Tichy cesky pristav
Quiet and cozy Prague, with its colorful pubs where visitors over Pilsner and dumplings gossip about anything but the crisis... Czech President Vaclav Klaus and Prime Minister Miroslav Topolanek are known as Eurosceptics. And it is not just about their reluctance to adopt the euro before 2013. The ruling tandem of the Czech Republic has a habit of going against the euro trend on any issue. Generally, the Czechs are perceived in Europe as extremely conservative people, who have only recently shed their socialist past and fear any progress. France recently reminded them of this unequivocally, stating that the Czechs are not ready to preside over the European Union, especially in such unstable times. French sarcasm was fueled by Klaus's statements on the Paulson plan and the like. He argued that the multi-billion dollar injections into the market by the US and Europe are a mistake. Old Europe finds this patronizing tone highly irritating. However, the Czech Republic's incomplete integration into the global system has become its lifeline in the ocean of crisis.
The Czech Republic has a strong currency – the koruna. Since 2003, it has risen against the euro by more than 13%. The banking system in the country is quite conservative. Local credit institutions are little dependent on foreign borrowing and US financial instruments. In other words, the ups and downs in the US financial market have not made much of an impression on the Czech economy. In other words, Czech banks are more focused on the traditional business model in a still unsaturated domestic market. They are weakly connected to global players, and their securities portfolios consist of low-yield but government-backed stocks and bonds.
"Czech subsidiaries and branches of foreign banks did not engage in risky operations and accumulated enough profit through traditional instruments – deposits and loans," says Mojmir Hampl, Vice-Chairman of the Czech Central Bank. "Czech monetary policy is recognized worldwide as one of the most transparent. Inflation in the Czech Republic and lending rates have been at very low levels for a long time, and the Czech koruna, despite some fluctuations, is constantly strengthening. Therefore, the foreign currency assets and liabilities of Czech entities are very small, unlike many Eastern European countries. I am confident that the crisis will not affect the financial sector."
The uniqueness of the Czech position is also that "parent" foreign banks are not allowed to freely withdraw liquidity from their Czech subsidiaries. It even goes so far that Czech branches lend to their parent companies abroad, as, for example, the Czech branches of UniCredit do. Since almost all credit organizations in the Czech Republic are of foreign origin and the banking market is already divided, a sharp withdrawal of funds could lead to disastrous consequences. Therefore, the local central bank requires maximum transparency of all operations related to the inflow and outflow of liquidity by banks.
However, the slowdown in economic growth will probably affect the Czech Republic. The high share of exports (65% of GDP – foreign trade operations), oriented towards the US and Europe, especially Austria and Germany, where a decline in economic activity has been observed, has already led to a reduction in the country's GDP growth from 6.5% (in 2007) to 4.8% (in 2008). But these figures themselves are several times higher than those of the EU old-timers, who have already officially declared the onset of recession.
Europe's Safe
Sunny Switzerland is preparing for the ski season, for Davos, for anything but the crisis. It has traditionally remained a "quiet haven" for almost two centuries. This country is the "mother of all banks" and Europe's main safe. The reliability of Switzerland's financial system dates back to 1815, when the Congress of Vienna guaranteed Swiss neutrality. Since then, it has not participated in any wars, and therefore its banks have never been subject to expropriation. But besides traditions and political stability, Swiss banks are also known for their ability to earn without risk.
This principle was sacred until recent months, when the bank UBS – one of the pillars of Swiss finance – suffered losses. It overplayed with US mortgage-backed securities. However, UBS is a transnational bank and by definition could not avoid losses during a global cataclysm. Secondly, the Swiss authorities proved capable of dealing with their banks' problems. The Swiss National Bank created a special fund of $60 billion to help UBS. At the same time, unlike the governments of most European countries, Switzerland refused to nationalize credit institutions, providing them with disinterested assistance. However, even this is a disgrace for the Swiss, a blow to traditions. So, another wave of state altruism should not be expected. Especially since macroeconomic indicators remain stable. Despite the slowdown in GDP growth to 1.9%, by the end of this year unemployment will remain at 2.5%, and exports will increase by 3%.
Against this background, the Swiss franc also looks good, having not experienced serious declines since September 27, 1936, when even this currency fell victim to the Great Depression.
Land of the Descending Crisis
The Land of the Rising Sun works tirelessly. It has already experienced its crisis. We are talking about the financial collapse of 1990. This period, thanks to journalists, went down in history as the "lost decade." And today, the Japanese have what is called the vaccination effect: having had the disease reduces the likelihood of recurrence.
The experience Japan gained during that crisis is invaluable, as it mirrors the current US collapse. The only difference is that Japan's troubles remained at home, while America's spread throughout the world.
The Japanese economic boom in the mid-1980s led to an accumulation of large financial resources that needed to be invested somewhere. And since there were virtually no untapped segments left in the economy, investors began putting money into risky financial operations, particularly in real estate. At the same time, Japanese authorities were actively pumping money into the economy by lending to commercial banks, which needed ever more funds for short-term but profitable stock market speculation. Construction companies had a powerful lobby in the ruling Liberal Democratic Party at the time. Unsurprisingly, this sector became the main object of speculation. Land and real estate prices rose dozens of times from 1985 to 1990, and homeowners, by mortgaging their property, invested in new projects. The bubble was inflated by financial authorities, who actively lowered interest rates, stimulating a credit boom. Banks, meanwhile, took the appreciating real estate as collateral for loans.
The thread broke in 1989. The Bank of Japan, seeing that commercial banks, swollen with 'easy' money, began buying foreign currency, thereby crashing the yen, decided to raise interest rates. A domino effect occurred. Banks refused to lend cheaply to clients. They, in turn, lost the ability to refinance their existing debts and began dumping real estate and stocks. Non-payments and collateral depreciation ensued. A wave of bankruptcies swept the country. This crisis has been haunting Japan for 15 years. If we continue the analogy, the prospects for the global economy are bleak. Experts believe that the Japanese crisis was prolonged by the actions of financial regulators, which today are being repeated by American and European central banks.
Over nine years, from 1990 to 1999, Japanese authorities adopted nine economic stimulus programs totaling $888 billion. They were intended to slow the decline in asset values. These funds were used to pay subsidies to 'overindulged' companies and banks, and stock market interventions supported the Nikkei index. Perhaps the Japanese authorities made a mistake by stretching the search for the 'bottom' over many years, thereby delaying economic renewal. However, it was precisely this extended anti-crisis program that ensured the current global crisis did not become a shock for the country.
Japan's modern banking system, aided by the world's second-largest gold and foreign exchange reserves (about a trillion dollars), is highly centralized. The homegrown crisis swept small players off the stage; the remaining giants began buying stakes from their American counterparts such as Morgan Stanley and Lehman Brothers.
Communist Paradise
China persistently continues to build its communist post-industrial future without regard to the crisis. One can hardly call the Celestial Empire a 'quiet financial haven'. It is an entire ocean of stability! The head of the People's Bank of China, Zhou Xiaochuan, stated to the whole country at the end of October that its economy is in excellent condition. And this is not propaganda.
China's financial institutions are not experiencing liquidity problems because they did not participate in speculation on the global market. Moreover, Chinese authorities decided to strike a preemptive blow against the crisis by beginning to prepare a rescue operation for banks in case the inflow of investments slows down.
A soft 'safety cushion' for China is the rapid growth of its GDP, which jumped to 9.9% in the first nine months of 2008, reaching $2.96 trillion. This is, however, 2.3% lower than the same period last year. Due to the decline in consumption in the US and EU, the main markets for Chinese exports, GDP growth is expected to slow to as low as 7.5%. But even this figure is several times higher than the growth rates forecast for developed Western countries. Moreover, Chinese authorities were already planning to cool the economy administratively to prevent overheating.
Another 'cushion' is the world's largest gold and foreign exchange reserves. At the end of September, China set a new record, increasing reserves by 32.9% to $1.9056 trillion. And since most Chinese have not yet experienced the joys of stock market speculation, this money is unlikely to be quickly spent on supporting stock indices. Therefore, Chinese communism will be able to fight the global capitalist 'infection' for a long time to come.
It would seem that looking for 'quiet havens' during a global storm is a thankless task. But, strangely enough, such countries exist. And they are united by ideas of gradual and conservative economic development, rather than maximizing short-term profits. There remains hope that at the Washington summit, the 'quiet and happy' will share their experience with those who are currently suffering distress.