Prospects of establishing new fiscal sysyem

Analysis Materials 3 February 2010 12:08 (UTC +04:00)

The end of January, the Alps, Davos. The World Economic Forum is held here traditionally every year. It is too difficult to make any conclusion about forum, which enrolls the world's best economic and political brains in different sessions simultaneously, in neighboring conference halls. The logics of the current meeting like the previous was iron: there cannot be a division between 'own' and 'strange' or 'west' and 'non-west' after the global financial crisis.

There was a different scene this year. The world's leading politicians in attendance are twice less in number as compared to previous years, whilst the top-bankers constitute the overwhelming majority. Over 2500 representatives from 100 countries, including heads of state and government, representatives of the famous companies, economists, experts, heads of international organizations and mass media are attending the forum. Attending the forum were political leaders of France, Spain, Brasil, Poland, SAR, Mexico, Isreal, Azerbaijan, Columbia, Slovenia, and others.

Session is being held under the slogan "Improve the State of the World: Rethink, Redesign, Rebuild" envisaged mulling the future of planet.

Meanwhile, New York University Professor Nouriel Roubini, who predicted the global crisis even a year before it began, is very careful in forecasting the economic growth. "Developed economies will be very weak in the nearest future," he stated on the first day of the forum. Big capital inflow into the country's economy enabled to set rehabilitation of the economy, whilst the efficiency of such assistance will disappear in the second half of 2010. Roubini forecasts economic recession in the U.S., Japan and Europe.

Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, thinks that namely 2010 will become a crucial moment in the world history, because the future requires us to realize the values and restructuring the system, as well as reorganization of institutes.

Opening the current forum, French President Sarkozy continued the tune of the last year summit, unmasking the costs of excessive capitalism and urging to tough financial regulation. It was well known, that the financial sharks intend to fight with regulators in Davos, to defend own vision and rights of business. It was based on US President Barack Obama's initiative on restricting the sum, risks and activities of banking activities, or to be more correct, a direct call to market regulators to act tougher. Obama promised with confidence that American taxpayers will never become hostages of banks, which are big enough to collapse.

Pros and Cons of Obama's ideas

Even on the first day of the summit all economic sessions and panels plus talks in the corridors and numerous interviews were focused on Obama's initiative. First support to Obama's initiative came from the French President. Sarkozy said G20 should design a common position on restricting the banking business. As one knows, the governments of France, Germany, and the UK backed imposing 50-percent tax on "fantastic" bonus.

Legendary investor George Soros has called for a radical break-up of banks that are "too big to fail".

He also backed US President Barack Obama's proposed reforms to limit the size of banks at the World Economic Forum in Davos.

Analysing attempts to overcome the crisis, Mr Soros had plenty of praise for Mr Obama's plan to split big banks - separating their commercial banking bits and their investment arms. To contain these banks, he said all major economies would have to agree on a common set of financial regulation that set strict limits for leverage - how much money the banks can borrow to invest.

Prof. Roubini shares Obama's proposal, but still considers them insufficient. He advises to divide the banking business into investment and commercial ones.

Heads of giant companies and banks warned the western powers that tough regulation of the global financial system can negatively affect the economy and delay revival from the financial crisis. They were making such statements while commenting on Obama's statement about necessity of reforming the banking system during his meetings with businessmen and financiers in the run up to Davos forum.

Barclays' president, Bob Diamond, warned Barack Obama's plans to limit the size of banks would hit jobs, growth and global trade.

Speaking on the opening day of the World Economic Forum in Davos, Diamond said the growth in "large, integrated, universal banks" had been a response to market forces in the post-communist world.

Diamond said there had been the failure of a "couple of banks" caused by poor regulation and ineffective management, particularly around management of risk.

"I have seen no evidence that suggests shrinking banks and making them smaller and more narrow is the issue." A new era of "narrow" banks would be harmful, Diamond said. "The impact on jobs, global trade and the global economy would be very negative."

The banks urge that there is no need for outside regulators, as the market itself will put everything in places. So strange, why then did almost all financial institutes trust on their governments rather "magic hand of the market? Sarkozy was quite right while stating that all would collapse without the government's interference.

This position of banks is quite clear - they are first of all concerned of their own profit. However, the politicians supporting Obama can rebuked of inconsistency. Despite numerous talks about necessity of reforming the world economic system, the majority of anti-recessionary actions of all developed countries implied pumping money to the financial sector. To say simply, the governments were supporting the financial structure which Sarkozy called the major guilty of the crisis while opening the forum.

                                                          Future of the euro-zone

Another painful issue in the agenda disturbed the EU member-countries in the forum. Roubini predicted the nearing collapse of the euro-zone. No secret, the poor state of the economy in Greece served as a basis of such forecasts. The budget deficit in the country exceeded 12 percent of the GDP, which is high by four times than the figure allowed in euro-zone - three percent.

Jean-Claude Trichet, president of the European Central Bank, had a very strict answer, saying that any talks about a country's leaving the Europe-zone are absurd.

"Down the line, not this year or two years from now, we could have a breakup of the monetary union," Roubini said. "It's a rising risk."

Economies including Spain and Greece are threatened by fiscal imbalances and declining competitiveness, Roubini said. Membership in the euro means they can no longer devalue the currency to export their way out of recession, he said.

Roubini said he has never been more pessimistic about the European monetary union's future.

Spain represents a looming threat to the ability of the euro region to hold together, said Roubini.

                                      Investments in developing countries

At the same time more optimistic forecsts were sounded for the developing economies at roundtables in Davos.

Carlyle Group founder David Rubinstain belives the dealmaking has already been active in the emerging markets. India, Brazil, Korea and Turkey look more attractive. These economies have weathered the global recession quite well and are poised to resume growth.

For example, when Carlyle Group set out to raise a fund in China -- denominated in the local currency. "There's no need for "worry" about a China asset bubble, and that it's the "best place in the world right now" to invest."

There is one issue which still bothers many of China's critics - especially in the US - and that's its policy of keeping the Chinese currency artificially low in value. Which makes Chinese exports more competitive, Soros said

Increasing its currency reserves and lending other countries, aggressively investing abroad, China can make a serious pressure on the global financial crisis, but as experts also believe it is in no condition to change a balance now.

Many economists warn that foundamental reasons leading to crisis have not been eliminated yet, so there will be a second wave - this is only a matter of time.

It is not surprising that Davos forum mostly concentrated on China as a a new locomotive of the global economy.

Global energy perspectives

The Azerbaijani president was amongst over 200 heads of states assembled in Davos. Azerbaijani President Ilham Aliyev also attended the meeting on the theme "Global energy view" on January 28. President spoke about the work done in the field of energy in Azerbaijan.

Participation of a country, which holds a recognized role in ensuring the international energy security, in such a global event is almost. Ilham Aliyev attended a session Global Energy Prospects, which focused on seeking win-win approaches to energy security both to energy producers and consumers. Despite the significant fall in energy prices after they reach a pick in 2008, there is increased threat with regard to energy security. All are first of all concerned on establishing safer and more stable world energy system. Azerbaijan's viewpoint as an energy supplier and transiter in this dispute was of course of much interest.

Speaking about the country's role in the global energy security Ilham Aliyev said Azerbaijan had implemented projects of international importance due to the right policy and with the joint effort of the partners. Azerbaijan's energy resources are transported in various directions. Pipeline infrastructure has been established for this purpose.

The president emphasized the Azerbaijan's increasing role in the world natural gas market and said there were quite enough confirmed gas fields in the country. "Azerbaijan is exporting natural gas to the neighboring countries currently despite that natural gas output of some of those countries is much more than Azerbaijan. We will develop diversification of gas export"

Today, the gas supplies of the Republic are limited with the region. However, given the large potential and the minimum proved gas reserves in Azerbaijan in volume of two trillion cubic meters, and the real five trillion cubic meters, entering new markets is an attractive point for Azerbaijan," Aliyev said earlier to Russian televisions channel Vesti..

Regarding the energy cooperation between Azerbaijan and Russia, the Head of State noted that the relations between the two countries have a large history and good results.

President Aliyev spoke about the economic development of Azerbaijan and said it became one of the most rapidly developing countries of the world in the past six years. "As a result of reforms, the economic development is provided on the basis of market principles. Private sector has 85% share of the country's GDP. Despite the crisis, Azerbaijan continued its development in 2009. GDP rose 9.3% and industrial production - 8.6% in Azerbaijan last year. The national currency of Azerbaijan didn't fall in price as well".

High time for reforming IMF

During the meeting, President Felipe Calderón expressed the need to reform the international system to ensure that it meets the needs of our countriese. He declared that the recent economic and financial crisis has taught us about the urgent need to establish the basis for a fairer, healthier global economy, for which international financial institutions should be reformed, in order to reflect the current economic situation and be better equipped to cope with global crises.

The global economy, battered by two years of crisis, is recovering faster than previously anticipated, with world growth bouncing back from negative territory in 2009 to a forecast 3.9 percent this year and 4.3 percent in 2011, the International Monetary Fund said in its latest forecast.

The major problem all countries should solve is to cure their economies of own anti-recessionary programs financed by the governments. Furthermore, economic stability is still questionable.

"Notwithstanding the recent sell-off, risk appetite has returned, equity markets have improved, and capital markets have reopened," Jose Viñals, Director of the IMF's Monetary and Capital Markets Department, said.

The developing economies face a threat of big debts (it first of all concerns the U.S., which owes rougly $12 trillion to the world). The developing markets face other problems.

But policymakers still face extraordinary challenges as they seek to unwind the unprecedented fiscal, monetary, and financial support they provided to keep their economies and financial markets from collapsing, the GFSR update pointed out.

More than three-quarters of 1,200 chief executives in 52 countries polled by PricewaterhouseCoopers expressed confidence in the 2010 global economy. Over 90 percet of CEOs appraised prospects of economic growth in the nearest three years.

Overall, 81 percent of CEOs worldwide are confident about revenue prospects for the next 12 months.

Even such a confidence does not hinder anyone to find an answer to questions, which remain problematic. How to create valuable grounds; how to strengthen economy and improve social status; how to reduce global risks and concrete systematic mistakes; how to guarantee sustainable development; how to ensure reliability; how to create efficient institutes - the answers to these questions interest every county nowadays, irrespective on the level of development of development.

Obligatory decisions are not taken on the Davos platform, but still many are keen on WEF. And it is not only for its prestige. There is another important issue - very fruitful discussions are held, financial and economic relations are established, projects are discussed, agreements and contracts are concluded, and there value cannot be re-estimated both in regional and global scale.