A NOTHER day on the stock markets and another incredible swing — fortunately this time a surge. It follows action by the Europeans rather than the Americans — not inappropriate since the EU is the world’s biggest economy. Moreover, one of the major factors in the continuing panic last week was European procrastination, with governments unable to act together until forced to by the imminent prospect of global meltdown. As an aside, this demonstrates the importance of European financial coordination: European governments acting on their own not only failed to stem the crisis, they exacerbated it; European governments working together have — even if copying the model unilaterally unveiled by the British whereby billions are injected into the banks in return for equity — boosted investor confidence. That said, instant solutions of the type the markets wanted, with blank checks attached, would not have resolved the crisis — as was seen with the US initiative; it did not stem the alarm. Time was needed to understand the deeper issues and come up with appropriate response. Not that the Europeans actually intended to take their time. That was more an accident. Nonetheless, the plan agreed by the euro-zone leaders has the merit in that it addresses the poisonous legacy of bad debt and unblocks interbank lending, one of the key concerns of the market.
It must be hoped that confidence will now return. It has been the commodity most absent in recent days and without it there is no hope of normality. Unfortunately, there is, equally, no guarantee that markets will not plunge again in days to come, despite the trillions of dollars being put into them by the world’s governments and the trillions more promised in guaranteeing investor accounts. That is because for the moment there is systemic pessimism in the world’s market places. Investors are looking for what can go wrong with politically-led rescue plans, not what can go right — and there is one big thing that can still go wrong: Recession in the industrialized world. In their present mood, investors are quite capable of panicking themselves and the markets into fresh turmoil over fears of recession. There is not a full-blown one as yet but if it comes, it would have devastating effects on the exporter economies of Asia, particularly China. India would suffer too, though probably less so since it is more focused on the expanding domestic market than the Chinese.
So too would oil exporters. In the chaos, everyone seems to have forgotten about oil which has nearly halved in value in just three months over fears of a recession cutting demand for energy. On Friday, amid the general panic, the price hit a one-year low. Prior to the financial crisis, that would have been the big news, with forests of print devoted to it. It is a sign of the new financial world we suddenly live in that oil prices are a nonsubject and that yesterday they leapt on the back of the European initiative.
Beforehand it was bad news that pushed them up — hurricanes, terrorist attacks on pipelines and the like. Now it is good news.
Not that Saudi Arabia is going to suffer from lower prices, unlike those producers that have committed all their abundant oil revenues to spending plans. Saudi investors, like investors the world over, may be nervous but the Saudi economy is in very strong shape — stronger than at any point since the first oil revolution of the 1970s. The country has earned so much over the past two years that coffers are overflowing — and will remain overflowing for some time to come, even taking into account the costs of all the mega projects planned. Prices would have to drop below $25 a barrel for it to cause consternation here, which is extremely unlikely. The country has plenty of cash and there are plenty of bargains to be picked up at the moment.
