“We have avoided collapse, but we need to guard against any relapse. 2013 will be a make-or-break year.” These were the words of Christine Lagarde, Managing Director of the International Monetary Fund, at the World Economic Forum last week. She was right. The business people, policy makers and pundits in Davos breathed a sigh of relief. For the first time since 2007, the focus of the discussion was not upon financial calamity. Yet the fact that the economies of the high-income countries have not fallen off their rickety bridge does not guarantee a swift return to growth. That may well come. But it is not yet ensured.
Confidence has improved. One indicator is the spread between the London interbank offered rate (Libor) and the overnight indexed swap rate (OIS), which offers a measure of the risk of default in the lending of banks to one another. These spreads have fallen to just 10 basis points in euros and 16 in US dollars. Stock markets have also recovered strongly from troughs in March 2009, particularly in the US. Spreads between the yields on sovereign bonds of vulnerable eurozone sovereigns and those on German bunds have fallen substantially: in Italy, the spread fell from 5.3 percentage points in late July 2012 to 2.6 percentage points on 25 January 2013; in Spain, it fell from 6.4 to 3.4 percentage points. As confidence in sovereigns has improved, so has that in banks. (See charts.)
Improvement in confidence is not limited to high-income countries. In its January Global Economic Prospects, the World Bank notes that “international capital flows to developing countries . . . have reached new highs”; that “developing country bond spreads . . . have declined by 127 basis points since June [2012]”; and that “developing country stock markets have increased by 12.6 per cent since June”. This then is a global change.