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THERE is good reason to be wary these days. Storm clouds are gathering over the global economy one more time, and large-scale disturbances have broken out. Nobody knows where they will end.
In the West, the drama unfolding around Greece has already entered “uncharted waters” according to the opinions of ministers and leading economists around the world. The referendum was only a moment’s worth of jubilation, when it seemed like the people had scored a point against the cold and impersonal forces of global capital. But that moment will not last.
Remember when Mubarak was overthrown? Didn’t it seem like a big victory of the people against a tyrant who had ruled with an iron fist for almost three decades? That moment was also short-lived as the election results made clear, followed by the coup.
The Greek debacle has few direct implications for Pakistan, but indirectly it can have massive consequences, depending on how it ends.
The Greek debacle has few direct implications for Pakistan, but indirectly it can have massive consequences, depending on how it ends. The debacle threatens the world economy in more than one way, and our country is critically dependent on the vagaries of the global economy, despite many who assure themselves falsely that we remain insulated from global storms. They were all collectively proven massively wrong in 2008, not the first time that reigning conventional wisdom has fallen flat in the face of facts from an inexorably driven situation.
How exactly does the Greek drama threaten us? We are a small economy by comparison to Greece. Our bailout in 2008 was $7.6 billion, of which $3.1bn was made available immediately. That’s all it took. Compare that to the cumulative 132bn euros released to Greece under the European Financial Stability Facility, far lower than the total committed. The scale of what is required in Greece is staggering by comparison.
Second, the stakes in Pakistan are of a totally different nature. Greece holds the fate of some of the largest economies in the world in its hands. If it defaults, and undergoes a disorderly exit from the eurozone, the impact will be felt hard in Germany and France who are some of its largest creditors. Our economy hardly even registers on the radar of major economies.
But our stakes are entirely geopolitical in nature. Nobody wants to risk a cataclysmic economic event in an unstable nuclear-armed country. In the past, whenever small countries have been unplugged from the circuits of global capital — Somalia, Sudan — they have descended into war zones run by militias. With only a few billion dollars as the bill, nobody wants to play with stakes of that magnitude.
It would be a mistake, though, to seek too much comfort in that fact. The world is changing very fast, and weariness amongst the advanced industrial countries for footing other people’s bills is rising alarmingly. What’s more, our alternative benefactors — China and Saudi Arabia — are struggling with problems of their own.
Which brings me to the second major storm cloud gathering over the world economy. Greece may have captured the headlines for now, and with their historic ‘no’ vote, may also have temporarily captured the imagination of many. But beneath the headlines, another large event is unfolding and nobody knows where it will end.
China’s stock markets are collapsing at an alarming speed. The People’s Bank of China is spending huge amounts of money to “hold the line against the outbreak of systemic or regional financial risk”, in its own words. Read that statement again.
When you hear a central bank talk about “systemic or regional financial risk”, it’s worth sitting up and taking the words seriously.
Two of China’s large stock market indices have dropped by almost 30pc in less than a month of continuous declines now that are gathering pace. Almost $3 trillion of value have been wiped off in the process. Trading in 50pc of their stocks has been frozen while the government works through a number of different state-owned entities to try and inject massive doses of liquidity into the markets, through a large stock-buying programme.
But it’s not working. Most recently the rout has extended to Hong Kong, Australia and even Sensex, India’s leading stock index, which have seen sharp declines as investors become spooked. Chinese authorities are showing signs of panic as well, evidenced by Chinese state media jumping on foreign funds that are encouraging investors to stay away from the stock markets, calling them “foreign crocodiles” and “foreign devils” and blaming the rout on them.
Already many commentaries are comparing the slide to 2007 in the US, when a slide began that ended in a crash so large it was compared to the Great Depression. In other places, questions are being asked whether the rout is a correction or “the first sign of deeper problems in the Chinese economy”, according to Vox.
That is the key question. China’s economy roared through the great financial crisis of 2008 with double-digit growth and looked invulnerable for a moment. It has ridden a massive stock market spike in the last couple of years, but its growth rate has slowed to 7pc. There have been stock market routs before too, but none in the context of a falling growth rate.
The point is, nobody seems to have an idea of where this will end. At some point, continuous declines in the financial markets can spill over into other asset categories, and some of that has happened already with metals plunging. But recall that China’s central bank has already raised the prospect of systemic risk, and you’ll get a sense of how serious the development is.
All of this matters to us because the affected countries are tied to us, either as export destinations or benefactors. Stock market routs inevitably land on our shores, despite the efforts of our brokerages to tell us that we are insulated from global developments.
Storm clouds are gathering east and west, and a sign on the road reads “caution: headwinds ahead”.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, July 9th, 2015
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