Global confidence under further threat
The process of interest rate cuts by the main central banks active in the global economy is raising a number of questions. They include those made by borrowers who want to know why many banks are not passing on in full the cuts made in their central...
The process of interest rate cuts by the main central banks active in the global economy is raising a number of questions. They include those made by borrowers who want to know why many banks are not passing on in full the cuts made in their central rates by central banks as part of the attempt to stimulate their countries' economies, and thereby the global economy.
Such stimulation is become increasingly essential as the global economy and its individual members move more and more deeply into recession. The slowdown in economic activity is already translating into higher unemployment, as well as in failures in the business community.
The situation is such that it is not only the banks that are apprehensive about lending to each other, and to their traditional borrowers. Suppliers of goods and services too are reluctant to give as much extended credit as they did up to the recent past.
They are afraid of burning their fingers more painfully than they have already done. Various suppliers are finding themselves carrying ordered stock which cannot be delivered, as those who ordered go into administration, making the amounts they already owe doubtful debts.
The apprehension is also felt in tourism. Hoteliers in the eurozone, for instance, have already discounted the tourism year which opened in November as potentially one of the worst on record. Intra-eurozone tourism is affected by the growing recession. On top of that, the euro has appreciated by about a third against the sterling, taking holidays in the eurozone out of reach of many British holidaymakers.
This newspaper reported last week that Spain, the second largest tourist destination after France, is expecting a drop of one million tourists this year. I am not aware that any forecast has been attempted in Malta.
Nevertheless it is common knowledge that forward bookings are down, a number of hotels have temporarily closed down, while others have placed some of their staff on a part-time basis.
Hotels dependent on UK travellers will be most affected, but others dependent on euro travellers expect to be hit as well because of the recession. The negative impact is extending to conference tourism, as corporate bodies cut back on their plans in the context of actual and forecast weaker sales.
Economic operators abroad are finding it harder than ever to borrow from their bankers, thereby moving perilously close to grinding to a halt for lack of liquidity. In this context, interest rate cuts do not help at all. Those who still manage to get bank finance do welcome the cuts - at least they marginally help their cash flow by reducing servicing requirements.
That is why such borrowers are the most vociferous over the fact that many banks are not passing on in full the cuts made by central banks in their own financing rates.
Governments have huffed and puffed over this relatively new practice by lending cuts, but they have not converted implicit threats into regulatory action. With governments having to step in to bail out banks, including through nationalisation, they are generally reluctant to constrain the free market further.
Yet, if lending banks continue, on their part, to constrain the full effect of a deliberately lax monetary policy, they effectively stymie public policy and the way it is being drastically tailored to counter the multiplying negative effects of declining growth rates and even shrinking economies.
Another side of the questions being asked relates to the extent to which rates can be cut. In the United States, the Federal Bank is approaching zero rates. In the EU and the rest of Europe, there remains some leeway. But, with every central bank rate cut, markets start factoring in the next one. And the pressure immediately starts mounting for further cuts.
The question is, if central banks empty their interest rate armoury without any sign of a turnaround in economic activity, particularly in real investment, what is left for them to do?
Central banks will not say much, but they will still have something up their sleeve. And in any case, monetary policy nearly always has to be complemented with appropriate fiscal policy.
Yet this particular question is perhaps the most worrying one. With confidence already at extremely low levels, if counter actions are perceived to be ineffectual, it will go down deeper.
This is certainly not a time for faint hearts.
Such stimulation is become increasingly essential as the global economy and its individual members move more and more deeply into recession. The slowdown in economic activity is already translating into higher unemployment, as well as in failures in the business community.
The situation is such that it is not only the banks that are apprehensive about lending to each other, and to their traditional borrowers. Suppliers of goods and services too are reluctant to give as much extended credit as they did up to the recent past.
They are afraid of burning their fingers more painfully than they have already done. Various suppliers are finding themselves carrying ordered stock which cannot be delivered, as those who ordered go into administration, making the amounts they already owe doubtful debts.
The apprehension is also felt in tourism. Hoteliers in the eurozone, for instance, have already discounted the tourism year which opened in November as potentially one of the worst on record. Intra-eurozone tourism is affected by the growing recession. On top of that, the euro has appreciated by about a third against the sterling, taking holidays in the eurozone out of reach of many British holidaymakers.
This newspaper reported last week that Spain, the second largest tourist destination after France, is expecting a drop of one million tourists this year. I am not aware that any forecast has been attempted in Malta.
Nevertheless it is common knowledge that forward bookings are down, a number of hotels have temporarily closed down, while others have placed some of their staff on a part-time basis.
Hotels dependent on UK travellers will be most affected, but others dependent on euro travellers expect to be hit as well because of the recession. The negative impact is extending to conference tourism, as corporate bodies cut back on their plans in the context of actual and forecast weaker sales.
Economic operators abroad are finding it harder than ever to borrow from their bankers, thereby moving perilously close to grinding to a halt for lack of liquidity. In this context, interest rate cuts do not help at all. Those who still manage to get bank finance do welcome the cuts - at least they marginally help their cash flow by reducing servicing requirements.
That is why such borrowers are the most vociferous over the fact that many banks are not passing on in full the cuts made by central banks in their own financing rates.
Governments have huffed and puffed over this relatively new practice by lending cuts, but they have not converted implicit threats into regulatory action. With governments having to step in to bail out banks, including through nationalisation, they are generally reluctant to constrain the free market further.
Yet, if lending banks continue, on their part, to constrain the full effect of a deliberately lax monetary policy, they effectively stymie public policy and the way it is being drastically tailored to counter the multiplying negative effects of declining growth rates and even shrinking economies.
Another side of the questions being asked relates to the extent to which rates can be cut. In the United States, the Federal Bank is approaching zero rates. In the EU and the rest of Europe, there remains some leeway. But, with every central bank rate cut, markets start factoring in the next one. And the pressure immediately starts mounting for further cuts.
The question is, if central banks empty their interest rate armoury without any sign of a turnaround in economic activity, particularly in real investment, what is left for them to do?
Central banks will not say much, but they will still have something up their sleeve. And in any case, monetary policy nearly always has to be complemented with appropriate fiscal policy.
Yet this particular question is perhaps the most worrying one. With confidence already at extremely low levels, if counter actions are perceived to be ineffectual, it will go down deeper.
This is certainly not a time for faint hearts.