On 13 Oc= tober, amidst the financial panic, Jochen Sanio, President of the German Federal Financial Supervisory Authority said, "We're still licking the wounds of Lehman.= It caused international damage of $300 billion outside the U.S." This fol= lowed upon the bailout of Fortis, the large Belgian bank, the German government g= uaranteeing bank deposits and British banks lining up for large government loans. A few days later, France’s and the current EU President Nicolas Sarkozy on = a visit to the USA called for a global summit to discuss the havoc – a “= ;second Bretton Woods” – as many in the media termed it. The first Bret= ton Woods came out of the ruins of a world war as the victors in that titanic struggle sought to create new global institutions. Financial panics hardly qualify as wars – with victors and vanquished – but in these da= ys of hype, the wordsmith’s licence goes much longer.
There is= no doubt some disagreement: Between continental Europe and the US about how the world financial system should have been run. However, the meat of the Europeans complaint is that the Americans, who they trusted to have had a firmer gras= p on matters of finance, so badly fluffed it and gave the lie to that trust (and= the sneaking admiration). Do not for one moment give any credence to the view t= hat the Europeans have all along held vastly different ideas of how financial markets should be structured and regulated, but alas the hyper-power had ri= dden roughshod over these protests. Else so many highly regulated European banks= and financial institutions would not have been eager customers of Collateralised Debt Obligations (CDO) and other wondrous products packaged in New York.
The grea= t wash of global liquidity that helped growth take root across all continents also benefited Europe. The Euro-zone gained from the global boom, growing at over trend rates for the past few years and enjoyed unprecedentedly low levels of unemployment. The new accession economies of Eastern Europe also gained eno= rmously from the liberal flow of private capital, which seemed to give hope and achievability to the vision of an economically prosperous enlarged Union. U= nlike the US, most Euro-zone nations have used the economic up-cycle to repair th= eir public finances, and that gives them some brownie points.
European motivation to ask for a finance summit, one that the US on its present reco= rd could hardly refuse, is surely multi-dimensional. At one level, it may wish= to try and re-fashion the power balance between itself and the US, after having failed to cause the “multi-polar” idea to materialise in the 19= 90s and then being rudely sidelined by the Bush administration. But that is ano= ther domain.
At the l= evel of economics and finance, there are I think two major components. The first is= a longer-term desire to seek better co-ordination of policy making and regulatory structu= res that produce both desirable economic outcomes which are also more predictab= le, i.e. have stable trajectories. The second is a near-term desire to work a w= ay out of the present mess and re-establish amongst the citizenry, faith in the government’s ability to maintain stable monetary and financial conditions, a faith that has taken a hard knock in the past months.<= /p>
To be ho= nest nobody has a clear idea of what the path ahead should look like, aside from= a resolve not to make the errors that were made in the recent past. But just knowing how to have won the last war is not very helpful. The jejune shouts from the anti-globalisation brigade is just that, jejune. Terrible, heart-breaking accidents are caused in traffic every day. So what would you want? To abolish cars and high speed travel and revert to bullock carts or = would you wish for safer traffic and better high speed urban mass transit?=
A major = foundational element of the Bretton Woods idea was a regime of fixed exchange rates with= in a framework of capital surplus advanced economies, which others were not, and= on the supposition that Europe would rise from the ashes of war, which it did.= The US dollar was the anchor in the system and this anchor was rooted in the go= ld standard. In a way it mimicked the idea of a global currency, an idea which Keynes liked, but others were not keen upon.
These pr= esumptions held good for some decades, but then ran aground. The failure stemmed from = the fact that we remain a global community of nation states, where each partici= pant wishes to retain their individual power of decision-making – be it in matters of monetary or fiscal policy, or of exchange rates or of environmen= tal management.
The idea= of dissolving nation states in favour of a world government (with Esperanto as= the official language!) is not on the agenda. The issues of improved co-ordinat= ion between national members of the global community, which by and large want to get along, are. The challenge is a complex and difficult one. There is some academic discussion on reform of the Brettton Woods system, but these are at best starting points that can slowly help to work towards the building of mutual trust and accommodation on a workable scheme of things. The US has a= new administration and at most the Summit will agree on a framework for discuss= ion that will have to await further development for the Obama inauguration in January 2009.
What sho= uld India do in this? There may be some barely concealed finger-pointing. The Russian= s, with oil prices down and their Georgian adventure now looking premature will back the Europeans and try to apportion blame. In fact, the early statements out of Moscow suggest that they may do so with vigour.
India, p= erhaps with China and Japan, should strike a different tone by promoting the idea of a = $500 billion global fund to be floated and supervised by the World Bank and IMF = to compensate for the disruption of private capital flow to emerging countries= in Africa, Asia, Latin America and Eastern Europe. Not as part of their usual conditional access, but as a straight sovereign-to-sovereign lending progra= mme where the receiving sovereigns on-lend these funds to their enterprises. It= is good that World Bank President Mr. Zoellick has begun talk of a $100 billion fund for developing countries. It needs to be larger.
The obje= ct must be to complete the myriad projects that have been halted because private capit= al (mostly from hedge funds and some banks) has stopped flowing to these asset= s. Given the private sector genesis of these projects, many, if not most of th= em, probably make business sense. The Bank/Fund should be restrained to only assess viability of these projects using commercial banks and other validating agencies, and not get into their usual prescriptive dilation.
Emerging= economies which have practiced principles of sound macro-economics – which their authors in developed country capitals chose to forget – should not be= now shut out or pushed around in their bid to keep the growth engine alive in t= heir own economies. Unconditional quasi-private source of loan capital would be = the least that the international community can do to safeguard growth in develo= ping countries. There is adequate demand for high quality debt. In evidence, see 3-month US Treasuries at 0.3–0.4% yield and 5-year paper at 2.5%. The World Bank can raise the monies as bonds from the market.
India sh= ould not plead for herself. If this pool of funds goes through, loan market conditio= ns would improve and Indian companies will be able to source private loan capi= tal in any case.
(The =
author is
Economic Advisor, ICRA)
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Number o= f words: 1,248
Publi=
shed in
Mail Today, Friday, 14 November 2008
Saumitra Chaudhuri
ICRA Limited
2F, Bldg 8, Tower A