Fatih Özatay, PhD - [Archive]

Risks everywhere! 20/09/2012 - Viewed 1758 times

European stability funds will impose certain terms for applicant countries and will closely monitor if these terms are met or not.

The other day, I stressed three risk factors ahead us: first was the risk that Spain and Italy don’t apply to the European stability mechanism. These countries need a mechanism that will enable borrowing at low interests until the economic policies in place deliver positive results. The latest decision by the European Central Bank gives them the opportunity. To benefit from this opportunity, however, they need to apply to the stability funds. From the beginning of the week to Wednesday morning, Spain acted ambivalently, which disturbed the markets. Ten-year securities of Spain started to be traded at higher interest rates due to the rise in the risk perception against the country. In short, the hike in interest was substantially lower than that would emerge if Spain does not apply to the stability funds.

ESM’s conditions

If Spain and then Italy applies to the stability funds, the first of the three risks I emphasized will most probably disappear. Let’s assume that the other two risks (US having to tighten the budget at the wrong time and Europe failing to establish a single authority to supervise and regulate the financial system) were eliminated with correct steps.

Even so, it will not be all moonlight and roses as there also are other risks beside the fundamental ones. Chief among these are: Europeean stability funds (the EFSF and the ESM) will impose certain terms for applicant countries and will closely monitor if these terms are met or not. Just as in the case with Turkey’s earlier stand-by agreements with the IMF. Possible delays or the failure to meet some of terms might escalate the tension. After all, I am not talking about Greece, but Spain and Italy which are large economies. Besides, even Greece caused substantial turmoil over a long time.

Growth challenge

All aside, many economists estimate that growth in developed economies will be below the pre-crisis levels for some time more. This is bad news for Turkey and peer countries as it will definitely have adverse effects on export performance. Foreign demand will be weaker and competition will be fiercer. Also, there is the “possible China issue”. By the end of 2011 or earlier in 2012, I addressed the opinions of experts on potential problems of China. Under the most optimist scenario, a slower growth was forecasted while the most pessimist scenario expected China to hit the wall. And I am not even mentioning the tensions between Israel and Iran, Japan and China or Syria and Turkey.

It is now more difficult even to preserve the economic status quo (or “middle income trap” in the popular trend). And we are not happy with that status quo, to begin with. At the dawn of a series of elections, no one will dare to sail close to the wind to change the status quo. This means Turkey might fall on hard times.

This commentary was published in Radikal daily on 20.09.2012