Filomena Scalise

SA can safeguard against the fallout of a potential credit freeze due to the European Union (EU) sovereign debt crisis if the government adopts a more trusting attitude towards business‚ says Investec economist Annabel Bishop.

There is a danger the EU crisis could lead to a credit freeze of a similar severity to that of 2008’s financial crisis‚ feeding through into a global recession and hence a South African one.

“An environment that increases the ease of doing business‚ assisting business instead of increasing costs and regulations‚ and facilitates the creation of new business will increase employment and so reduce poverty‚” Bishop wrote.

“To achieve this the government needs to listen to business more closely‚ altering its attitude to one of trust. Specifically‚ stock answers to business concerns should be avoided‚ such as‚ ‘We cannot engage with individual companies as this would promote special interests.’

“Instead information needs to be collected from these individual companies on what is really impeding job creation in SA‚ not the watered-down version from the industry organisations. There is always something to be learned from a conversation‚ government may well be surprised at the volume.

“While the probability of an EU crisis is high‚ at 40%‚ the probability of it not occurring is currently even higher‚ at 51%.

“If the EU summit departs from previous outcomes and results in firm commitments to fiscal‚ legal‚ political and banking union that result in new legislature supporting this‚ then our probability of the down case occurring will fall. This potential watershed outcome could see the down case’s probability fall to first 35% and then 30%‚ with the expected case of Europe avoiding a credit crunch rising towards 60%.

“The rand is currently weaker (at R8.42 per dollar) than fair value (estimated at R8.05 per dollar)‚ indicating the markets continue to factor in a significant degree of risk aversion‚ although concern over the outcome of the ANC’s economic policy conference is also affecting it.

“With policy conflicts and unintended consequences already tripping up industry in SA‚ policy outcomes that support and facilitate businesses (and so support job creation and reduce poverty) will be viewed favourably by markets.

“Further outcomes which just increase costs and the culture of dependency in SA (each taxpayer supports 2.6 individuals on social welfare)‚ are not sustainable and will cause both credit rating downgrades and rising poverty and unemployment‚” she said.

“Since 2008 markets have been separating euro countries’ bond yields from that of Germany’s bund based on the state of the individual countries’ fiscal health. Prior to this‚ all eurozone sovereign bond yields for similar maturities essentially ran at the same levels from 1998.

“The financial crisis of 2008 was the starting point‚ with euro countries most likely to default seeing their bond yields climb the most steeply - ie Greece and Ireland‚ which were the first two euro members to receive bail-outs‚ closely followed by Portugal.

“In contrast‚ bund yields tracked down sharply‚ well below pre-euro levels as Germany has become Europe’s investment safe haven.

“Europe’s largest economy consequently enjoys exceptionally low borrowing costs‚ while the weakness of the euro has boosted export growth to the point where its economy is close to full employment.

“Euro coins and bank notes entered circulation in 2002 but the concept of the euro as the currency of the common monetary union was formally introduced at the start of 1999.

“However‚ 1998 saw the borrowing costs of all initial member countries drop below even Germany’s previous levels on enthusiasm for the common currency. This proved to be short lived‚ as yields of the eleven members then tracked back to Germany’s pre-1998 level‚ reflective of the market’s view that all euro members had a similar likelihood of repayment of debt as Germany did.

“However‚ Chancellor Angela Merkel has been at increasing pains to disabuse the markets of this notion‚ accelerating the disparity between yields as she repeatedly states that Germany will not bail out the rest of Europe‚ refusing to allow her country to be part of shared debt issuance and a bank deposit insurance scheme until debt-embattled members pursue tighter fiscal rules.

“Germany is understandably reluctant to extend the consequence of moral hazard (here the GISPI’s‚ or Greece‚ Italy‚ Portugal‚ Spain and Ireland’s‚ tendency to over-borrow with other countries liable for payment) that euro membership has engendered.

“However‚ maintaining a hard line on austerity clearly could see the eurozone break up. The result for Germany of a euro breakup will undoubtedly be slower economic growth and rising unemployment on it currency’s strength‚ with the possible double whammy of higher sovereign borrowing costs as the need for a euro safe haven (store of value) falls away.

“Far better to allow greater leniency now than to relentlessly push ahead with fiscal reforms and unsustainable austerity measures that have already seen cracks appearing in euro membership. While it is not in Greece’s best interest to leave the eurozone (the bail-outs keeping the country running are also essentially grants as there is little chance of repayment)‚ other euro members are not as indebted and have a chance of surviving outside the zone as their economies are more competitive.

“The stomach for austerity measures will be measured by the will of individual countries’ populations to vote (or revote) in the governments implementing them.” - I-Net Bridge