Last Updated on Thursday, 30 March, 2023 at 3:03 pm by Andre Camilleri

Silvan Mifsud is director of Advisory at EMCS Tax & Advisory

The macro-economic turbulence shows no way of abating. Following the shocks of the pandemic and the war in Ukraine, monetary policy all around the world was focused on battling inflation. This means that in a very short span of time we have seen significant increases in interest rates. This has led us into the so called world of unintended consequences.

One of such unintended consequences was that such a rapid rise of interest rates has effected the price of various financial securities. In turn, this las created issues for the banking world. A case in point is what happened to the Silicon Valley Bank (SVB) in the US. The collapse of the tech boom from November 2021 onwards meant that many of SVB’s corporate clients were drawing down their deposits in 2022. The high proportion of assets tied up in loans and bonds meant that SVB had not left itself a lot of room for manoeuvre should deposit outflows increase. This meant that after exhausting its cash reserves and short-term liquid securities, the bank had to start selling its bond securities. The problem for SVB was that the rising interest rates effectedthe price of the bond securities held by SVB, which dropped in value. This in turn created a perfect storm whereby as soon as depositors became aware of the above-mentioned vulnerable position of SVB it accelerated the run on the bank with quickly meant that the bank run out of capital and hence collapsed.

The ripple effects of all this meant, that a bank like Credit Suisse who was plagued by a number of situations in the past, had to sold off to UBS. Panic spread after the failure of regional US lender Silicon Valley Bank and investors began ditching anything that smelled of banking risk and deposit flight.  Credit Suisse stock slumped as much as 31% on the 15th March when the chairman of its largest shareholder, Saudi National Bank, ruled out investing any more in the company. This prompted Credit Suisse to ask the Swiss central bank for a public statement of support. The cost of insuring the bank’s bonds against default for one year surged to levels not seen for a major bank since the global financial crisis of 2008. Aware of the potential economic fallout if Credit Suisse collapsed, the Swiss central bank offered to lend it as much as 50 billion Swiss francs and buy back up to 3 billion francs of debt. This bought Swiss authorities a little time to find a more sustainable solution. Over the following weekend, they forced the bank into the arms of its local rival UBS for about $3.25 billion — less than half its market value when the shares closed the previous Friday.

Beyond all the above turbulence there are also developments that are maybe closer to home. The Eurogroup statement on fiscal guidance for 2024 issued on the 13th march, 2023 states “We agree that over 2023-24, prudent fiscal policies should aim at ensuring medium-term debt sustainability, while raising potential growth in a sustainable manner and addressing the green and digital transitions and resilience objectives through investment and reforms. Fiscal policy will help to ensure the stability of the euro area economy and facilitate the effective transmission of monetary policy in a high inflation environment.” In essence the Eurogroup is pushing to return to fiscal sustainability and hence wean off the fiscal incentives that were given by various European governments in response first to the pandemic and then the inflationary effects following the war in Ukraine. This means that the push is also to remove fiscal measures that are subsidising energy prices. The Eurogroup is concerned since by end Q4 2019, the government debt to GDP ratio in the euro area stood at 84.1%. However, by end Q3 2022, the general government gross debt to GDP ratio in the euro area stood at 93% clearly showing the effect that the pandemic and the war in Ukraine had on public debt levels in Europe. As seen below, many large economies, like Italy, Spain and France has today a % of public debt to GDP that exceeds 100%.

In the common months and years, we will also likely see a renewed push for tax harmonisation in Europe as many European governments will see this as a way to gain much needed new revenues to balance their books.

In the midst of all this, I strongly believe that Malta needs to reform and re-think its economic model. How will the present economic sectors need to be reformed in order to remain competitive? What new economic sectors will we need to attract and create in order to sustain malta’s economic growth? What skills will we need to sustain reformed and new economic sectors? What decisions need to be taken now and in the future to make sure that our economy is based on higher productivity levels and more value added? How can we also make sure that our public sector becomes more efficient leading to a public sector expense that is sustainable in the longer term? Thinking, that we can sustain future economic growth by doing more of the same of what we did in the past, will likely be a recipe for failure.

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