Rebalancing

This has never happened before: the world’s central banks acting in concert and governments coordinating intensively in search of a way to avert a global financial meltdown.

Over this last weekend, finance ministers of what is now called Group of 20 huddled in Washington DC to devise a way to fight back a global recession. The countries represented in the Group of 20 cover 85% of the world’s economy. They have issued a communiqué summarizing the main points of agreement on a plan of action. The plan itself is in the process of continuing negotiation.

At about the same time, 15 European leaders convened in Paris to discuss a coordinated plan to save their banks, prevent a financial meltdown and bring back confidence in their markets. The meeting was called, on very short notice, by French President Nicolas Sarkozy.

Over the weekend, too, several countries including Australia, New Zealand and the United Arab Emirates announced their governments would guarantee all bank deposits. Although none of their banks are in any imminent danger, the guarantees are intended to avert further uncertainty among ordinary bank depositors that could aggravate prevailing financial conditions.

Even the International Monetary Fund stepped into the picture this weekend. From its Washington headquarters, the IMF announced its readiness to assist nations facing financial distress at this time of unprecedented market panic.

We will see this week how the markets react to the concerted efforts of the world’s financial and political leaders.

Last week, trillions of US dollars simply evaporated from sharp drops in equities markets from New York to Tokyo. Never before had the world seen so much wealth disappear so quickly from the global markets. Never had so many banks turned belly-up in so short a time and across so many economies.

After such a bloody week, a healthy correction is expected soon. Most analysts agree that the equities markets all over have become so grossly oversold. Bargain hunters should soon reenter the markets.

We are all hoping that will happen this week, after all the encouraging signals delivered by the world’s monetary and political leaders. If the correction does not happen in sufficiently encouraging magnitudes this next few days, a dark mood will begin to take hold.

Europe is not expecting to grow its economy through 2009. The US and Japan are clearly in recession. Growth in India, China, Russia and Brazil will drop significantly in the coming period — even as they will continue to perform impressively compared to the mature economies.

No one will be spared from the adverse effects of this financial crisis. The export-driven economies of Asia will take a cut in growth simply because the world’s largest importer — the US — will be very weak into the medium term. Every indication is that US consumer spending is falling through the floor.

The economic recession in the US will not be short and shallow. Most analysts are now expecting it to be deep and long. That is not good news for the exporting countries of the world, the Philippines included.

It is unthinkable that we would slide into a worldwide economic depression. There are simply more policy tools that governments could use to avert a deeper slide into depression. We now have a better sense of how economies and markets work than they had during the Great Depression.

Over the past few days, governments have demonstrated that they were prepared to use every policy tool at their disposal to head off a generalized economic failure. But that does not mean there will be no pain.

It will take some time for the policy tools that are now being used to begin producing their intended results. In the meantime, everything about how markets work and how nations seek to prosper will have to be reviewed profoundly.

The word we will hear constantly in the coming period will be rebalancing.

Licking their wounds, the banks must now move nimbly to rebalance their positions, move away from the uncertain financial products and develop a more conservative posture. The policies governing the operations of investment houses will have to be retooled to improve risk management.

Economies, too, will have to rebalance. Those economies most dependent on exporting to the US market will have to rebalance their economic growth strategies. China, for instance, will have to quickly grow its domestic market to reduce dependence on exports to the US. The US, for its part, will have to force both its enterprises and individuals to “de-leverage” rapidly.

The final root of the weakness that precipitated this financial crisis is “over-leveraging” by both individuals and corporate entities in the US. In the world’s largest economy, the ethic of disciplined savings has simply disappeared. The average American spends $1.10 for every dollar he earns. Homes were bought entirely on credit and with no savings. That produced the mortgage crisis.

In the Philippines, we have to think really hard about our options for rebalancing. Our furniture export industry crumbled ahead of this crisis when our currency appreciated sharply. Our electronics sector will likely stop growing altogether unless global consumer demand is revived quickly.

Our growth has been consumer-led for a long time, fueled by remittances from our large expatriate labor force. That gives us our unique strength given the circumstances. Once again, our migrant workers have saved the day.