Spotlight: Avoid complacency to avert another global financial crisis, experts say

by Stefania Fumo

ROME, April 13 (Xinhua) -- Policymakers must avoid complacency to avoid a repeat of the global financial crisis that began in the United States in 2008, say international experts at a roundtable organized by the Institute for International Political Studies (ISPI), an Italian think tank.

"Clearly there is the raw material for a crisis, and there are possible triggers for the explosion of a second wave of financial disasters," ISPI Vice President Franco Bruni said, adding that "total world debt...is enormous and growing".

The last crisis was caused by excessive amounts of debt, and we are in trouble because we cured the debt crisis by entering into more debt, Bruni explained at the forum on Thursday.

"FRAGILITIES" IN EUROPE

London Business School Professor Lucrezia Reichlin said that while she disagreed that another 2008-style crisis is "around the corner", there are "fragilities" in many parts of the eurozone system.

"What we have learned from the crisis is that the euro is prone to self-fulfilling liquidity crises since the countries don't own their own debt," she said.

"We have to be very careful to avoid complacency," Reichlin said. "We have done a lot after 2008 to build a multilateral framework, which makes us more robust, and I think it would be extremely dangerous to go back."

London School of Economics professor Lorenzo Codogno, formerly a chief economist at the Italian Treasury, agreed that "Europe is intrinsically fragile, so the sooner we move to fiscal and political integration the better."

However, Codogno said he is "not particularly optimistic" on the progress of EU integration, given for example recent election results in Italy where nationalist and protectionist forces prevailed.

"Basically we remain somewhat exposed to future crises (and) crises happen -- it's a fact of life," Codogno said, adding that another source of concern is that the United States has become a source of instability because they no longer support a multilateral approach to trade.

CHINA'S EFFORTS

Gao Haihong, with the Chinese Academy of Social Sciences in Beijing, said that China is committed to multilateralism as expressed in the Group of 20 (G20) forum of governments and central banks.

"Corporate debt is high and growing fast" in China's expanding economy, she said. This leads to "vulnerabilities...linked to shadow banking (also known as market-based finance)," Gao explained.

The G20's Financial Stability Board (FSB), which monitors the global financial system, defines shadow banking as "credit intermediation involving entities and activities (fully or partly) outside of the regular banking system," she said.

The Chinese government is working hard to fix regulatory loopholes, reduce corporate debt, and reduce over-capacity, according to Gao. "China wants to reduce domestic risk and also play a bigger role on the global level," she concluded.

Brad W. Setser, a senior fellow for international economics at the New York-based Council on Foreign Relations, said that while he thinks "the risk that the U.S. poses of triggering a new financial crisis is modest", his concern is that a stronger U.S. dollar could have a negative global impact. Enditem