US deficit the world's biggest economic problem: Morgan Stanley CEO James Gorman Morgan Stanley president and chief executive James Gorman. Picture: Amos Aikman Source: The Australian THE biggest issue facing global markets is not Greece but the $1.5 trillion US budget deficit, according to Morgan Stanley chief James Gorman. The Australian chief executive of the US bank spoke to The Australian yesterday on a brief visit to Melbourne as part of an Asian trip. While unable to comment on the bank's earnings with the second quarter about to end, Wall Street analysts have downgraded estimates due to a slowdown in trading. Mr Gorman said: "There is not a lot of demand right now. There is a lack of confidence in the system. We need a couple of trigger events and the big one is some clear sign that the deficit will be cut. Washington must show it acknowledged the problem and was doing something about it before confidence started to recover. "We need to see clear steps that the issue is being addressed and worked on," he said. Mr Gorman expressed confidence in the strength of the Australian dollar, saying it would remain "pretty solid" for the forseeable future. "US interest rates hold the key to the Australian dollar, but right now where US rates are I think the Australian dollar is fairly solid," he said. He also expressed confidence in the Chinese government's handling of the economy. The Chinese administration is managing extremely well. Its focus is now on the intended and unintended consequences of its expansion, things like pollution, food supplies, the labour issues," he said. Like JPMorgan boss Jamie Dimon, Mr Gorman said the US financial system was in better shape but a lot of uncertainty was slowing things down, which explained the need for real action on the deficit. With a presidential election in 18 months, the chances of a substantive program may be limited but steps in the right direction would help. JPMorgan's Mr Dimon last week also played down the impact of Greece on global markets. Mr Gorman said yesterday: "I don't think Greece will default, in part because the banks with the biggest exposure are European national banks." At $200 billion, the Greek debt is relatively manageable but if a country such as Spain was hit next, that would be a different story. "If Spain went, that's when things would change," he said, but noted it had made encouraging improvements. Mr Gorman has redirected Morgan Stanley to more capital-light, customer-centric business, which he said was the right model for the moment and through the next cycle. His changes came ahead of the post-crisis regulatory crackdown, which meant the impact of those on Morgan Stanley was relatively small. "The financial system post-crisis is in a better position than it was," he said. The key immediate post-crisis issues were "liquidity, leverage and capital have been addressed." "Sovereign debt is now the problem," he said. At Morgan Stanley, leverage has halved to 15 times and balance sheet liquidity has increased from 9 per cent to 22 per cent. He rejected suggestions that Wall Street's ethics were sub-standard, saying: "Ethics on Wall Street are very strong." Another area of uncertainty was being removed, with international regulators close to settling issues on required capital for large financial institutions, with the maximum capital buffer about 3 per cent, he said. The idea was that big banks, which played a key role in local markets, should have a buffer against any collapse. The battle was over how much the buffer should be, because too much capital stifled growth. The buffer will bring capital ratios up to 10 per cent, but at this stage the top rating for any bank looks like being 9.5 per cent, leaving room for growth. Mr Gorman said the rules meant "there is a disincentive to get too big and no reward for getting smaller." But he said the bank could work with the rules, and said the key was certainty, so it knew where it stood. The debate in global capital markets has focused on the banks pushing for more freedom to stimulate the economy, with JPMorgan's Mr Dimon warning regulations would stifle growth. Mr Gorman acknowledged that was not the only issue, because demand was also weak, a point also conceded by Mr Dimon. Morgan Stanley's renewed focus on "customer-centric activities" meant it had already made some of changes demanded, such as spinning off its proprietary trading desks and limiting the amount of capital spent on private equity and related deals. This was part of Mr Gorman's push to take the volatility out of the business and set up earnings on a more sustainable basis. Wealth management accounted for about 35 per cent of earnings, up from 10 per cent.