Yesterday at this column the results of the comparisons for the two crises I have made until today were summarized. The comparisons focused on what happened during and after the each crisis. Today I would like to take a look at the initial conditions that prevailed before the two crises. It appears that I can make the final evaluation after a few more commentaries. For analyzing the initial conditions, I will take a look at the year 2000 for 2001 crisis and the year 2007 for the global crisis. I will also address the years 2001 and 2008 in order not to constrain the analysis with one year.

The initial conditions before the 2001 crisis and the global crisis differ in two main areas. These differences pertain to the fiscal policy and financial sector. When making the comparisons, one point shall be focused on: the data on national income that we currently use was first announced in March 2008. When budget realizations for 2007 were publicized, it became possible to make an overview of the year. But before that, we used to make the evaluation on the basis of the old series. The new series derive a national income 30 percent higher than that used in the old series.

As a result, the ratio of budget deficit to national income for instance stands at 10.3% with the old series and at 7.9% with the new series. Today I will make a comparison on the basis of the new series. However, indicators for fiscal policy in particular determine the risk premium by affecting deeply the expectations and thus the confidence in the economy. I must underline that the environment before and right after the 2001 was driven by high budget deficits calculated as a ratio to the national income based on the old series. Nonetheless, the situation does not change even if the new national income level is used: fiscal policy implemented before the 2001 crisis is quite disturbed. This prevails for 1990s as a whole excluding a couple of exceptions. Table 1 gives four important indicators about fiscal policy: budget deficit, interest payments out of the budget; average maturity of public debt, and total debt of the public sector. The maturity indicator is in months and the rest of the indicators are as a ratio to GDP.

The ratio of central government budget deficit to GDP is give times higher in 2000 than 2007. When we also add the years 2001 and 2008 to the analysis, the situation gets worse against the 2001 crisis: the deficit in 2001 is 6.6 times higher! Another symbol of the distortion in fiscal policy before the 2001 crisis was that a significant proportion of the budget revenues went to interest on debts. Though the table does not give the interest payments as a ratio to budget revenues, it appears clearly that the figure is quite high.

Borrowing maturity was low before the 2001 crisis. The shortness of maturity is important in this sense: If things go bad, the risk perceived by savers increase and they refrain from lending to the state. Even if they do, they impose higher interest rates and want to take the repayment as soon as possible. The number of creditors who are willing to lend decreases significantly. However, the budget deficit of the state does not ease; i.e. the state needs borrowing. As the maturity shorten, the state has to borrow more frequently, which implies bearing a higher interest burden. What is more, the state has to deal with the concerns reading "Will I manage to borrow as much as I need?"

Public debt in 2001 is higher than all years given in the table. The figures for other years are similar. However this might be deceiving since the figures represent the debt pertaining to that particular year. The explicit and implicit guarantees the public sector provides are as important as the level of debt for that particular year. For instance, some developed countries had to bailout private banks during the global crisis. In this context, implicit state guarantees given to banks come to fore. Bailout operations pushed the public debt in these countries noticeably over one year. Therefore, the public debt for 2000 is much higher than the figure shown in the table. In fact, the main reason for the escalation of public debt in 2001 is the bailout operations. When this fact is taken into account, it appears that the public debt before the 2001 crisis is much higher compared to the period before the global crisis. So, the question to be asked here shall be: Will not the public debt tend to rise if the public sector has to launch a bailout operation? In that case will not the previously mentioned difference between the levels of public debt in the two crises disappear? These are of course fair questions; but the answer would be no.

Currently such a risk does not exist. This brings us to the data on the banking sector. Let us address this in the next commentary of the series.

Table 1: Fiscal policy indicators (as a ratio to GDP)

This commentary was published in Radikal daily on 30.05.2010