Failing Banks, French Turmoil & Sri Lanka’s Contraction & Confusion
By Rajan Philips –
Last Wednesday, March 15, the Department of Census and Statistics (DCS) revealed a whopping 7.8% contraction of the economy in 2022, the fourth quarter being the villain with 12.4% negative growth. Everything now is the worst ever. But there is no contraction, whatsoever, in the political confusion that is twisting the country’s parliament in knots. In global economic news, the dramatic collapse of the Silicon Valley Bank (SVB) in California last week, followed by New York’s Signature Bank, and Credit Suisse’s public woes on Wednesday, in Zurich – all in a span of five days, have raised alarms about a repeat of the 2008 financial crisis. In France, the Macron government is executively pushing through pension reforms without a parliamentary vote and risking an even more heightened confrontation with protesters who are already out on the streets in their millions, from Marseille to Paris.
There is no connection between the bank failures, French protests and Sri Lanka’s contractions and confusions, but by juxtaposing parallel developments one might luck out in getting better insights than by navel gazing into homegrown sovereignty. The troubles facing the two American banks and the premier Swiss bank have been primarily attributed to their idiosyncratic circumstances. Poor risk management is suggested in the case of the Silicon Valley Bank, which although only 40 years old is the 16th largest American bank and the financial mainstay of the technology sector. It has also been compliant with regulations and did nothing improper. The 167 year old Credit Suisse, on the other hand, has long been beset by scandals, losses and plummeting shares.
Whatever is necessary
At the same time, amidst growing market and investor fears, the three banks in trouble are being seen as the first casualties of the aggressive interventions by central banks to raise interest rates and tighten monetary policy to end what is being called “the era of easy money.” The era of easy money began after the inflation crisis of the 1970s and the downward trend in interest rates that followed. Easy money flow became a flood after the 2008 financial crisis and more recently the pandemic, which triggered near-zero interest rates and stimulus funding as necessary responses to avert economic depression.
The not wholly unintended consequence has been the steep rise in national and global debt levels. To put it in perspective, the global debt level rose by 30% in five years to a staggering $300-trillion in 2021, which is 350% of the annual global GDP of $85-trillion. The combination of debt and rate hikes in the new fight against inflation has made the financial system, if not the real economy, vulnerable to failures. The Silicon Valley Bank (SVB) which had created an unusual mix of a high proportion of bond assets and large volumes of variable-rate deposits became a direct casualty of rising interest rates.
Although it is the failure of only one bank, real people were affected as technology firms lost their deposits, even if temporarily, and could not make payroll leaving thousands of employees in the lurch. But this is America, where during a government shutdown standoff under former President Trump that would have left the US government unable to pay its employees, Trump’s Commerce Secretary and business tycoon, Wilbur Ross, infamously asked, “why do people need salaries?” May be, no longer.
While asserting that the troubled banks were not a source of contagion to the financial system as whole, the Federal Reserve and other regulators in the US, and the Central Bank in Switzerland, have decisively stepped in to provide liquidity to stop panic bank runs escalating the crisis. President Biden has vowed to do “whatever is necessary” to protect the American financial system, seemingly echoing an identical pledge in 2012, by then European Central Bank President Mario Draghi to protect the euro from collapse.
Whatever he wants
Turning to Sri Lanka, I do not recall any pledge by President Ranil Wickremesinghe to do whatever is necessary to rescue Sri Lanka’s economy. Only thing anyone can recall is his assertion that there is no economy to rescue or reform. The other thing everyone can now realize is that rather than doing whatever is necessary, President Wickremesinghe is bent on doing whatever he wants. He has raised the issue of LG elections to a new level of presidential intransigence. He is directing the executive branch to stop funding the Election Commission to conduct the local elections. He is putting the legislature and the judiciary on a needless collision course over whose responsibility it is to manage state funds. He is daring protesters and strikers to try what they did with Gotabaya Rajapaksa, in order to teach them a lesson.
Not unlike the lesson that his mentor-uncle made clear after a shooting incident involving security forces and protesters in January 1966. Raising the matter in parliament, Dr. NM Perera asked rhetorically, whether the government thought it had the army to shoot people. Pat he got the answer from the then Minister of State, JR Jayewardene, “what else, for fishing?” More than a decade later as Executive President, Mr. Jayewardene was known to muse that he was glad that he got power late in life as he was not as ruthless as he was when he was young. It may be that President Wickremesinghe is learning to be ruthless in his old age. But to what end?
And the opposition parties are either nowhere where they need to be, or all over the place where there is no need for them. The President’s cheap maneuvering over LG elections is abominable, but he is using the election as a bone to keep the opposition distracted while he goes about doing whatever he wants. The real question is what is the President going to do about the contracting economy? The 2022 contraction is not easy to overcome, and the ongoing political circus involving the President, his nondescript government and the unfocussed opposition is not making economic recovery any easier.
If the President is going to insist on doing and continues to do what he wants, he is not going to achieve the critical level of consensus that is needed for anything that he undertakes to succeed. Aside from the LG elections the proposed tax changes have become a major flashpoint. The current standoff could have been avoided through prior consultations and the proposed measures need not have been presented as a take-it-or-leave-it fait accompli. The threatened strike action has not been a convincing success but it would be a mistake for the government to conclude that it has succeeded in stopping it. Friday’s announcement that the organizations opposing the tax changes are going to meet with the Secretary to the President and eventually with the President himself, is a positive sign, but such meetings could and should have occurred before, and not after, the tax proposals were finalized.
In a vastly different situation, French President Emmanuel Macron with his executive fiat to raise the legal age of retirement from 62 to 64, is taking on some of the sacred cows of French society – the deeply ingrained commitment to equality and social solidarity, and the equally well grounded resistance to unbridled capitalism and suspicion of profit motives. Quite a far cry from the conventional American ethos which celebrates greed and profit so much so that someone like Trump was cunning enough to exploit it to win the presidency. Sri Lanka is neither here nor there but it doesn’t have to be either/or. It can remain small and in the middle, even if not beautiful always. The French resistance to having to work two years longer to get their pension is not the same as the opposition to taxation in Sri Lanka. There cannot be social security without progressive taxation, but it is not easy to change a system of low taxes or no taxes that people have got accustomed to without provoking a backlash.
President Macron has gone to unprecedented lengths to achieve his retirement age goal. Having secured the passage of the pension bill in the inherently conservative Senate, the Macron government on Thursday invoked the ‘nuclear option,’ Article 49.3 of the constitution, and adopted the pension reform by executive decree without a vote in the legislature, where the government does not have a majority. In the peculiarly French way, the same article allows the opposition to automatically bring in a motion of no confidence against the government.
Such a motion may likely succeed as President Macron currently heads a minority government having lost his legislative majority in the parliamentary election last June. Out on the streets, turmoil continues as France faces political uncertainty and not without revolutionary nostalgia. It has been said that President Macron is risking his political future by going ahead with his plan to raise the legal age of retirement. “You have to take your risks,” is his mantra. At 45 years of age, nearly 20 years to retirement in any job, Mr. Macron has indeed taken a huge risk. President Wickremesinghe, on the other hand, is 74 and does not have too much of a political future left to risk. But he seems prepared to risk the country’s future to get one elected term as President.
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