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94 Deleveraging, What Deleveraging
are still being promoted and implemented, such as the new set of fiscal rules and
the resolution mechanism.
Profound differences between the Eurozone and the US plague comparisons.
The US has faced one financial crisis, while the Eurozone was faced with a
sequence of financial crises, each with a different timing and features. Addressing
the banking and sovereign debt crises is clearly very difficult. Moreover,
intervention is more complex in the financial structure of the Eurozone, which
is a bank-based system with large banks, than in the US market-based system,
where price signals are continuously available and naturally more conducive to
prompt policy intervention.
Different statistical and accounting systems also matter. The accounting
standards in the Eurozone tend to produce higher bank leverage than in the
US. The consolidation technique is different between the FASB and the IFRS.
This contributes to the differences in measured leverage and it complicates
benchmarking, as the comparison of the two regions’ non-financial corporate
sectors shows. These heterogeneities and their implications must be recognised.
Real growth also requires attention. An example is the situation in the
Netherlands and Italy. In the Netherlands, leverage is high but the country is
growing and there is no financial tension. In Italy, leverage (public and private)
is much lower but growth languishes.
While concerns about China are justified, we still need to ask what would have
happened to the global financial system had China not supported global demand
after 2008 Most likely, the global financial system would be in a much worse
shape. The adjustment process in the US would have been much more difficult.
Furthermore, it seems that the Chinese authorities have the necessary resources
to intervene in order to ensure financial stability. China is still a developing
country and it needs to grow and generate 10-12 million jobs per year to avoid
social tensions.
Finally, the unresolved problems of US debt, the protracted poor growth in
the Eurozone and the expansion in leverage in China are the symptoms of the
same illness: a global debt overhang, as observed by Claudio Borio. A global view
of leverage and of possible policy measures would recognise the externalities of
national policies and call some form of international coordination.
Angel Ubide, (D.E. Shaw Group and Peterson Institute for International Economics
Angel Ubide argued that there has been a paradigm shift because someone
created the ABX index. When the ABX index was created, investors could short
the housing market, ABX assets became informationally sensitive and the repo
market dried up. Assets and important elements of the economy essentially
changed from being white to being black. This led to shadow banking risk
aversion and to declining asset values.
Flight increased risk aversion, the US policy response shifted debt from the
private to the public sector, lowered interest rates and promoted risk-taking by
quantitative easing and forward guidance. There is nothing in this explanation