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THE EUROZONE
‘DEBT’CRISIS
‘Centre’-’Periphery’ interaction under financial
globalization; the case of Europe
Complete paper
• European Crisis: A New Tale of Center–Periphery
Relations in the World of Financial
Liberalization/Globalization?, International Journal
of Political Economy, 44:3, 174-195, DOI:
10.1080/08911916.2015.1035986 To link to this
article:
http://dx.doi.org/10.1080/08911916.2015.103598
6
Cross-border financial flows; “boom” and
“bust” and its consequences for debtors
and creditors
Fast growth of private finance and
financial globalisation
• The privatisation of the international monetary
and financial system;
• A lot of talk has been addressed to the
accumulation of foreign exchange reserves –
by public bodies - and, most specifically, by
emerging and developing countries, as in fact it
has been the case as may be gathered from
the following graphs.
FOREIGN EXCHANGE RESERVES
(in U. S. million dollars)
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
1995
1996*
1997*
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total foreign exchange holdings
Claims in U.S. dollars
Claims in euros
EMEs Total foreign exchange holdings
EMEs Claims in U.S. dollars
EMEs Claims in euros
2010
2011
2012
2013
• Such accumulation of resources by public bodies would seem to counter the
tendency for privatisation. But in fact, the amount of foreign exchange
reserves is minimal relative to the volume of cross-border finance.
• In spite of their fast rate of accumulation those reserves stood somewhat above
US$ 11 trillion about 11% of global cross-border assets that had reached US$
101 trillion by 2011.
• By far beginning in the 1970’s private cross-border finance has become
dominant vis à vis national public resources and also those of Bretton
Woods institutions.
• IMF resources – total assets including buildings and unusable currencies - only
amounted to US$ 490 billion and those of the World Bank to another US$ 324
billion. In terms of their lending, credit outstanding by the IMF is US$134 billion
and that of the World Bank US$ 144 billion.
• Thus, national and multilateral public resources were minimal compared with
those more than US$ 100 trillion of cross-border assets, their potential expansion
depending on that of the reserves currencies – mainly the U.S. dollar – or of a
multilateral currency, i.e., SDRs.
• Moreover, cross-border finance – almost fully private - in only 20-odd years
has tripled in relation to world GDP, its volume reaching almost 1.5 times
that of world GDP to become a major force in the performance of the “real”
economy as is also the case with “financialisation” at large, the amount of global
financial assets having reached by 2011 US$ 225 trillion, 3.5 times world
GDP.
Figure 1. Cross-Border Financial Interconnectedness, 1985 –2010
0. 055
(Index of the number of bilateral links between economies, as a share of all possible bilateral
links)
0. 050
0.045
0.040
0.035
0.030
0. 025
0. 020
Sep. 1985 Sep. 1988 Sep. 1991 Sep. 1994 Sep. 1997 Sep.2000 Sep.2003 Sep.2006 Sep.2009
Source: Fund staff estimates, based on Hattori and Suda (2007) and banking sector data from the BIS.
Acute instability of finance and crossborder finance
• There are well established and documented cycles of
finance even in advanced countries, the major forces being
the behavior of private sector credit and property prices
(Borio,2013);
• Peaks in those financial cycles coincide with what
Kindleberger would have called “financial distress”;
• The “Great Moderation” – the victory on inflation central
banks were so proud off – was precisely the building ground
for the crisis starting in 2007 (as Minsky would have
imagined stability leading to more risk taking).
• Experience has also shown that the cross-border
component of credit is much more volatile than the
domestic side of it.
The financial and business cycles in the US
• To understand the impact of cross-border finance on the
performance of the world economy attention should be placed
on gross capital flows, in the following graph we are
visualizing the behaviour of EM countries gross private inflows
that in spite of rapid growth are still a small part of the world
total as, at global level, gross flows concentrated in transactions
between the advanced economies.
• Going back to EMEs. First thing, the sizable amount of gross
flows relative to the size of the recipient economies making
up to an average of some 5 per cent of their GDP (“Big Fish in
Small Pond” (Haldane) or “Herd of Elephants in a Pond”
(Sheng) problem).
Second, proverbial instability of gross capital inflows to
Emerging Market Economies; from 2008 to 2010 a cut of more
than 8 points of the recipient countries’ GDP. Net capital inflows,
of course, are smaller than gross inflows but, most important,
gross flows are more volatile as shown in one of the following
graphs.
• Gross inflows, also, even at global level, are larger and much
more unstable than current accounts and changes in reserves;
current account imbalances moderating after the crisis in the
presence of a vertical decline in gross flows.
• As Bruno and Shin (2013) have shown, gross capital flows are
dependent on the leverage cycle of banks in its turn, something
verified by other authors, associated with global factors mainly
financial markets risk perceptions – as proxied by VIX - and although
less so by the monetary policy stance in the major advanced
countries.
• Global “supply push factors” dominate local “demand pull”
factors in Emerging Market Economies associated with the
“fundamentals” in the recipient countries (Tucker 2014, points to
“carry trade” as one main force in capital flows movements). In fact,
there is the sad story examined by Eichengreen and Gupta (2013)
that those countries that had made an effort to deepen their
domestic financial systems denominated in their own currencies
suffered most during the crisis.
Emerging and Developing Countries
Gross and Net Private Capital Inflows
2006-2013
1580.0
1480.0
1380.0
1280.0
1180.0
1080.0
980.0
880.0
780.0
680.0
580.0
480.0
380.0
280.0
180.0
2006
2007
2008
2009
2010
2011
2012
2013
EMERGING MARKET AND DEVELOPING COUNTRIES
Gross Private Financial Flows, Change in Reserves and Current Accounts
(in US$ billion)
1800.0
1300.0
800.0
300.0
-200.0
-700.0
-1200.0
2006
2007
2008
Gross Inflows
2009
Gross Outflows
2010
Current Account
2011
Change in Reserves
2012
2013
• As analysed by Borio and Disyatat (2011) so-called “global imbalances” – current
accounts – performance tell us little about global finance and its impact on
domestic financial conditions. For instance, as surveyed by these authors the
largest source of capital inflows into the U.S. was Europe – one-half of total, out of
which more than half came from Great Britain, a country running a current account
deficit. Volumes were larger than those originating in China and in Japan both
countries with a significant surplus in current account.
• But the major point is a conceptual one, very clearly made by these authors which is to
draw a clear distinction between savings and finance. Current accounts are tied to
“savings” – a national accounts concept of income not consumed – but finance is
provision of purchasing power in the form of money. Consumption and investment
require financing but not savings; eventually, after spending that finance, as we all
know from national accounts identities, differences between saving and investment will
be equal to current accounts.
• And, then, global banks are instrumental by funding themselves in financial centers
and allocating resources on an international basis. Thus, Shin (2012) speaks about
“global banking glut” rather than “global savings glut” European banks, for instance,
exposed to the U.S. financial market for a higher figure than the exposure of local
banks.
• There is no cross-border transmission of “savings” but of “finance” in which the
degree of leverage of banks is as important as the monetary conditions in their funding
places.
Figure 1. US balance of payments (As a percentage of US GDP)
Notes: 1 4-quarter moving average. 2 Sum of US Treasury securities, foreign assets in US dollar and US liabilities
to unaffiliated foreigners.
Sources: Bureau of Economic Analysis; authors’ calculations.
• Now, as posited very clearly by Hélène Rey in her Jackson Hole presentation
of August 2014 (Dilemma and Not Trilemma), under the influence of waves of
capital flows, without some form of “capital flows management” there is
no monetary policy independence (“the impossible duality” as baptised
some years ago by H. Flassbeck).
• There is an accumulated experience of those regulations in recipient
countries that quite a few EMEs have introduced to avoid the de-stabilising
effect of the variability of international finance. And although attention has
been drawn to their use in managing exchange rates, their significance for
financial stability should be taken into account, currency crises having gone
hand-in-hand with banking crises.
• Also, there has been insufficient discussion of regulations on the
originating side. EMEs lending is an “asset class” by itself and additional to
the renewed preoccupation about speculative waves in real estate, some
countercyclical regulations have to be applied to speculation in lending to
EMEs. Big banks being very much part of the game the risks involved end
up combining with the “Too-Big-To-Fail” question as witnessed by the
European crisis and previous ones in more far away lands (Latin America in
the 1980’s, East Asia and Russia in the 1990’s…).
• Back in 2010, the IMF proposed to the G20 a levy on non-core liabilities that could have
dampened the leverage cycle of banks that is the main force behind financial instability. It did not
find sufficient support. But new avenues should be explored through other vehicles for
macroprudential regulations.
• Simultaneously, as Shin ( 2011, 2012) has observed the main and almost single reserve
currency is the one that dominates the world of international banking being their funding
currency of choice. Foreign bank branches in the U.S. borrow more than US$ 1 trillion, a large
part of which is sent to their main offices that actually could re-lent it in the U.S. market as it was
the case in the last decade.
• “Finance” again is decisive in determining through gross capital flows developments in the
various financial markets. In fact while foreign reserves are placed almost only in
government paper, it is cross-border private finance that is highly exposed in the private
market, for instance, European banks in the U.S. CDOs.
• But in the other direction no doubt monetary conditions in their funding market get
transmitted to the rest of the world so that the question of the reserve currency comes
up. Not to chastise the monetary authorities in the U.S. for their expansive monetary policy – the
only instrument almost they were left with to support an economic recovery because of the
politico/ideological paralysis in which fiscal policy has been thrown.
• It is a call for a new currency reserve system not based on any national currency neither
on the high throne of “castor oil” disciplines imposed on the whole world by a political
unaccountable bureaucracy.
Financial Globalisation in Europe
European Banks were active decisive participants in the
process of financial globalization.
Europe’s Web of Debt
From the perspective of the recipient countries one may
detect the intra-EZ concentration
Figure 10 presents four clusters (i.e., countries that together form more of a closed system), centered around a set of core connections that are
closely linked to Greece: (i) a red cluster of countries with access to funds domiciled in Luxembourg; (ii) a black cluster with access to funds
domiciled in the offshore centers of British Virgin Islands, Jersey, Cayman, Guernsey, and the Isle of Man; (iii) a blue cluster with Ireland at the
core; and (iv) a green cluster of the U.S. with several key European and other countries. Greece is interconnected with each of the central nodes
of these clusters.
The relative size of the largest European banks to the GDP of
the countries of their main offices is much larger than that of
the U.S. ones
Country
Largest Bank
Size in Assets
Country's GDP
Quotient
France
BNP Paribas
2494
2,778.09
90%
Germany
Deutsche Bank
2974
3,607.36
82%
United Kingdom
Royal Bank of Scotland
3808
2,431.31
157%
United States
Citibank
2188
15,075.68
15%
Sources: The Banker's and IMF-WEO, Database, Oct.2012
Leverage of EZ ‘centre’ countries banks – as may be gathered
from its inverse – the median ratio of capital to assets that
went down from 4 to 2% – was fast increasing till 2008
But financial institutions of the ‘centre’ were funding their lending to
the ‘periphery’ outside their own markets; so that mention to
current account balances and/or to savings transfers among the EZ
countries is totally misleading
Rest of Euro Area Exposures to Greece, Ireland, Italy, Portugal, and Spain
(In billions of euros and percentages)
Dec.2009
Sept.2012
in euros
TOTAL
ECB lending
SMP
EFSF/EFSM
Lending by private banks
Centre of Euroarea GDP (at current prices)
Lending by private banks/GDP
1666
275
0
0
1391
2221
859
209
301
852
5,795.05
19.3%
6,378.74
13.4%
Source: for periphery borrowing from centre IMF-GFSR (Sept.2012), Chap.1, Graph 1.7
and for GDP figures IMF-WEO, Database, Sept.2013