SIGNS OF economic recovery are unlikely to emerge before the end of 2010 or even early 2011, a leading economist said yesterday.
Prof Willem Buiter said the recession of the real economy was only just beginning outside the United States and, because of the “tattered” state of the financial sector, it was likely to be both deep and long.
Prof Buiter, a former member of the Bank of England monetary policy committee and professor of European political economy at the London School of Economics, was addressing the sixth Mercer European Investment Forum.
He was addressing more than 300 of the largest institutional investors and asset managers from across Europe who, between them, are responsible for more than €1 trillion of funds. He said banks globally had been procrastinating on the state of their balance sheets.
Recovery, in part through recapitalisation and new lending, would only be possible when banks disclosed fully the scale of their bad debts.
He was hopeful that, “by the end of the year, we will truly know who has been swimming without trunks”.
The excesses of Irish banks were not as bad as those in Iceland, he said, but they were not far short.
“There was no supervision, no regulation and wild excess. Ireland saw the biggest building boom since the pyramids and this is going to be a painful adjustment,” Prof Buiter said.
“It is only because of the implicit guarantee of euro zone partners, particularly Germany”, that Irish banks and the State itself were likely to emerge from the present crisis.
Prof Buiter said one casualty of the crisis would be cross-border banks, unless the European Central Bank managed to implement at least a rudimentary fiscal Europe, with “binding burden sharing agreements on cross-border banks put in place ahead of any future crisis”.
However, he said figures for money supply, central bank discount rates and government deficits showed that policymakers had learned the lessons of the past and were taking more decisive action to address the economic slide.
While it would be premature to read too much into the current stock market rally, Prof Buiter said that, over the medium term, the outlook for equities and commodities was positive. A survey of asset allocation published to coincide with the conference showed that Irish institutional investors remain more heavily invested in equities than their European peers, with a lower weighting in lower risk bonds.
More particularly, despite the small size of the Irish Stock Exchange in global terms, Irish investors have a higher average exposure to domestic equities than any of the other countries surveyed across Europe.
However, between 40 and 50 per cent of Irish survey respondents said that they were planning to decrease their exposure to stock markets this year.
The results also show that Irish investors are least likely to look to alternative investments.
