You can listen to the interview from PM radio program - see link...

You can listen to the interview from PM radio program - see link at end of the story below.



OECD official warns of double dip recession and new credit crunch

7 August, 2009



MARK COLVIN: A senior OECD official says the global financial crisis is far from over and that the world faces a serious risk of another credit crunch and a double dip recession.

Adrian Blundell-Wignall is the deputy director of financial and enterprise affairs at the OECD.

He used to head the research department at Reserve Bank of Australia and he has worked in the financial markets for Citigroup and Bankers Trust.

He says the world's banks are still replete with toxic assets and carrying too much leverage but regulators are using a magician's sleight of hand to hide the problems.

Dr Blundell-Wignall spoke to economists Sydney this afternoon - among them, our economics correspondent Stephen Long.

STEPHEN LONG: Before the meltdown, Adrian Blundell-Wignall was highlighting the problems. At the OECD he wrote a series of papers that exposed the high levels of leverage in the world's big investment banks.

And, in an interview with PM two years ago, he warned there was a giant rolling bubble of excess liquidity moving from market to market, inflating asset prices.

Unless the problems causing it were addressed, he warned, that it would eventually burst with devastating consequences. It did, of course. So what's the world learned? He says, not much.

ADRIAN BLUNDELL-WIGNALL: To me, already, we're now basically trying to get back to where we were in 2007 before the crisis.

STEPHEN LONG: Dr Blundell-Wignall says the world's governments and regulators have failed to address the problems in the banks.

He says the lessons of history, from every crisis stretching back to the Great Depression, make it clear what needs to be done.

First, guarantee bank deposits and funding. Second, remove the toxic assets from the banks. Three, recapitalise the banks. But he says the world has ignored step two.

ADRIAN BLUNDELL-WIGNALL: Did we remove the toxic assets from the balance sheet of the banking system, anywhere? No, nowhere.

STEPHEN LONG: Instead, he says, governments and regulators have conspired in the use of a magician's sleight of hand to hide the toxic mess.

The US, for example, changed the accounting rules so banks no longer have to state the current market value of the toxic assets and no longer have to declare losses.

ADRIAN BLUNDELL-WIGNALL: If you can change the accounting rules and say, hang on, we don't have to declare any losses on this $700 billion... this $800 billion, we can now declare that they're all book value.

So, it's really there and all those losses are going to be there but we don't have to declare it, and we won't have to raise any capital for it; it'll kind of be there just hidden behind the silk screen.

So, you know, you can see the strategy. We're going to basically miss step two and we're going to play the magician juggling act to see if we can do it.

STEPHEN LONG: And trick the financial markets into thinking everything is OK so that stock markets rally and the banks can eventually raise more capital.

ADRIAN BLUNDELL-WIGNALL: And what you'll see now is bank earnings in the US and other places will start really improving and everyone's going to see headline earning of financial institutions - look how great this is; you know, we're out of jail.

STEPHEN LONG: The OECD's deputy director of financial affairs is highly critical of stress testing of the top US banks. It found that they were either sound or salvageable.

But he says that assumes the banks will be able to balance the toll of bad loans and toxic securities through a 2 per cent return on their assets.

ADRIAN BLUNDELL-WIGNALL: Now let me tell you something. US banks have never earned 2 per cent on their assets.

STEPHEN LONG: But he says it is possible that they will because central banks are lending money at zero rates

ADRIAN BLUNDELL-WIGNALL: And if that was the case; if I could really believe that banks by the end of next year would be square then I'd be basically saying let's toss the hats in the air and crack the champagne bottles, cause that's not too far away and we're probably can see the light at the end of the tunnel.

But the problem is that the next line, the off balance sheet exposures.

STEPHEN LONG: About $US800 billion in toxic assets off the books of the big banks for which they're still responsible.

And the toll of bad loans is going to get worse, he says, because claims of a US housing recovery are a false dawn

ADRIAN BLUNDELL-WIGNALL: Every time the unemployment rate goes up when someone losses their job they can't pay; obviously you can't; that's one of the biggest determinates of, you know, people having to default on their loans, and house prices being the other one.

It seems to me like there's still downward pressure there and we know the unemployment rate's going to lag the US by 12 to 18 months, so we know it's going to keep going up.

So, bad loans are going to continue to happen; that's the credit crunch aspect.

STEPHEN LONG: Europe's banks are worse, with double the leverage of America's. Adrian Blundell-Wignall also says that the efforts to rescue the world through massive fiscal stimulus and bank bailouts are unsustainable.

ADRIAN BLUNDELL-WIGNALL: When you add up the capital injections, the loans, the guarantees, the Federal Reserve actions and guarantees and so on, what you see there is the US as taken from the private balance sheet and put onto the public balance sheet, not 11 per cent of GDP, 80 per cent of GDP is what that all adds up to.

Of which on the right hand side the only 6 per cent of GDP is actually being paid.

STEPHEN LONG: And to top it off, there's a huge asset price bubble building in China and some other parts of Asia in the stock market and in property prices

ADRIAN BLUNDELL-WIGNALL: So another one of balls that has to be kept in the air is can China allow the bubble to keep bubbling? What we're talking about here is like a race.

We've got to keep all those balls juggling in the air while the banks get rid of their underlying bad debt problems, whether they admit to them or not with the change in accounting rules.

STEPHEN LONG: He says there's a clear real risk of a double dip recession and another credit crunch, but it's possible the world will muddle through, though not to healthy economic growth.

ADRIAN BLUNDELL-WIGNALL: If you can do all those things and the juggler on the stage doesn't drop one of the those balls, then you can see how you would muddle through, but it must be stagflationary cause it all works; it all works by pushing up asset prices and in the end will turn into inflation.

MARK COLVIN: Adrian Blundell-Wignall, the deputy director of financial and enterprise affairs at the OECD, ending that report by Stephen Long.

And Dr Blundell-Wignall wants to stress that these are his personal views and don't necessarily reflect those of the OECD member states.


http://www.abc.net.au/pm/content/2008/s2649677.htm