formalization of the United States of Africa, Colonel Muamar Gaddafi could have been quick to seize the opportunity and share his oil dollars on fellow African countries. However, things are not working for him. With the much demolition and pounding of public infrastructure in the ongoing rebellion, even if Libya would return to peace tomorrow they will be much interested in rebuilding their country than intervening in the affairs of other countries.
The EU has played a big role in bailing out and prescribing austerity measures for its members state, would the African Union do the same? Definitely no, it does not have big pockets to bailout its own members.
The AU has always moved at a retarded pygmy’s pace in response to several African crises. It was there, named the Organisation of African Unity, when the Rwandan genocide occurred, it had to take the UN to declare a famine in Somalia for the AU to be jolted into action. Does it mean that the AU has no capacity to monitor what is happening in its own land? So far there has not been tangible, comprehensive and convincing response from the AU to Somali famine except that t will hold a summit.
In such crises Africa has always looked to the West for a hand, but will the EU and off course America be able to bail out African countries needing so n view of the bitter prescription of austerity measures?
Currently the EU is sending fears that it may not be able to bailout all its members states. Apart from Greece, Portugal and the Irish Republic, there are others among the 23 users of the Euro who are under intensive watch. The European Commission is concerned that it might not be able to afford to rescue Italy and Spain, which are its third and fourth largest economies in a situation that they need a bailout.
Spain has just sold €3.3billion worth of bonds amid struggles to convince lenders and retain confidence of its ability to pay back. Prime Minister Jose Luis Zapatero had to delay his summer holiday to address the mounting concerns about the government's finances.
Italy has the second biggest debt stock in the Eurozone amounting of 120 percent of its GDP. Prime Minister Silvio Berlusconi has defended his economic policies and attacked rumours that the country was on a course to default.
The niche prevalent is to look to the East, where China and India are. China is now the world’s second biggest economy and of recent its state banks; The China Development Bank and the China Export Import Bank, have given more loans to Africa that the World Bank. China should definitely be interested in whatever happens in Africa as it is interested in what happens in America. Despite being a big economy China keeps its foreign reserves in US dollars. It is the biggest creditor to America with an estimated $1.5 trillion.
This is already sending shivers to Chinese economists that if politicians become preoccupied with domestic matters and ignore their debts, the country will be affected. The same could apply if African countries default. Will China bail out African countries?
A default by African countries will mean that the Chinese banks have to write off massive loans given to Africa thereby posting losses and shrinking the economy. It is difficult to tell because China ranks itself not as a developed country but a developing country. Secondly it will be a risky venture because it is foreseeable that despite a bailout, the countries are definitely bound to ask for another bailout.
For African countries, what will be needed is not another loan to bail them out of a situation that they are unable to pay another loan, but just direct debt cancellation. Will China be willing to cancel all the debts through its banks?
Squeezed with austerity measures, the developed countries, also known as the donor community, will try to find every excuse, starting from failure to adhere to IMF programmes to bad governance and corruption, to reduce, cut or even stop, giving support to the developing countries.
It will not make an economic sense for them to heavily tax their citizens and send the money to Africa. With no outside aid African countries will really be in deep problems as most cannot raise enough to provide for their own budget and depend on foreign direct budgetary support.
The crux will be when the debt crisis reaches the Oil and Petroleum Exporting Countries (OPEC). These ones are likely to raise oil prices to raise more money which will also be a big blow to African countries. We rely on imported petroleum products bought in US dollars even for countries like Nigeria and Libya where they have oil deposits.
In short the start of the debt crisis might the start of another world economic crisis, even of much greater degree than the credit crunch. All the countries that are being hit by the debt crises are registering an increased rate of interest of borrowing while being unsure about economic growth. This will be more pronounced in Africa because most countries have low star rating on their ability to pay. That means the African states will even be willing to offer higher interest rates just to attract lenders.
Greek has been a classical example of this. It had to take the intervention of the EU led by German and France to bailout the Hellenistic economy when its philosophies could not salvage it from sinking in the economic sea mess.
German and France were not just interested because Greece is a member of the EU family but that they all use the same currency, the Euro. A default by Greece could have destabilized the Euro and its strength against the dollar could have weakened.
If Greece was still using the Drachma and Germany the Deutschemark, several options were available for Greece like to print more of Drachmas and devalue its currency. However, with the Euro this is not viable.Apart from protecting the Euro, Germany and France were also interested because their banks are the biggest lenders to the Greece government. A default could have led the French and German banks writing off some assets thereby posting losses which meant a shrunk on the economies of the two countries.
In a technical way, it can be said that by bailing out the Greek government, France and Germany were bailing out their own banks and protecting their economies.
At least for now Greece’s operation was successful but the problem is that it is not alone, there are several developed countries that are in this trail. The Italian, Spaniard and Irish economies are under intensive watch on a likelihood of defaulting on their sovereign debts.
The President of America, Barrak Obama is just having a sigh of relief after striking a deal with the Republicans to extend the world’s biggest economy debt limit by $2.4 trillion so that the country does not default on its sovereign debt. Lucky America needed not bailout from anyone; no country or international financial institution to bail it out.
Although these measures are helping solve the problems at the moment, they are not a deterrent a recurrence; they are just pushing the debt responsibilities into the future or they are just cope up mechanisms. Any time sooner than later these problems will rebound and even in bigger magnitude tat will overwhelm the think tanks.
The saying is that when America sneezes the whole world catches the cold. What has begun in EU and America is definitely going to affect the whole world and it has already started spreading.
A warning from European Commission President, Jose Manuel Barroso that the eurodebt crisis is spreading beyond the Eurozone is very true and should be given fullest attention.
South Africa has just agreed for a financial bailout to Swaziland despite calls from its opposition not to do so because of the human rights and bad governance record of the country. The 2.4billion rand loan to the kingdom country is just a quarter of what Swaziland had asked for. King Mswati has told the press that they had approached a number of institutions including the IMF for a financial bailout but there was no response.
Although South Africa’s officials said the bailout was in the interest of stabilizing the economy of the country and the region (SADC), their interests might be the same as of German and France; its companies and business people have a lot of investments in Africa’s last absolute monarchy and the country stands to lose a lot if the Swazi economy plunges in chaos. It is apparent that a colossal sum of this loan amount will see its way back to the South Africa’s economy.
Swaziland might be fortunate this time around because at least South Africa has offered a hand, how many countries will be able to find a neighgbour to bail them out in the event they need it?
It is likely that there are more “Greeces” in Africa, who will soon sound an SOS, than there are Germans who will respond with deep pockets. South Africa might have played “German” over Swaziland this time around but does it have the capacity to help all “African Greeces”?
Apart from South Africa another country that could have taken pride in bailing out fellow African countries is Libya.
In his quest to fast-track the formalization of the United States of Africa, Colonel Muamar Gaddafi could have been quick to seize the opportunity and share his oil dollars on fellow African countries. However, things are not working for him. With the much demolition and pounding of public infrastructure in the ongoing rebellion, even if Libya would return to peace tomorrow they will be much interested in rebuilding their country than intervening in the affairs of other countries.
The EU has played a big role in bailing out and prescribing austerity measures for its members state, would the African Union do the same? Definitely no, it does not have big pockets to bailout its own members.
The AU has always moved at a retarded pygmy’s pace in response to several African crises. It was there, named the Organisation of African Unity, when the Rwandan genocide occurred, it had to take the UN to declare a famine in Somalia for the AU to be jolted into action. Does it mean that the AU has no capacity to monitor what is happening in its own land? So far there has not been tangible, comprehensive and convincing response from the AU to Somali famine except that t will hold a summit.
In such crises Africa has always looked to the West for a hand, but will the EU and off course America be able to bail out African countries needing so n view of the bitter prescription of austerity measures?
Currently the EU is sending fears that it may not be able to bailout all its members states. Apart from Greece, Portugal and the Irish Republic, there are others among the 23 users of the Euro who are under intensive watch. The European Commission is concerned that it might not be able to afford to rescue Italy and Spain, which are its third and fourth largest economies in a situation that they need a bailout.
Spain has just sold €3.3billion worth of bonds amid struggles to convince lenders and retain confidence of its ability to pay back. Prime Minister Jose Luis Zapatero had to delay his summer holiday to address the mounting concerns about the government's finances.
Italy has the second biggest debt stock in the Eurozone amounting of 120 percent of its GDP. Prime Minister Silvio Berlusconi has defended his economic policies and attacked rumours that the country was on a course to default.
The niche prevalent is to look to the East, where China and India are. China is now the world’s second biggest economy and of recent its state banks; The China Development Bank and the China Export Import Bank, have given more loans to Africa that the World Bank. China should definitely be interested in whatever happens in Africa as it is interested in what happens in America. Despite being a big economy China keeps its foreign reserves in US dollars. It is the biggest creditor to America with an estimated $1.5 trillion.
This is already sending shivers to Chinese economists that if politicians become preoccupied with domestic matters and ignore their debts, the country will be affected. The same could apply if African countries default. Will China bail out African countries?
A default by African countries will mean that the Chinese banks have to write off massive loans given to Africa thereby posting losses and shrinking the economy. It is difficult to tell because China ranks itself not as a developed country but a developing country. Secondly it will be a risky venture because it is foreseeable that despite a bailout, the countries are definitely bound to ask for another bailout.
For African countries, what will be needed is not another loan to bail them out of a situation that they are unable to pay another loan, but just direct debt cancellation. Will China be willing to cancel all the debts through its banks?
Squeezed with austerity measures, the developed countries, also known as the donor community, will try to find every excuse, starting from failure to adhere to IMF programmes to bad governance and corruption, to reduce, cut or even stop, giving support to the developing countries.
It will not make an economic sense for them to heavily tax their citizens and send the money to Africa. With no outside aid African countries will really be in deep problems as most cannot raise enough to provide for their own budget and depend on foreign direct budgetary support.
The crux will be when the debt crisis reaches the Oil and Petroleum Exporting Countries (OPEC). These ones are likely to raise oil prices to raise more money which will also be a big blow to African countries. We rely on imported petroleum products bought in US dollars even for countries like Nigeria and Libya where they have oil deposits.
In short the start of the debt crisis might the start of another world economic crisis, even of much greater degree than the credit crunch. All the countries that are being hit by the debt crises are registering an increased rate of interest of borrowing while being unsure about economic growth. This will be more pronounced in Africa because most countries have low star rating on their ability to pay. That means the African states will even be willing to offer higher interest rates just to attract lenders.
