DAWN RITCH'A SURVEY of Global Finance' published by the Economist on May 3-9 incorporated the following three paragraphs:
"...In addition to weakly regulated banks, most crisis countries had, in effect, virtually unregulated quasi-banks operating alongside (the regulated system). Thailand's finance companies are the most notorious example. South Korea had its 'merchant banks' owned by the country's conglomerates, and more or less unregulated, they were at the forefront of credit expansion and of borrowing abroad. Indeed, the government allowed these ex-finance companies to borrow abroad only if the debt was short term...
"....Having started, and grown bigger, why does the bubble eventually burst? All it takes is a shift in perceptions, reversing the one that started it all off. After a few years of overborrowing, balance sheets start to look stretched. At some point, borrowers begin to think enough is enough. Here and there, asset sales begin as firms try to restore financial ratios to something closer to normal. Prices stop rising and then start falling. Inflows of capital slow and the currency comes under pressure.
"... The central bank would like to defend the currency by raising interest rates, but finds it cannot because the weakness of the banks has suddenly become clear. All at once the abyss opens up, and there is a stampede to get away from it. Panic and forced selling accelerate the decline in property and equity prices into a crash. The government's reputation for competence tanks. As capital flees, pressures on the currency force it to give way. Lenders' unwarranted faith in the stability of the currency is important both in inflating the bubble and then in worsening the effects when the bubble bursts..."
These observations are more than a little relevant to Jamaica. This country also has 'quasi-banks'. We have also had 'asset sales' by individuals, firms and indeed by FINSAC and the Govern-ment itself. We are about to sell off the remainder of our assets, it seems, in what is shaping up to be a new round of financial collapse in this country. The reputations of both the Bank of Jamaica and the Government have been the subject of continual alarm. We have had a stampede to get away from the Jamaican dollar. Confidence is at an all-time low. The business sector and the general public continue to express grave concern about the future.
BUDGET BLOWN
It's best to start with the facts of our latest crisis. Last December Jamaica's Finance Minister Dr. Omar Davies admitted that he had blown the budget in order to win the general election. As a consequence the rate on Government of Jamaica (GoJ) Sovereign debt was downgraded by the international ratings agencies. In my column 'The Dollar Remains Under Pressure' on April 13, I pointed out that this in turn led to the value of the GoJ U.S. dollar global bond falling sharply. This, in part, resulted in losses to holders of these bonds.
I wrote then "Those local investment houses which margin-financed or borrowed to make their purchases of those U.S. dollar global bonds have now to find still more U.S. dollars to cover their short positions with the lenders overseas ...a financial crisis is not out of the question, because once again the domestic financial sector has bought long-term fixed income securities (GoJ bonds) with short-term money". In the weeks that followed the Jama-ican dollar collapsed.
Local investment houses had to find even more Jamaican dollars to pay their short-term overseas debt which is denominated in U.S. dollars. The only speculators, therefore, that the Most Honourable P.J. Patterson is likely to burn with his very recent revaluation are those who borrowed money to buy U.S. dollars.
The other category of people likely to suffer are those who can't increase their prices. These are not speculators, but people with legitimate business needs.
The only financial speculators I have been able to identify thus far, are those who simply follow the lead of Dr. Davies, the greatest speculator of them all. First in his admittedly unsound financial actions in order to win last year's General Election, and second in his reliance upon the continued issuance of government paper in order to finance his 'house-keeping' expenditures. When he and the Prime Minister complain about speculators therefore, they're both biting the hand that feeds their voracious appetite for borrowed funds.
The budget they tabled was the signal to the country that they don't intend to change their 'spend and borrow' ways. "After a few years of over-borrowing, (read Government) balance sheets start to look stretched." All in all the Finance Minister's confession, the budget, along with the doubling of their own salaries were the triggers causing a seismic 'shift in perceptions'. It made Jamaicans wake up and pay attention to the fact that the Government has no control over themselves, much less the country.
COMPETENCE TANKS
"All at once the abyss opens up, and there is a stampede to get away from it (the Jamaican dollar)... the government's reputation for competence tanks." I went to a recent workshop of the Private Sector Organisation of Jamaica, and got a terrible shock. The head of Citibank in Jamaica, Peter Moses, had just asked Dr. Davies what signal he was going to send to the financial market to ensure confidence, not over two days or two weeks, but on a sustained basis. The Finance Minister replied that while in Washington the multilaterals had said that they wanted to hear from him more often. He therefore, plans to become a more frequent communicator. He also said that this approach applied equally well to Jamaica.
Dr. Davies then went on to suggest that had he taken the precaution of telling everybody that he wasn't going to Washington to borrow money from the IMF, the Jamaican currency would not have collapsed in his absence. Is this so Dr. Davies? Very few, if any, were of the view that this visit was to seek additional credit. The collapse of the currency had little or nothing to do with the IMF. More correctly the collapse was due to the country's growing trade deficit, questions as to the attainability of the growth targets announced by the Government, and the programmed reductions in Jamaica's 2003/2004 budget deficit. People just didn't believe the Finance Minister.
Dr. Davies must really think himself the little Dutch boy with his finger in the hole. The fact is, however, that the dyke has been significantly undermined, and it's going to come tumbling down, whether or not he has his finger in it. They should take him out of the way before any repairs can begin on the country's confidence. Instead Dr. Davies remains in the position of Finance Minister. There he continues to demonstrate as always, nothing else but an abiding belief in talk.
There is no doubt that he talks very well. Indeed all the top members of the PNP Government and their economists can talk a blue stream at the drop of a hat, if you'll pardon the mixed metaphors. The problem is that everything they say is as slippery as an eel... oops, there it goes again. So there is to be no end to the audits, studies and committees commissioned by the Government. Each new study or report will lead to the inevitable press conference and fuel the endless debate about our policy options, or lack of them. Tough decisions continue to be postponed effortlessly, as though by official decree.
To paraphrase an Irishman, you'd never know there were real people behind all those numbers. Neither the ones making them up, nor the ones who have to live with them.
