Tackling Too-Big-To-Fail: Overview of Proposals

Following the financial crisis, the debate over the proper way to prevent a reoccurrence of the conditions leading up the crisis has largely focused on the role of systematically important or “too-big-to-fail” banks. One of the most controversial proposals, the Volcker Rule, put forth by President Obama aims to stop banks from becoming sufficiently big or interconnected so that the failure of one does not leads to the collapse of other key institutions. Chairman Christopher Dodd in the new bill on financial sector regulation recommends the creation of a Financial Stability Oversight Council to tackle the problem of too-big-to-fail.

Poland’s Deteriorating Fiscal Position

Countercyclical fiscal stimulus helped Poland avert recession in 2009, but contributed to fiscal deterioration. According to the IMF, “Discretionary fiscal relaxation of an estimated 1.75% of GDP in 2008 and 2.5% of GDP in 2009, together with a fall in revenues due to the economic slowdown, increased the general government deficit from under 2% of GDP in 2007 to over 7% of GDP in 2009. While the government initially intended to offset revenue shortfalls to the extent needed to maintain the state budget deficit below the limit of 18 billion zloty in 2009—through what would have been highly pro-cyclical expenditure cuts—it appropriately changed such plans at mid-year, when it increased the deficit limit to 27 billion zloty.” The IMF sees the public debt-to-GDP ratio rising to 62% of GDP (above the legal debt limit) by 2014.

Germany: ZEW Economic Sentiment Indicator Declines for Sixth Straight Month

Schaut so der Aufschwung aus? hfk

• On March 16, 2010, the economic expectations survey conducted by the ZEW Center for Economic Research in Mannheim registered its sixth consecutive decline. The index, which is based on the views of 288 analysts and institutional investors, reached a three-year high in September 2009. The headline expectations index fell from 45.1 to 44.5. This is the indicator’s sixth consecutive fall. Despite the fall in the headline index, the March reading is still well above the expectation index’s historical average of 27.2, and consensus forecasts had expected a reading of 43.0. The index’s weak performance in recent months raises concerns about the sustainability and strength of the German economic recovery.