Don’t add gasoline to the fire

Last week, the World Bank made public a report  entitled “Global Economic Prospects Summer 2010: Fiscal Headwinds and Recovery”. The report warned that “a serious loss of confidence in the debt of the five most heavily indebted EU countries (EU-5) that led to a freezing-up of credit in those countries could cause GDP growth to slow by as much as 2.4 percent in 2011”. If one looks at the statistics, the most indebted countries in the European Union are Italy, Greece, Belgium, Hungary and France, in this order.

                                Source: Eurostat

However, according to the World Bank, the top 5 countries in the “most heavily indebted” category are Ireland, Spain, Italy, Greece and Portugal. These are the countries the report focuses on. The Spanish newspaper El País contacted the World bank after its report was published, to inquiry about the reason for this mistake. A spokesman from the World Bank lamented that the “unfortunate” redaction of the text actually refered to a combination of national debt and deficit, without further explanation on the criteria the World Bank had employed in this case. Hours later,  it published a modified version of the report which now read that “a serious loss of confidence in the debt of five EU countries combining high fiscal deficits and high government debts that led to a freezing -up of credit in those countries could cause GDP growth to slow by as much as 2.4 percent in 2011” (our italics). The mistaken statement had been dropped out.*

The references to the Southern European countries (plus Ireland) conjure up a regrettable image that was popular in the anglosaxon media in the 1990s. Back then, it was in vogue -in the British press in particular- to allude to the economic problems of Portugal, Italy, Greece and Spain with the derogative term of PIGS, an acronym formed with the initial letters of those countries.

It seems reasonable to think that in these times of extreme anxiety on the part of the financial markets, both media, institutions (whether public or private) and governments ought to display information with the utmost care and rigor. This is because documents such as the aforementioned World Bank report, or rumours fuelled by certain newspapers and not rebutted by the goverments concerned (i.e., the article in the German newspaper Frankfurter Allgemeine Zeitung which attributed last week to official sources in Berlin the probability of a Spanish request of financial help from the EU) are potentially harmful pieces of information in the nervous hands of international financial actors.

This kind of misguided information is amplified by the markets, overriding other positive and often more important elements that might also be taken into account. The interaction of the market’s very selective perceptive capabilities with the cacophony of half-truths and exaggerations displayed by the media often results in a self-expanding hysteria that builds up until it has tragic consequences for the real economies. For instance, the mentioned speculation regarding a European rescue of the Spanish economy was among the reasons the diferential between the German and the Spanish bonds reached 204 basis points. To counterbalance the hearsay about the ailing health of the Spanish financial system, the Spanish government has pressured the European Council to make public the results of the Stress Test recently conducted by the Committee of European Banking Supervisors, in which the Spanish banks are supposed to have fared quite well. Needless to say, this positive news has yet to offset the bad ones and, although there are many reasons for this, the asymmetric sensibility of markets towards some often inaccurate flows of information -working hand in glove- is one of the most important aspects.

To be sure, it is up to the goverments in question to give precise information and, better still, to come up with credible, sound plans of stabilization. In this regard, they are the ones responsible for restoring their good name. However, there is no doubt they would certainly welcome the help of institutions that are supposed to be unbiased, in the form of impartial and diligent public assessments, and not stigmatizing ones. In the present circumstances, anything else would amount to adding gasoline to the fire.

(*) The original report is here, and the modified version here.

Francisco Beltran

Researcher, Institute for European Studies, University of British Columbia