ECB chief says many nations cannot take cue from China as they lack sufficient leeway in their budgets
Mr Trichet said that while some countries were well placed to pump-prime their economies, many lacked sufficient leeway in their budgets. -- PHOTO: AGENCE FRANCE-PRESSE
EUROPEAN Central Bank chief Jean-Claude Trichet warned that many nations lacked the fiscal ammunition to take a cue from China and spend billions of dollars to ride out the global financial storm.
Beijing pitched in nearly US$600 billion (S$894 billion) to the global campaign to stave off the worst downturn in decades to the applause of markets and policymakers who had looked to China to do its bit to help the faltering global economy.
While there is mounting evidence that the United States, Japan and much of Europe are in recession, the world's fourth-largest economy is still growing, abeit it at a slower pace than the heady double-digit growth of the past six years.
The news of Beijing's stimulus plan buoyed Asian stock markets and drove commodity prices higher. Tokyo shares gained close to 6 per cent despite a grim manufacturing orders report and markets elsewhere in Asia rose almost 3 per cent.
But Mr Trichet said that while some countries were well placed to pump-prime their economies, many lacked sufficient leeway in their budgets.
'They already have deficits now, which are very substantial, and for them the room for manoeuvring does not exist', he told Brazilian TV after a meeting in Sao Paulo of the Group of 20 of the world's major economies.
Some euro zone nations are set to breach the European Union's budget deficit cap of 3 per cent of gross domestic product this year and others have to tread carefully to stay within the limit, which the EU aims to enforce despite the financial turmoil.
In the United States, the budget is already creaking under the burden of the Iraq war and US$700 billion earmarked for bank bailouts.
President-elect Barack Obama is expected to top up the bailout with hundreds of billions of dollars in a fiscal stimulus package.
Bleak outlook Emerging markets economies that have relied heavily on foreign capital and borrowing have fared even worse coping with the global headwinds.
The flight from riskier markets triggered a capital crunch in several nations around the globe, prompting several from Iceland to Hungary and Ukraine to seek help from the International Monetary Fund, triggering a wave of credit rating and outlook downgrades.
On Monday, Fitch Ratings cut Romania's ratings by two notches to make it the first EU member with a 'junk' status. It also cut ratings on three other east European nations and said ratings of such major emerging economies as South Korea, Mexico, Russia and South Africa were all in jeopardy.
Beijing announced on Sunday plans to shift the economy's focus away from struggling export markets to the domestic economy, promising to spend 4 trillion yuan (S$873 billion) on infrastructure and social services.
It also flagged a shift to a 'moderately easy' monetary policy from a 'prudent and flexible' one, possibly heralding further cuts in borrowing costs after three since mid-September.
'This is clearly another significant step towards combating global economic risks', Goldman Sachs economist Yu Sing said.
China's stimulus plan comes on top of more than US$4 trillion in government pledges around the world for bank bailouts, credit guarantees and fiscal spending to contain the damage from the worst financial turmoil since the 1930s Great Depression.
The G20 meeting in Sao Paolo produced assurances that there would be no let-up in efforts to pull the world economy out from the doldrums, but specific action would more likely come from a crisis summit of world leaders on Nov 15 in Washington.
Spreading disease In Washington, officials were hard at work, revamping a government bailout of AIG that would bring the insurer under the umbrella of the US$700 billion financial rescue package.
In a reminder of how quickly the disease caused by toxic debt linked to US mortgages spread beyond the financial industry to other businesses and consumers, Japanese manufacturers suffered their biggest quarterly slump in machinery orders in a decade.
The Japanese data followed Friday's US jobs report, which showed unemployment in the world's biggest economy at a 14-year high, and coincided with a cut in Australia central bank's growth forecasts.
The Reserve Bank of Australia cut its outlooks for this year and next for the economy that had long been sheltered from the global turmoil by Chinese demand for its commodities.
But with Chinese industry shifting down because of a slump in export markets, some of Australia's top producers have been forced to scale back output and investment plans.
On Monday, mining giant Rio Tinto announced a 10 per cent cut in iron ore shipments.
Australia's dimmer outlook cemented expectations of more interest rate cuts after a hefty 200 basis points of easing in two months, in line with worldwide bets that borrowing costs will slide further.
Mr Trichet kept those expectations alive saying another cut in the ECB's benchmark rate was 'possible' after last week's half point cut to 3.25 per cent, a two-year low.
According to Goldman Sachs calculations, the world's 10 major economies, with the exception of Japan, cut rates by an average 190 basis points from their peaks, and interest rate markets are discounting total easing of over 3 percentage points.
ECB Governing Council Member Mario Draghi warned, however, rate cuts were not a cure-all and aggressive easing not backed by government fiscal measures could leave world markets with too much cash further down the road. -- REUTERS
