a must listen, page-2

For those of you who are unable to listen to the on air story, here is a transcript.

http://www.abc.net.au/pm/

Act now or we're doomed: risk analyst PM - Tuesday, 10 March , 2009 18:22:00
Reporter: Stephen Long

MARK COLVIN: The risk analyst and author Satyajit Das predicted the current economic crisis in 2006. He wrote a paper titled 'The Coming Global Credit Crash', highlighting the toxic debts that would poison the global financial system.

Mr Das now says that unless urgent action is taken, the world is headed for a sovereign debt crisis that will doom us to something akin to the Great Depression.

Echoing the World Bank, he says businesses and governments in the emerging economies are already being choked by a lack of funds. And he fears that even advanced nations like America and Britain will not be able to finance their massive banking bailouts and stimulus packages.

Satyajit Das has just returned from a trip to Singapore, Japan, Canada and Dubai. He talked to economics correspondent Stephen Long about what he'd seen and heard.

SATYAJIT DAS: Well I think the real situation is now getting to the point of diabolical, particularly in, people in the export industry, trade protectionism has kicked in, they cannot get any money financing, they're actually getting squeezed both on the sale side and the financing side.

In places like Dubai, where obviously property speculation has been a big part of the economy, property prices, particularly at the high end have fallen by between 30 and 50 per cent. The best way to describe Dubai, which at one stage had 14 per cent of the world's cranes employed, is there are a lot of cranes, but they ain't going anywhere.

STEPHEN LONG: What was it like Asia; there have been some horrific figures on growth and exports, particularly from Japan, with exports down 46 per cent.

SATYAJIT DAS: The export industries have essentially just hit a wall and fallen right of the edge of it.

It was fascinating talking to somebody in the computer industry in Japan, who said they had not received one order since the month of November, and they were essentially looking at a blank order book once their existing orders are fulfilled.

STEPHEN LONG: So, IT ordering has just collapsed.

SATYAJIT DAS: Absolutely, and you're seeing that in figures of much larger companies like Intel, where effectively their profitability, cash flow, sales have fallen by an alarming rate.

STEPHEN LONG: So where does this lead?

SATYAJIT DAS: Well I think what we're now seeing is a global coordinated slowdown. For the first time in a very long time we're seeing global trade come down, for the first time in a very long period of time we're seeing global capital flows.

To put that into perspective, in 2007 global capital flows, that's money flowing from country to country, particularly to emerging countries, was just under a trillion dollars. This year it will be under 200, nobody can get any money.

So essentially global growth cannot continue and we are going to see a coordinated recession. It's only the depth and the length of that recession seems to be in doubt.

STEPHEN LONG: Well that collapse in global capital flows is one of the very, very serious concerns in this crisis, but most people wouldn’t perhaps understand what that implies.

SATYAJIT DAS: It occurs at different levels, for instance India requires itself about 10 per cent of its gross domestic product. For the size of the economy, 10 per cent has to be borrowed overseas to finance its businesses. So they cannot get any financing and if they can't get financing, particularly where they have borrowing which as falling due, they're in serious difficulty.

At individual levels companies cannot get money to just prepare orders for sale. So this actually squeezes these companies to the point where they can't actually make things and sell them. This is also starting to affect agriculture, where farmers cannot get actual funding for crops in terms of buying seeds and buying equipment.

What this is, is absolutely totally choking the life out of the economy. It's like oxygen, debt's always been like oxygen. It's now not there in the room and everybody is suffering from a bad case of asphyxiation.

STEPHEN LONG: Yesterday I interviewed Ashok Sharma from the Asian Development Bank and he said that there is virtually no credit in emerging Asia, companies can't get loans, governments can't issue bonds, they can't raise money.

SATYAJIT DAS: Well I think this is actually the first phase of a major, major problem that will play out to the rest of 2009 and beyond. What we're seeing is money to emerging market get cut off but a primary reason for that is the major developed nations, like the United States, Great Britain and so forth have to raise somewhere between US$3-trillion and US$4-trillion. The US alone has to raise US$2-trillion, and they have never raised more than about 500, a billion dollars, so that's four times their normal borrowing need.

They're squeezing everybody else out of the market.

STEPHEN LONG: It's crowding out the rest of the world but the issue then is, not only huge hunger, poverty because countries in the developing world can't get finance, but is there a real question about whether America, Britain, the major advanced western economies will be able to raise that kind of money, will be able to fund their debts?

SATYAJIT DAS: Well I think this is the question that everybody's asking and the signs are not good. For instance this year alone, we have had two German bond auctions, this is where the German state auctions its Bunds, which are its government securities. Two of these auctions have failed. What that means is when they offered a certain amount of securities for sale, there wasn't sufficient buyers to cover the entire amount.

STEPHEN LONG: And Germany is seen as one of the lower-risk nations of Europe.

SATYAJIT DAS: That's absolutely correct, and Great Britain recently issues 30-year bonds and one dealer to me described this auction as a debacle, as this process unfolds over 2009 we are effectively seeing the US issue between $40-billion and $60-billion of paper every week. And at some point in time there is going to be a problem of demand.

Will people buy it? It depends now on the Chinese and Japanese and these developing countries - their appetite for this paper.

The problem is they themselves are in a position where their surpluses are turning to trade deficits, we've just seen that with Japan. And so under those circumstances, there just isn't the money. So this is the million-dollar question, or the trillion-dollar question – will they be able to get this paper away, or will they have to resort to literally the Zimbabwean option of printing money.

STEPHEN LONG: OK, I'll give you the priceless question – is there anything that can be done to avoid this economic and social catastrophe?

SATYAJIT DAS: The critical thing now is a global agreement between the debtor nations and the creditor nations, to actually work out how to keep the funds flow going. Simply because if this breaks down in the way it's now breaking down, it dooms us to something akin to the 1929 period.

And the last thing that we need to do which is again being addressed, but in a very piecemeal and unsatisfactory way, is trying to get the financial system, particularly of countries like the United States, and Great Britain, to some semblance of working order.

STEPHEN LONG: What are the hopes of that actually being achieved?

SATYAJIT DAS: Human beings never do anything until they get to the edge of the abyss and look down. We are now within touching distance of the abyss.

MARK COLVIN: The risk analyst and author, Satyajit Das speaking to Stephen Long.