Joseph Stiglitz: The worst is yet to come

Romania's economy could continue to slide in the coming quarters at a rate similar to that registered in the first quarter, of 6.4 percent, if the effects of the crisis in Europe "are harsher than expected," according to a statement for Business Standard by Joseph E. Stiglitz, recipient of the Nobel Prize in Economics, and former Senior Vice President and Chief Economist of the World Bank.

The erstwhile Chairman of the Council of Economic Advisers of former U.S. President Bill Clinton is considering an even sharper drop in Romania's gross domestic product (GDP) in 2009 than the 4.1 percent forecast by the International Monetary Fund (IMF).

"There is a possibility that in the coming quarters Romania will register an equally steep reduction. However, the global economic decline level has slowed. This could be a positive sign for the evolution of Romania's GDP," said Stiglitz, who added that the Romanian economy will depend on the evolution of global financial markets. "The Romanian government will only be able to control to a small extent the evolution of this year's economy and that in the coming years, because this is highly dependant on the behavior of global markets," Stiglitz added.

According to the Nobel Prize winner, we are at but the end of the first stage of the crisis, but the global level drop rate slowed recently. If this trend of improvement is maintained, then IMF's targets could be met.

Joseph E. Stiglitz said that the relaunch of lending does not depend on keeping the profits of lenders in Romania. "Even if the money is not repatriated to the countries of origin of the financial institution, this does not necessarily mean that banks will resume lending. They might rather invest in state bonds, for example. So, regarding the bank's portfolio, this will not be affected by the fact that the profit was not sent abroad," said Stiglitz.

In an interview for The Money Channel, Stiglitz said that the worst is yet to come, considering the rise in the number of unemployed and the effect this will have on the financial system, because an increasing number of people will be unable to repay their loans.

Business Standard