The actual execution of these deals is frightfully low. Anyone who have seen the most recent results of the major investment banks would know that. The point is there are things to do but people are understandably pulling back. Now, you reference the measures of the ECB in December and upcoming, absolutely taken tail risk out of the financial system which is incredibly important. There is not going to be a style event in Europe that matters but that is different than having a well fully functioning banking system in Europe, a banking system that is lending to the real economy.
We see deleveraging effects, perspective deleveraging effects , I don’t think we are really seeing this yet, in a number of key financial markets. In project finance, in trade finance, in the commodity markets, there is a direct pullback by European Institutions. I think we should be conscious that the majority of foreign holders in the emerging markets that are European and some of this pull its capital back into Europe has directly affected emerging market capital flow so we’re getting a perverse flight from where we need growth and need capital to where it’s being repaired.
Overall in terms of the where the financial system is and I will conclude with this. The system is much healthier as a whole than it was in 2008. Capital has increased in virtually all jurisdictions, although the least in Europe which is one of the fundamental issues. Liquidity is up substantially in all jurisdictions. In fact there’s probably too much liquidity being held directly in the financial sector.
Those are the positive and a number of structured markets and other markets that caused problems have diminished very much in importance. The other way that financial resilience has increased though is left positive and I will finish on this which is that the contingency measures that institutions are taking for the possibility of a more adverse outcome in Europe and elsewhere are holding back the willingness to provide finance across the range of projects. So implementing pristine solutions will make a real difference in terms of corporate attitudes, I think, but also in terms of direct supplies capital.
Thank you very much. One of the issues is I think very much raised which a lot of the banks have complained about is they’re being asked simultaneously, immensely to improve their capital ratios and to increase their lending. I’m sure you wanted to address that sort of concern and indicate how
Completely coherent and cohesive and together the policy direction is for the world economy.
Let me now turn to you Chancellor. You are in the slightly strange position of being the nearest we have to somebody who can speak to the Euro Zone. The irony will not be lost on anybody. But anyway, you are in the meeting. I would like you to think a bit about from your perspective where the UK is in this context and what the options of the UK are and also particularly where you personally think the Euro Zone has got to and what you might want to add to Christine Lagarde’s indication of the priorities and one of the issues that we will touch on now but that we will come to later is what you think the role of the IMF needs to be in that crisis.
Thank you Martin and yeah I am looking forward. Probably the only time in my life I intend to speak to the Euro Zone. I think people have commented on the mood of this conference being quite somber but having been here for a couple of days, people have also pointed out that actually people are slightly more optimistic at the end of the week than the beginning even if, as you put it Martin, that’s because they’ve been hanged. I think, of course, the economic challenges are very self-evident to particularly western economies, particularly European economies and the UK is certainly not immune to that.
But I think, and I will focus on three things which I think rely within the hands of policy makers. Positive actions that would turn a more optimistic mood at the end of the early week of January into a more optimistic outlook for the world economy at the end of this year. I would focus on these. I mean first of all, the Euro Zone. I think it is important to recognize that for elected politicians to achieve what has already been achieved in the Euro Zone has been a real act of courage to pool your national resources into a common fund to help other countries is very controversial to undertake austerity measures usually gets you kicked out of office unless you manage that correctly. To undertake difficult structural reform of pensions or labor markets is again very controversial.
Davos 2012 – Global Economic Outlook Pt 4
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