The global sovereign debt crisis has been a much talked about topic in Asia with the general consensus being that this part of the world is somewhat immune to the problems in the West. By and large this is being attributed to the restructuring of monetary policies in the region following the Asian financial crisis in 1997.
What has been a less covered topic is how the global private sector credit and housing crisis morphed into the current sovereign debt crisis and also how the developed Western economies can now get out of the muck.
Although the market has seen a pick-up in recent weeks, the eurozone is still way off from receiving a clean bill of health and from shaking off the problems of the sovereign debt crisis. With the €750 million ($975 million) bail-out package issued by the European Central Bank in the second quarter still not satisfying the market, it is expected that overall money and credit growth will remain weak in the region well into 2011.
The forecasts are similar for both the US and the UK, with the latter expected to experience 2% to 3% growth in credit and the US almost zero growth.
"The repayment of debt is causing very slow growth," said John Greenwood, chief economist at Invesco. "And people don't want to borrow."
However, the message is not so much in the historical account of how we got to where we are now, but really how we turn the global outlook around. At a press briefing in Hong Kong this week, Greenwood spoke of five options for developed markets in the West: high inflation, default, grow out, debt trap and belt-tightening.
Out of these five, Greenwood believes the only plausible option for developed economies is the fifth one, which would require a reduction in government spending or GDP. And if such a scenario is realised, it would imply sub-par GDP growth and low inflation, even if currencies are weak.
Greenwood referred to Sweden and Finland after their 1992 crisis as well as the non-Japan Asia economies after the 1997 Asian crisis. In almost all these cases, recovery was accompanied by moderate growth and low inflation due to the deflationary effects of debt repayment.
It should be stressed, he said, that most Asian countries did not take part in the credit housing bubble. Learning from the experiences of 1997, Asian economies have been able to repair their balance sheets and have recovered much quicker from the recent credit crisis than the West.
They were able to do this by taking the Keynesian approach of keeping finance in line with industry, which has prevented leverage from building up too much in the public sector.
Where Asia, and China in particular, got unlucky was with regard to trade. Greenwood points out that, during the previous credit crisis, China concentrated strongly on exports and, as a result, experienced a very severe downturn in net trade.
"What [the West has] got to do now is build economies that are relatively immune to this kind of downturn happening again," said Greenwood.
This means that inflation will be low, but the environment will remain good for equities and very good for credit, he noted.