Markets fear bank-bailout plan won't work, says top economist
Tuesday June 09 2009
NOBEL prize-winning economist Professor Robert Engle says the markets are unsure whether the Government's bank-bailout strategy will work but adds that there are signs the global economy is recovering.
Speaking at a conference in Dublin yesterday, Prof Engle said a decline in volatility on global markets was a signal that the uncertainty about the future had declined. "I think that's evidence that the financial markets see green shoots," he said.
However, Prof Engle cautioned that major co-ordinated international effort was needed to ensure that risk in markets could be managed properly.
He expressed limited knowledge on the Government's plan to bail out the banks through NAMA, but said given the recent movements on our credit default swaps -- the insurance products to cover Irish government bonds -- it was evident that the market had a lot of concern over whether the NAMA system was going to work.
Rescue
And he added he did not feel the US bank rescue plan, involving a similar approach to NAMA, was going to be effective.
In light of the decision by Standard & Poor's to downgrade Irish debt again yesterday, Prof Engle said the rating agencies were trying to compensate for their failings last year by being more proactive in their moves to re-rate sovereign debt.
While he declined to agree that they may be "over-compensating" for their failures last year, he said they were generally out of date with their ratings.
He said the credit default swaps had already risen for Ireland last week, and that the latest downgrade from S&P was merely catching up with that.
During his address, the Professor of Finance at New York University outlined his work on the modelling of risk and how it could be applied to investing in markets, in particular to identify hedges against market volatility.
He said it might be possible to assemble effective hedges against a variety of market drivers, with gold and treasury bonds highlighted as providing effective hedges against the most recent market turmoil.
- Pat Boyle
