As sparks fly in the EU, Thailand must keep its powder dry

It is also putting an extraordinary spin effort into playing down the size of the financial hole, thought to be in the neighbourhood of a mere 15,000 million euros.

Taking a closer look, however, Spain’s biggest banks have collectively lent over 220 per cent of the country’s 2011 GDP of 1 trillion euros. The recent takeover of Bankia, the fourth biggest lender in the country, required a 19,000 million-euro injection of cash, both in the form of equity and debt. Just how big the combined actual debt is remains anybody’s dreadful guess.

The government of Prime Minister Mariano Rajoy has tried its best not to call the cash injection for the bank’s recapitalisation a “bailout”. It has also avoided spelling out the conditions of this assistance. Nor has it said where the money will come from. The painful political backlash that is happening in Greece over the frontloaded bailout package from the euro zone’s core anchors is visibly fresh in the minds of the Spanish authorities.   

Spain may not be the worst nightmare for the EU’s financial stability and essential viability. At present, Spain’s sovereign debt-to GDP ratio is about 70 per cent, not over 100 per cent like the other three euro-zone countries that have received bailouts, namely Greece (165 per cent), Portugal (108 per cent) and Ireland (108 per cent). The country’s bond yield of about 6.7 per cent, is not quite at the 7 per cent psychological threshold for a disastrous investor backlash, but it is getting there. The next two or three months will be critical as the extent of the country’s non-performing loans will be revealed.

Meanwhile, Italy is obviously in a clear and present danger zone, with its national debt-to-GDP ratio standing at 120 per cent, second only to Greece. The recent statement by the Austrian finance minister that Italy is in such a sorry financial state that its need for an EU bailout is urgent, prompted a spiral market sellout and a furious response from Italy’s Prime Minister Mario Monti.

At the heart of the bailout issue is the gap between the requirements of the core euro-zone lender, Germany, and the political and financial realities of the borrowers.  

Recently, Dr Andreas Dombret, a member of the executive board of Deutsche Bundesbank, stated very clearly that the right cure regarding public finances in the European Monetary Union is to prescribe front-loaded consolidation, namely reform of the tax structure and tight fiscal control and discipline – i.e. austerity policies.  

He is telling the troubled euro-zone economies to bite the bullet now, not tomorrow, as tomorrow will never come without the bailouts. And of course, they may not expect bailouts to come without the front-loaded consolidation. 

Paul Krugman, one of the most prominent American economists, has argued strongly against the front-loading; it carries dangerous, negative risks and ramifications, politically and economically, that could destroy the euro. But the US is not the lender, Germany is. 

The question of how to reconcile the lenders’ requirements and the borrowers’ constraints is certainly an important factor in the European Monetary Union’s future.

What should be the course of action for Thailand in the face of this fragile and shifting global financial situation?

Fortunately, Thailand still has room to manoeuvre and time to ponder. Currently, Thailand’s debt-to-GDP ratio is 43-44 per cent, and as long as it does not exceed 55 per cent, the nation’s financial standing is still healthy. The problem is with our export revenue.

Thailand’s exports to the EU are approximately 9 per cent of our total exports, which account for 6-7 per cent of our GDP. However, the EU crisis is affecting every exporting country that is an important importer of Thai exports. For instance, Thailand’s exports to China are 12 per cent of our GDP, whereas China’s exports to the EU are 18 per cent. The same thing can be said about Japan, the UK and other countries. As such, growth in those countries is heading south; China’s economic growth in the second quarter was only 7.5 per cent compared to 9 per cent last year. It is estimated that the euro-zone financial crisis will affect about one-third of Thailand’s exports, directly and indirectly.

What the Thai government should do is to keep its powder dry and prepare the country for negative global financial repercussions.  The interest rate does not have to be lowered at the moment, so we can leverage it for a rainy day. The fiscal policies dominated by populist programmes will have to be retooled with an eye on their long-term growth effects, rather than their currently almost zero productivity enhancement benefits. 

It is also time for the government to pay close attention to those sectors, especially exports, that will be hard hit by EU volatility. Credit guarantees that the government – via the Thai Ex-Im Bank and the Bank of Thailand – could provide to ease the credit difficulties of both exporters and importers would be one policy for the government to consider.

Nobody can predict with any reasonable degree of certainty how far and how deep the euro zone’s woes will affect the rest of the world. The EU is at a crossroads and its path ahead will prove treacherous to everybody involved, in various ways, in both the short and medium term. The US economy is another toxic chicken that will eventually come home to roost. This is a time for Thai policy-makers to put the country’s economic planning at the top of the national agenda, not the interests of any particular person or faction. The stakes are too high to mortgage our future over such shortsighted and self-interested policies.