The Other Financial Crisis
By Mohamed El-Erian
November 2, 2012
NEWPORT BEACH â€“ Two variants of financial crisis continue to wreak havoc on Western economies, fueling joblessness and poverty: the one that we read about regularly in newspapers, involving governments around the world; and a less visible one at the level of small and medium-size businesses and households. Until both are addressed properly, the West will remain burdened by sluggish growth, persistently high unemployment, and excessive income and wealth inequality.
The sovereign-debt crisis is well known. In order to avert a likely depression, governments around the world engaged in fiscal and monetary stimulus in the midst of the global financial crisis. They succeeded in offsetting nasty economic dislocations caused by private-sector deleveraging, but at the cost of encumbering their fiscal balances and their central banksâ€™ balance sheets.
While sovereign credit quality has deteriorated virtually across the board, and will most probably continue to do so, the implications for individual countries vary. Some Western countries â€“ such as Greece â€“ had fragile government accounts from the outset and tipped quickly into persistent crisis mode. There they remain, still failing to provide citizens with a light at the end of what already has been a long tunnel.
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(c) Project Syndicate