Prof. dr Goran Pitić - FEFA iznosi svoje stavove u decembarskom broju 2011 godine magazina CorD o aktuelnim ekonomskim pitanjima

1. interview
DR GORAN PITIĆ, PROFESSOR AT THE FEFA FACULTY AND CHAIRMAN OF SOCIETE GENERAL BANK’S MANAGING BOARD
Cash Falls - Crisis
Grows ■ By Mirjana ZEC
Back in 2008, many
economy experts and
analysts claimed that
the economic downturn,
which just started to show
all over the world, would
take the shape of the letter
“W“, i.e. the crisis would
sharply reduce economic
development, primarily
in America and Europe,
then recovery would ensue
followed by another heavy
decline and slower recovery
W
The events from the past
few months just validate
this theory, particularly in
Europe. Professor at the
Belgrade FEFA Faculty and
Chairman of Societe General Bank’s Man-
aging Board, Dr. Goran Pitić warns that the
second crisis blow could leave more seri-
ous consequences than the irst one. The so-
called crisis economies would be able to pull
through, but only with an abundant helping
of European money or the IMF funds.
Hence, we ask professor Pitić for his opinion and forecast interest rates or printed more money. This was a common pol-
on the further development and repercussions of the crisis in icy shared by all central banks. The second part of the stimu-
Europe, the world and Serbia. lative measures pertained to supporting programmes which
It is quite obvious that the logic of economic policies in were supposed to absorb the impact on economic growth and
inancial systems has changed and, undoubtedly, huge stimuli employment. In theory, there is something called ’the liquid-
was needed in order to cushion the irst surge of the crisis. We ity trap’, which means that even if interest rates are reduced,
have witnessed these stimuli being injected, either from or businesses will not bene it much from it, or react to it. What
through monetary policy or via central banks, which reduced follows is a series of dangerous de lation traps, since lower-
22

2. Regulation Politics Euro
The crisis has opened up all the sore spots of Politics certainly wriggles its way through I am afraid that the value of euro has been
the European system. Greece, Italy, Portugal and the economy. Many economic moves, pushed up by inflation, which is not visible at
Ireland are perfect examples, with bad financial especially during the time of crisis, depend the moment, so it is quite possible that the
regulation being the most vulnerable. on political relations. euro will depreciate in the future.
ing interest rates does not result in economic growth. Germany is also in the recession zone. Let’s not forget
There is a way out of such a situation, but it requires that Germany was the driving economic force and at
time and huge sacri ices. Countries are perfectly aware the core of our belief that we were exiting the crisis.
that there has to be an international coordinator that Now, it is very clear that the crisis is coming back with
will deal with the problems of large-scale economies full force. On the other hand, the U.S. cannot restore its
and not only emerging ones. In other words, this coor- pre-crisis economic rhythm and its problem now is in
dinator is supposed to provide help and make the ‘big how to come out of the recession and create new jobs.
ones’ adhere to the rules for overcoming the crisis. The The second problem is the issue of public debt and
IMF was seen in this role. how to deal with it, i.e. how to reduce it. Everything
that Europe is currently doing when it comes to the
■ To what extent can the IMF help in the case of large sovereign debt crisis leads towards an accumulation of
economies that are experiencing serious problems? new sovereign debt and that should be dealt with now
- The trouble is that the IMF proved to be insuf iciently and, particularly in the years to come.
capitalized to handle a crisis of such volume and it is
only logical if some states contributed to the Fund’s
capitalization. The IMF, faced with a crisis as big as
this one, has changed its mandate to a certain extent
and shown much more understanding for serious is-
cal stimuli than in the past. From the typical IMF ap-
proach - “Tighten your belt, reduce spending at all lev-
els, increase savings,” we have come to the philosophy
“Loosen the control of spending, but still watch over
it carefully, and save if and wherever you can.” The in-
creased capitalization of the Fund serves as a guarantee
that the crisis will not spread further, i.e. a guarantee
that the Fund can swiftly react if the Greek crisis spills
over to Europe’s peripheral zones. The most challeng-
ing part now is Italy, and this is where the biggest con- The European Financial Stability Facility (EFSF)
cerns are. In such cases and in that context, the IMF
should guarantee stability, hence it shouldn’t come as a
disposes of €420 billion and aims to increase this
surprise that Italy has accepted the IMF as its partner. amount to €1,000 billion. Italy’s debt alone stands at
Through a combination of different policies, the IMF €1,900 billion, whilst the Greek amounts to €380 billion
makes room for policies that are conducive to econom-
ic growth, and, on the other hand, shows the necessity ■ How much can the European Financial Stability Fa-
for the implementation of serious measures that stim- cility (EFSF), which was recently established, help?
ulate saving. This was evident in the Greek example. - These two institutions have two different mandates.
Over a longer period of time, for instance 5 to 10 years, The IMF is helping countries in the balance of payments
these measures will resolve the basic problem that is problem, i.e. it renders help in balance of payment lows,
evident now, i.e. the problem of sovereign debt and re- strengthens foreign currency reserves and guarantees
ducing this debt to normal levels. that certain measures will be applied. The second Euro-
pean fund has been set up with the aim of helping set-
■ When can we expect to see the irst results of tling with a certain debtor – creditor relations. Its initial
IMF’s measures in Greece and Italy? budget was €420 billion, which proved to be insuf icient,
- Currently, unemployment and recession are the main since Italy’s debt alone stands at €1,900 billion, then
problems and it is evident that we have been hit by the there are the Greeks with €380 billion and several other
second wave of the crisis. Italy has accepted IMF and similar countries. The EFSF simply cannot deal with such
its supervision, and, in the case of Greece, it is highly high debts. Hence, the plan is to increase its budget to
likely that it will follow suit. According to some signals, €1,000 billion which, albeit, is considerably higher, but
primarily the data coming from the industrial sector, still not enough to handle a possible big inancial shock
23

3. in Europe, which could easily happen if the situation is ■ Where can additional funding be obtained, since
not kept under control. The EFSF is supposed to prevent it is rather obvious that both the IMF and the Euro-
the problems which engulfed some EU members (like pean Financial Stability Facility (EFSF) need it?
Greece) from spilling over into entire the EU, rather than - I don’t believe that it is in anybody’s interest for the
solving them where they were created. Hence, the EU is European economy to be weak and I don’t believe in
trying to come up with enough capital to secure the sta- theories that the U.S. ’exported’ the problem to Europe
bility of the eurozone and to maintain the longevity of the and then left it to fend for itself. I also don’t believe
euro as the eurozone’s currency. That, at least for now, is that a weak Europe suits America and that the survival
something that all member states are working towards, of the entity called “the EU” is jeopardized. There are
especially those states that are inancially powerful. That people who claim that Europe’s economic and politi-
is why Germany and France lead the talks. cal empowerment doesn’t suit a super-power like the
U.S. since, apart from China, America would have yet
■ So, why is the U.S. mostly keeping mum to prob- another threat to its world dominance. Economically
lems in Europe? speaking, I don’t think that anybody wants such huge
uncertainty and risk. China is expected to help and that
is something that is de initely being discussed since
the country has huge foreign currency reserves. Even
the BRIC countries and South Africa have expressed
interest in helping. The thing is, that with the culmi-
nation of the economic crisis the political factor takes
over. In other words, they have their own terms, which
are not necessarily purely economic. We need to bear
in mind that BRIC countries (Brazil, Russia, India and
From the typical IMF approach - “Tighten
your belt, reduce spending at all levels,
increase savings,” - we have come to
the philosophy “Loosen the control of
spending, but still watch over it carefully,
and save if and wherever you can“
- At the G20 meeting in Cannes, the U.S. President said China) have their own problems to deal with and that
that it was in America’s interest for Europe to solve its they will also have reduced GDP in the coming period
problems as soon as possible and in a way that would which will undoubtedly have an effect on their capac-
secure long-term stability. We need to bear in mind ity to ’extinguish ires’ in other markets.
that America has had its own share of serious prob-
lems and that not all of them have been resolved. All ■ Is Europe on the right track when it comes to
countries are involved in dealing with the crisis in ighting the crisis?
Europe. China said that it would help European funds - There was this ‘balloon’ that came from America, be-
since it is in a good position cash wise and can ‘pump cause its inancial system was badly regulated. Today,
in’ certain funds to the IMF and EFSF. The U.S. needs to we have another ‘balloon’ that is casting a shadow over
deal with its own internal problems and, by doing so, Europe. Most of Europe is experiencing de lation pres-
will contribute to global stability. It is very important sure, and yet there is the grave danger for the situa-
for America to eliminate its problems and then give tion to turn upside down, i.e. that everything that has
Europe a push, primarily through enabling Europe’s been ‘pumped’ (the money) into the system has to be
exports and thus creating a passage to leave the reces- ‘pumped out’ at a certain point. Is everything that is
sion. Let’s not forget that the U.S. President said that he currently in lated, like huge sovereign debts, enormous
expected Chinese currency to shift since the U.S. is re- amounts of money that have been spent, big in iltrated
ally suffering from an imbalance in trading with China. risks, and large demands put on certain countries going
For quite some time, the U.S. has been claiming that to result in the euro’s future being endangered and hav-
Chinese currency has been underestimated and that ing to de late too? I am afraid that the value of euro has
that has enabled China to export to the U.S., generate been pushed up by in lation, which is not visible at the
a huge trade surplus and create big foreign currency moment, so it is quite possible that the euro will depre-
reservers, which it then uses to by U.S. state bonds. ciate in the future. Are we going to have a new inancial
24

4. balloon that will spoil the balance of power between tional pressure on the economy and, in the case of Ser-
the euro and other currencies? It is dif icult to ascertain bia, reduce project funding. Banks will have to get rid
how high the de lation will be - 5% or 40% - and what of high-risk clients and there will be fewer funds avail-
will happen next. At this moment, there are so many able to good clients. All of this imposes a great need for
new open issues starting from whether the U.S. dollar our state to improve its liquidity and help the compa-
should still be considered the global currency or should nies which are implementing state-funded projects. In
another currency emerge as the global leader, as well as other words, the state should insist on the bylaw, which
the issue of how stimulating the euro is for those econo- shortens payment terms to a maximum of 60 days, to
mies that are currently suffering and have no in luence be implemented immediately since everybody involved
on European Central Bank’s policy. In addition, there is in the process should be disciplined and both state and
the question of the establishment of a new European local debts need to be drastically reduced. By doing so,
Government, which should bring order into the iscal substantial funding for large and small companies alike
systems of member states and enforce the rule that you will be secured, which would help them to survive this
cannot behave irresponsibly in your own iscal system period and would also increase liquidity in the entire
when there is a joint monetary policy in place. system. Economic growth depends on available loans
and I believe that most banks will try to adhere to the
■ Did the U.S., Europe, Japan and some other coun- instructions that Societe Generale Bank got from its
tries have to give so much of their taxpayer money
to save the banks?
- There are institutions that are so big and important
that they should be protected from anything bad hap-
pening to them. If these institutions did fold, then we
would have something that is called a “contagion effect”,
The problem with the liquidity of
the U.S. dollar is growing in Europe
since the capital inflow from American
funds has been reduced so Brussels
has turned to China and BRIC
countries for fresh funding
i.e. the system risk would spread rapidly and would headquarters in France which stated that we need to ex-
burst at the seams. Simply put, some institutions in the ercise a high level of responsibility towards our clients.
system need to be saved at any cost. The European gov- That means that we need to ind a way to accommodate
ernments have said that it was imperative for the banks our clients during these trying times. In certain cases
to survive and have suf icient capitalization in order to that means restructuring, and in other cases debt con-
provide security and maintain clients’ trust. They also solidation, but there always needs to be an understand-
had to continue with performing their basic function, ing so we can help businesses since the bank exists to
which is retail and corporate crediting in order to pre- service its clients. Not all banks will have the suf icient
vent the side impact to the economic capacity from hap- capacities to do that since the inancial situation in Eu-
pening. Now, we have the second impact since banks rope is getting more strained as we speak - much more
need to be recapitalized. Large commercial banks have than two years ago when the crisis was in full swing. ■
to restructure their portfolios and capital structure be-
cause of the reduced capital in lux to Europe, especially
the ones from certain U.S. funds. The problem of U.S. This crisis is challenging some established economic theories, but,
dollar illiquidity in Europe is growing because of the as it turns out, there needs to be an invisible arm to regulate the
existing risks. The banks had to write off or reduce their market. The state is no longer a good contractor in the market game.
claims toward Greece and that affected their results and The state needs to lead economic policy and intervene when needed,
increased the need for additional recapitalization. but only in the short term. The market-orientated proponents are
becoming popular again, since it has become obvious that the state’s
■ How much of that will in luence the Serbian
extensive involvement is not good for the economy’s future. More and
economy?
more people agree that there should be a limit to state intervention,
- Certain banks will have to ‘clean out’ their portfolios
and reduce their credit exposure. That would put addi- since, if that doesn’t happen, the private sector will be pushed out.
25