We're busy with elections but let's not forget what's happening in the world and how we will be affected, irrespective of which party forms the next government.
A recent Citibank report states that several countries in the Caribbean "have European debt dynamics", a euphemism for being on the brink of default. What happens in Europe is vitally important to governments in the Caribbean because first, the existence of a debt crisis in Europe will cut into consumer spending including expenditure on tourism in the Caribbean. Second, the conventional wisdom is that how the European debt crisis is handled will have important implications for how other heavily indebted countries will be allowed to reorganise their debt.
The vicious circle of indebtedness has a stranglehold on the European Union. The faltering steps by the EU to control and reduce the debt and prevent serial defaults across the union are of vital importance. This is so because of the role of the EU in the global economy, the distinct possibility of igniting a global contagion and elements of the approach could form part of a model for other regions such as Caricom.
Italy is the world's third-biggest sovereign borrower and at the moment, the IMF is conducting "enhanced monitoring" of Rome's policies. The recently concocted Franco-German plan to stabilise the Euro involves shoring up Italy and Spain. The EU will be setting the rules, enforcing the rules and providing the money. The IMF is on standby but it is not clear what role it will be called upon to play if there is a big bailout for Italy and Spain and if the European Union has sufficient resources to go ahead without the IMF.
Standard and Poors (S&P) has announced that they had put 15 of the 17 Euro Area countries on watch for sovereign credit downgrade, including France and Germany, with the two exceptions being Cyprus and Greece, which are already rated low enough. France was one of a group of nine countries for which a two-notch downgrade is a possibility.
S&P cited the interaction of several adverse factors, but the main drivers of this negative forecast are the tightening in fiscal policy and the increased possibility of a region-wide recession in 2012. S&P now projects 0.4% growth for the Euro Area in 2012, with a 40% chance of an outright decline. Many economic pundits think that the likelihood of an outright decline in 2012 is far higher than this.
The threat of a collective downgrade of euro-zone credit spread like a tsunami over European markets, dampening confidence in plans for a solution to the debt crisis. However, markets recovered from an initial unease and German Chancellor Merkel dismissed the threat of a collective or European-wide downgrade by the rating agencies.
Given that the small, developing economies of the Caribbean are among the most vulnerable to events in the global economy and given the limited resilience of this type of economy, there is need for a new debt adjustment/management paradigm. The Caribbean should be doing the technical formulation and the political leadership must take this initiative to the international community for funding and technical support.
Now that even the formally immune European Union is caught in the throes of a debt crisis it has created the political receptivity to new ideas about debt management. The Caribbean must seize the moment to help ourselves.