Financial authorities should revise their views on external debt

29.09.2011 19:27
Financial authorities should revise their views on external debt

In an interview with ARKA news agency Harutyun Mesrobian, a management expert, shares his views and thoughts about whether Armenia is threatened by the second wave of the crisis, and if yes how to protect the country from it and what to do with the economy in the future.

ARKA – There is a lot of speculation and debates now on a possible second wave of the global financial crisis. Pessimistic moods are reinforced by debt problems of several European countries making many experts predict the advent of another global crisis in the nearest future. If that happens what kind of an impact it may have on Armenia?

Harutyun Mesrobian - In fact there is no second wave of crisis because the first wave is still here. The crisis has undergone mutations aided to some extent by the government’s reaction to the 2008 crisis.

ARKA - What mutation process are you talking about?

Harutyun Mesrobian – I mean the debts generated largely by secondary market tools. If the global GDP is measured in tens of trillions of dollars, the secondary market is twice higher. In the early 20th century 90% of stock transactions were sale and purchase deals, in the late 20th century 90% were transactions on the right to buy and sell i.e. they were derivatives. These debts started to blow in 2008, and spill into the real economy sector. To keep the markets from exploding the governments began to pay their debts by budget funds, while central banks resorted to issuance of additional money.

ARKA – It was actually not the best option of anti-crisis policy?

Harutyun Mesrobian - Exactly. The authorities in many countries chose the simple but also very dangerous path. Much of the debt suddenly took shape of real sector debts. It is no accidental that this was followed by the problems in Greece, Portugal, Spain, Italy, because their debts translated from virtual to real. Thus, everything that is happening now is nothing but a mutation of the same crisis. Now we are seeing its phases caused by the mechanisms designed to combat the crisis. Today we are seeing the effects of the global crisis, and as long as the international community is not clear with some concepts, unfortunately, this crisis would be impossible to overcome.

ARKA - What concepts do you exactly mean?

Harutyun Mesrobian - The most fundamental concept today is the debt. Ultimately, the defaults that accompanied the crisis, are nothing but the emergence of debt with accruing interests. And debts must be paid off. Otherwise, if they pile up, the crisis will pass into another phase.

ARKA - In your opinion, what should be done to address this issue?

Harutyun Mesrobian - Financial authorities around the world, in Armenia too, instead of having to deal with primitive fire extinguishment must alter their views on the debt - this is the first step. Secondly, it is necessary to modify the financial markets around the world. Derivatives are good when they are only indicators of future changes, for example, futures can show currency expectations. It is very dangerous to give derivatives a chance to lure real money in the financial cycle. Third, we must abandon the single currency. Monopolization of anything in economy is already dangerous. We need to have a basket of currencies to use equally for various financial transactions.

ARKA – These are the basic directions for overcoming the crisis in the world. And what is the situation in Armenia? Will the new phase of the crisis hit us?

Harutyun Mesrobian - The crisis in Armenia is not overcome yet, and the worst is yet to come. There are countries in which the national debt is more than 50% of its GDP, there are countries whose state debt is over 100% of GDP. In Armenia, the state debt is below 50%, but is our situation better? Our economists are fond of digging deep into the numbers and stay there. The fact is that the quality of the economy shows what a burden the country is ready to take on. If a Germany-made car can handle ten tons of cargo, it does not mean that the Armenian-made car also can afford that amount of cargo. Taking more than one ton of cargo would be disastrous for Armenian-made car. Figuratively speaking, the Armenian economy is this car and it can not sustain that amount of debt.

ARKA - What's the reason for the "small capacity" of our economy?

Harutyun Mesrobian - In countries like Armenia, there is very strong polarization, indicating the presence of a privileged segment. Polarization is often seen as the cause of social tension. The greater the gap between the rich and the poor, the bigger the social tension is. But on the other hand, in a polarized society the privileged layer gets more and more legislatively-set tax breaks, and the main tax burden falls on the unprivileged strata. The resulting gap is very dangerous. Another dangerous moment is the oligarchic nature of our economy. When the oligarchs direct symbolic amounts of money for charity, avoiding the bulk of their taxes this suggests that the economy is sick and may explode.

ARKA - When a new economic recession is expected to come?

Harutyun Mesrobian - Armenia is already seeing a recession. We confuse the numbers with the real economy.

ARKA - Could you give some examples?

Harutyun Mesrobian - Here's an example. Last year’s inflation was 9.4%. What does this figure show? The authorities take 470 names of goods to calculate the subsistence basket and inflation. I believe that inflation should be calculated for three categories of population: the wealthy, on the basis of 470 items of goods; for the middle class on the basis of 150-200 items and for needy segment on the basis of 50-60 staples.

ARKA - And what will give us this mathematics?

Harutyun Mesrobian - The true picture of inflation to use as a basis to build our financial and economic policies.

ARKA - But still, how can Armenia resist a possible new phase of the crisis?

Harutyun Mesrobian - There's only one way: the government should do away with the oligarchic system. It can not be done by civilized methods because the oligarchic control system implies that laws are passed by oligarchs, who also determine the prices. In this situation it is impossible to operate by civilian methods. Only a surgery intervention will help us. --0--


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