Sunil Jain: Roubini's right?

PERSPECTIVES

The US may finally manage to cobble together another version of the $700 billion bailout package, but the big question is whether that’s good enough. Nouriel Roubini, the economics professor at the Stern School of Business at New York University who first talked of the likelihood of the banking crisis and big banks going under, for instance, thinks the cost will be more likely to be around $1.7 trillion. A working paper on the IMF website by Luc Laeven and Fabian Valencia (both affiliated with the IMF though the views are not necessarily those of the IMF) has analysed all systemic banking crises from 1970-2007 – there were 124 banking crises in this period, 208 currency crises, 63 sovereign debt defaults/restructuring, 42 twin crises (banking and currency crises in succession) and 10 triple ones (banking, currency and defaults in succession). In most banking crises, emergency/blanket liquidity support and taking over of banks like the US is doing are par for the course. The time for which such support has to be given varies across countries. What’s interesting, the paper points out, fiscal costs, net of recoveries, average around 13.3 per cent of GDP (around three times the size of the current US package) and can be as high as 55.1 per cent of GDP. Output losses tend to be around 20 per cent of GDP per year for four years but can be as high as 98 per cent. In other words, there’s still a lot of pain out there.
       

Cost of banking crisis
Country	Starting date of banking crisis	Share of NPLs at peak (%)	Gross fiscal cost (% of GDP)	Output  loss (% of GDP)
Argentina	2001	20.10	9.60	42.70
Brazil	1994	16.00	13.20	0.00
Chile	1981	35.60	42.90	92.40
China	1998	20.00	18.00	36.80
India	1993	20.00	—	3.10
Indonesia	1997	32.50	56.80	67.90
Japan	1997	35.00	24.00	17.60
Malaysia	1997	30.00	16.40	50.00
Mexico	1994	18.90	19.30	4.20
Russia	1998	40.00	6.00	0.00
Thailand	1997	33.00	43.80	97.70
United States	1988	4.10	3.70	4.10