As share prices tumbled across the globe, finance minister Pranab Mukherjee said there was a perception about policy makers being perhaps unable to handle a possible double-dip recession.
“What is adding to the market nervousness is perhaps the apparent lack of confidence in the ability of policy makers... since both fiscal and monetary tools seem to be exhausted,” he said at a meeting of BRICS nations on the sidelines of the International Monetary Fund-World Bank meetings in Washington.
He said an area of major concern was that financial markets continued to be in a state of uncertainty, showing little confidence in the growth prospects and policy actions taken by sovereign governments, particularly in advanced markets. “The most serious problem (to be) faced on an immediate basis is the market perception that public debt of developed countries will continue to rise, even as growth remains subdued,” he added.
At a press conference of BRICS (Brazil, Russia, India, China and South Africa) finance ministers, Mukherjee also warned of the danger of a currency exchange war if the crisis deepened. This could be avoided through dialogue and not through competitive devaluations, he stressed at a crowded press conference. At the BRICS meeting, he said with the near-term prospects in both the US and the European countries appearing bleak, experts believe chances of a double-dip recession could not be ruled out.
In the euro zone, the indications are that drastic austerity measures might entail a recession, without resolving their debt sustainability problem, and possibly also affect the growth prospects of neighbouring European economies.
He said, “There is also a fear that the euro zone sovereign debt crisis can spread to some larger countries that are too big to be bailed out.” He said it is, therefore, evident that the revival of the global economy following the financial crisis of 2008 has started to falter.
More From This Section
The markets seem to be speculating that while the sovereigns could bail out the financial sector, the only way sovereigns themselves could be bailed out is through higher quantitative easing, that is likely to eventually result in inflationary outcomes. Currency markets are also being impacted due to investors seeking safer havens, said Mukherjee.
“The consequences has been increased volatility of capital flows and heightened prices of safe haven assets like gold, US Treasuries and also commodities,” he said.
In their joint statement, the BRICS governments said they were open to consider additional efforts in working with other countries and international financial institutions to address the challenges to global financial stability.
However, there was no detail of any such plan. Earlier, Brazil had suggested the BRICS nations buy the bonds of euro zone countries. These five governments also expressed concern at the “slow pace” of quota and governance reforms in the IMF.