Global Financial Governance Ten Years After the Crisis

The financial crisis of 2008, which resulted in the near meltdown of the world’s financial and banking system, has left a lot of questions unanswered regarding reform and whether enough has been done to avoid another similar crisis. A leading authority on financial governance, Ilene Grabel, Professor of  International Finance at the University of Denver, spoke to C. J. Polychroniou about where things stand today ten years after the biggest capitalist crisis since the Great Depression. (Cross-posted at Global Policy.)

C. J. Polychroniou: It’s been ten years since the outbreak of the financial crisis, and the verdict on the effect of that crisis on global financial governance remains largely ambiguous.  Nonetheless, all this may soon change as a result of the publication of your recent book titled When Things Don’t Fall Apart: Global Financial Governance and Developmental Finance in an Age of Productive Incoherence.  In this book, you argue that much has in fact changed since the East Asian financial crisis of 1997-98 and especially since the global financial crisis of 2008. In what ways has global financial governance changed over the last couple of decades?

Ilene Grabel: I argue that the contradictory effects of the East Asian financial crisis (EAFC) of 1997-8 laid groundwork for consequential (albeit paradoxical) shifts in several dimensions of global financial governance and developmental finance that deepened during and since the global crisis. The EAFC solidified neoliberalism through the leverage granted to external and domestic actors who had been previously unable to secure liberal reform prior to the crisis. The EAFC also inaugurated a gradual, uneven rethinking of capital flow liberalization. In addition, the crisis gave the IMF a vast new client base. But the crisis was ultimately costly to the institution because its crisis response led EMDEs to implement strategies (such as reserve accumulation) to escape its orbit. Reserve accumulation was enabled by the fortuitous global economic conditions that followed the EAFC.  The Asian Monetary Fund (AMF) proposal catalyzed by the EAFC was quickly scuttled by tensions between Japan and China, tensions that were adroitly exploited by the IMF and the U.S. government, both of which strongly opposed the AMF. Though the AMF proposal failed, the crisis ultimately bore fruit in the region and beyond. Not least, it yielded the creation of a currency reserve pooling arrangement among the members of the Association of Southeast Asian Nations plus Japan, China, and South Korea (ASEAN+3). More broadly, the EAFC stimulated in other regions of the developing world an interest in regional mechanisms that could deliver countercyclical liquidity support and long-term project finance through institutions that are, to some degree or other, independent of the Bretton Wood Institutions (BWIs, namely, the IMF and World Bank). In sum, the EAFC marked the beginning of the end of a unified neoliberal regime.

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Expansionary Fiscal Consolidation Myth

Anis Chowdhury and Jomo Kwame Sundaram

The debt crisis in Europe continues to drag on. Drastic measures to cut government debts and deficits, including by replacing democratically elected governments with ‘technocrats’, have only made things worse. The more recent drastic expenditure cuts in Europe to quickly reduce public finance deficits have not only adversely impacted the lives of millions as unemployment soared. The actions also seem to have killed the goose that lay the golden egg of economic growth, resulting in a ‘low growth’ debt trap.

Government debt in the Euro zone reached nearly 92 per cent of GDP at the end of 2014, the highest level since the single currency was introduced in 1999. It dropped marginally to 90.7 per cent at the end of 2015, but is still about 50 per cent higher than the maximum allowed level of 60 per cent set by the Stability and Growth Pact rules designed to make sure EU members “pursue sound public finances and coordinate their fiscal policies”. The debt-GDP ratio was 66 per cent in 2007 before the crisis.

High debt is, of course, of concern. But as the experiences of the Euro zone countries clearly demonstrate, countries cannot come out of debt through drastic cuts in spending, especially when the global economic growth remains tepid, and there is no scope for the rapid rise of export demand. Instead, drastic public expenditure cuts are jeopardizing growth, creating a vicious circle of low growth-high debt, as noted by the IMF in its October 2015 World Economic Outlook.

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G20 Finance Ministers focus on private financing of infrastructure

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

Last weekend, G20 Finance Ministers had their penultimate meeting before the G20 Leaders summit, scheduled for December in Turkey. Despite the current instability in stock markets and currencies in many countries, the focus of the communiqué is on the continued push, led by multilateral development banks and the OECD, to radically change the way infrastructure is financed by trying to draw in private finance, though this method has a weak recent track record. Discussion of ongoing efforts to combat tax evasion and reform the financial sector were slated for the next meeting in October, while the G20 continued to complain about the failure of IMF governance reform, but offered no hope that an IMF governance crisis can actually be avoided.

This was the Finance Ministers’ third meeting of the year, with one more slated to coincide with the World Bank/ IMF annual meetings in Lima in October. Detailed analysis of the outcomes of the meeting has been hampered by the fact that almost all of the large number of background papers were not put in the public domain until some days after the summit ended.

The stock market problems in China, and related currency problems of many other emerging markets were at the centre of the discussions, but monetary policy coordination has been a major area where the G20 has failed to have any impact in the past. The communiqué underscores this fact by noting that “monetary tightening is more likely in some advanced economies” – effectively endorsing anticipated raises in interest rates in the United States, which many expect will lead to a significant outflow of capital from developing countries.

Private infrastructure top of the agenda

Instead, as Eurodad predicted earlier in the year, the big focus this year is on “boosting investment,” which the ministers proclaim as “a top priority.” This is nothing new – infrastructure was a major theme of the Australian G20 presidency in 2014, though outcomes were limited – but the sheer scale of the preparatory work suggests the international institutions that act as the secretariat for the G20 have moved into overdrive, with multiple background papers from the OECD, the World Bank and others.

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New Food for the Vultures?

Lack of state insolvency regime undermines Ukraine debt deal

By Bodo Ellmers, Guest Blogger

Bodo Ellmers is Policy and Advocacy Manager at Eurodad, the European Network on Debt and Development.

Ukraine has reached a debt restructuring agreement with a creditor committee representing 50% of outstanding government bonds. Substantial debt reduction is essential to bring Ukraine’s debt down to sustainable levels. But the agreed deal falls short of what is needed. And the participation of the other 50% of bondholders is not secured, and cannot be secured in absence of a multilateral debt restructuring framework that can make binding and enforceable decisions. The Western powers’ reluctance to help build such a framework might have fed their ally to the vulture funds and their aggressive litigation strategies.

The Ukraine debt deal

According to information obtained by the Financial Times, Ukraine has reached a deal with a creditor committee led by the investment fund Franklin Templeton. The deal agrees a 20% haircut to Ukrainian government bonds worth US$18bn. It will also extend the repayment period by four years to ease Ukraine’s liquidity needs. As a sweetener, participating creditors receive a higher interest rate of 7.75% instead of 7.2%. In addition, reports the FT, “a GDP ­linked warrant will be provided from 2021 to 2040 that will pay out up to 40 per cent of the value of annual economic growth above 4 per cent.”

Too little, too late

The deal comes after Ukraine’s economy fell into a deep recession following the outbreak of the civil war and the annexation of the Crimean peninsula by neighboring Russia. Last year, Western powers used their influence in the IMF to unleash bailout loans of €9.6bn under the Extended Fund Facility. The programme came with brutal austerity and structural adjustment conditionality attached.

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Why it would be good for the IMF if Greece stopped repaying the IMF loans

Bodo Ellmers, Guest Blogger

The creditor community has another shock and awe moment this week, as more and more influential actors argue that Greece should stop repaying the International Monetary Fund (IMF) loans and instead use scarce public resources to tackle its economic and humanitarian crisis. While Prime Minister Tsipras still tries to ease the creditors, the idea is here to stay. And it is a good one: Greece should not just postpone loan repayments but default on them – stopping payments to the IMF for good. This would help to finally reform the IMF from the political puppet that it is now into a real and effective crisis response instrument.

Risk-free lending can quickly become irresponsible lending

Whoever loses in a debt crisis – and usually there are many losers – the IMF is always off the hook. It is common practice that borrowers grant preferred creditor status to the IMF, and pay off the IMF loans in full and in a timely manner. While it isn’t written down anywhere in international law that there’s such a thing as an IMF preferred creditor status – not even in the IMF’s own Articles of Agreements – all countries traditionally stick to this practice. This even goes for countries such as Argentina, which have been branded recalcitrant debtors by US judges and have no intention of maintaining good relations with the IMF.

Repaying the IMF often comes at high opportunity costs for borrower countries’ development, and for the other creditors who do have to take a haircut, and a larger one if the IMF does not participate in a debt restructuring. The fact that everyone’s repaying the IMF means that lending is essentially risk-free for them. And as in all other cases when lending is considered risk-free, the lender is encouraged to act irresponsibly, and to do really stupid things.

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IMF and World Bank Spring Meetings: Missing the Big Picture?

Jesse Griffiths and Tiago Stichelmans, Guest Bloggers

The IMF and World Bank spring meetings, which used to be a major forum for global economic decision making, end today with few concrete outcomes, the Bank under fire for its human rights and environmental record, and the IMF still unable to make any progress on reforming its creaking governance structure.

Finance ministers and central bankers from all over the world met in Washington DC this week for the IMF and World Bank spring meetings. The concerns caused by slowing growth in emerging market economies, collapsing commodity prices, and uncertainties over the future of monetary policies in the developed world were very real. Action to deal with them was not. Instead, all the IMFC – the ministerial committee that oversees the IMF – could promise was “vigilance” when dealing with “large shifts in exchange rates and asset prices, protracted below-target inflation in some economies, financial stability concerns, high public debt, and geopolitical tensions”.

The centrepiece of discussions for this year’s meetings was supposed to be the critical upcoming United Nations summit on Financing for Development (FfD), slated for July in Addis Ababa. However, the background document prepared by the World Bank and five regional development banks did not tackle the breadth of structural issues that are on the FfD agenda. It reads more like a prospectus for increasing use of the banks that authored it.
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Winds of change in Asia

Martin Khor

In the last month, the international media has been carrying articles on the fight between the United States and China over the formation of the Asian Infrastructure Investment Bank (AIIB).

Influential Western economic commentators have supported China in its move to establish the new bank and judged that President Barack Obama made a big mistake in pressurising US allies to shun the bank.

The United States is seen to be scoring an “own goal” since its close allies the United Kingdom, Australia and South Korea decided to be founding members, as well as other European countries, including Germany and France, and most of Asia.

The United States also rebuked the United Kingdom for policies “appeasing China,” but the latter did not budge.

The United States did not give any credible reason why countries should not join the AIIB.

Treasury Secretary Jack Lew said the new bank would not live up to the “highest global standards” for governance or lending.

But that sounded like the pot calling the kettle black, since it is the lack of fair governance in the International Monetary Fund (IMF) and World Bank that prompted China to initiate the formation of the AIIB, and the BRICS countries (Brazil, Russia, India, China and South Africa) to similarly establish the New Development Bank.

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The Reregulation of Cross-Border Finance

Kevin Gallagher

Regular Triple Crisis contributor Kevin Gallagher, of Boston University and the Global Economic Governance Initiative (GEGI) summarizes the key arguments in his new book Ruling Capital: Emerging Markets and the Reregulation of Cross-Border Finance. He focuses on the re-emergence of capital controls since the 2008 financial crisis—with developing-country governments reining in cross-border capital flows from “flying into their country, flying out”—and how the “policy space” emerged for such measures.

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