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Financial Crisis Impacts
Sargon Nissan
nef (the new economics foundation)
Analysing the Crisis Impact
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nef embarking on study analysing
vulnerability of developing countries to
the financial crisis
Considering impact of continued financial
liberalisation and financial dependence
How exposed are Developing
Countries?
What determines vulnerability?
Some context - Crisis Headlines
Risk Pricing
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Market valuation of risk is good at
shutting the door after the horse bolts
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The worst time to invest in banking stocks
was not now but 12 months ago!
Run-up to the crisis
Liberalisation’s Logic
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Increased investment
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Stability
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Better targeted investment (efficiency)
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Growth
Justify financial market and banking sector
de- or re-regulation
Exposure and Vulnerability
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Exposure; direct
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Direct consequences in terms of financial and asset
positions
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Lost income from exports, currency exposure, increased
debt servicing costs
Vulnerability; contingent
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Economic and political features which are contingent
Extent to which countries can respond to and resist
Highlights importance of linkages amongst different
dynamics in financial markets and how they determine
impact
Different evolutions of crisis will have different
implications across countries
Exposure and Vulnerability
Vulnerability
• In particular factors impacting sovereign
autonomy
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Foreign banks’ involvement in Developing Countries
(grown)
FDI restrictions in banking sector
Asset share of bank assets by foreign banks
Reserve accumulation
Fluidity of flows
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Net private inflows vs gross outflows
FDI outflows, including from ‘non-official’ sources
Exposure and Vulnerability
Vulnerability, not just exposure
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Why the distinction? A final thought
Considering direct impacts/exposure to the crisis to
reveal the most ‘non-vulnerable’ country could
suggest N. Korea is best positioned to withstand
it.
Countries can influence both the dynamics of the
crisis and some have a degree of agency over
how exposed they are and how the c
Analysing Crisis Impact
Examining three major factors
Reliance on exports
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Need to examine which sort, e.g. oil vs luxury cars
Reliance on international finance
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Some forms of reliance are inherently more precarious,
e.g. extent of FDI accounted for by portfolio flows, bank
lending…
External penetration of the financial system
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Raises issues of home bias, lack of local knowledge,
regulatory power of domestic authority
Analysing Crisis Impact
Reliance on exports: Trade
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Trade openness
Current account balance
Export focus (to whom?)
– South-south links
– Extent of presumed ‘decoupling’ – looks like
we’re all in it together
Export vulnerability (Elasticity of demand for key
exports)
Analysing Crisis Impact
Reliance on international finance
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Openness of capital account
Capital inflows as % of GDP
Bank flows as % of GDP
Portfolio flows as % of GDP
% of domestic assets and liabilities in domestic banks’ portfolios
% of foreign currency denominated debt
Level of private external debt (and short-term debt) to GDP
Reserves to GDP
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Currency denomination of foreign exchange reserves
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Ability to offset foreign shortfalls
Impact of falling US dollar
Correlation of domestic and international interest rates
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Impact on domestic cost of capital
Analysing Crisis Impact
External penetration of the financial system
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Foreign ownership of banking system
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Impact on domestic credit creation
Asymmetric information
Larger, more distant banks are not equipped to lend
effectively or appropriately after crises when home
markets have to be prioritised
Current and projected losses + credit impact
% of gross national savings comprised of foreign
private savings (correlation between domestic
saving and domestic investment rates)
Other Impacts
Consequences of crisis not restricted to
direct economic impacts, implications of
changed character of financial sector
ownership or future regulatory models
Impacts on other key areas of negotiation
particularly where proposals incorporate
private financing or rely on assumptions
about economic activity or growth
Other Impacts
Crisis reveals financial system’s
inability to value risk appropriately
– In economic sense
– In environmental sense
These two risks are of course related
Financing Climate Change Adaptation
Range of options currently discussed
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Slowdown in growth expectations affecting revenue
assumptions
Raised financing costs
Key issues
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Equity
Efficacy
Sufficiency (to reach e.g. $50 bn)
Implications for advocacy
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Need for renewed analysis of the appropriateness of
approaches
– Potential reduction in amounts raised
– Extent to which models still reflect an efficient and/or
equitable approach in relation to each other
Financing Climate Change Adaptation
EU proposal
Domestic Scheme
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Involves auctioning emission permits to the private sector entities
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20% is envisaged to be used for a number of climate change
related activities, including helping developing countries adapt.
With particular priority to the LDCs
The Aviation scheme
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Opportunity to overcome some of the ‘domestic revenue problem’
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Auctioning by member states who will also determine the use to
which proceeds are put to.
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UNFCCC predict this kind of auctioning could raise $22bn in 2010
at $23.6/tCO2.
World Bank proposal
Chinese proposal
Financing Climate Change Adaptation
US proposal
Bi and Multilateral Carbon Auction Levy Funding
(The US International Climate Change Adaptation
and National Security Fund)
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To be established in the US Treasury, with the aim of financing
international climate change adaptation from 2012 till 2050.
Administrator of the US Environmental Protection Agency (EPA)
would auction a percentage of the annual emission allowances of
the proposed US emission trading scheme, starting with 2012:
1%, and raising gradually to 7% in 2050.
Amounts to around $1bn in 2012 increasing to $6bn by 2030.
60% of the funds can go into international funds provided they
meet certain UN framework requirements.
Financing Climate Change Adaptation
Chinese proposal
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0.5% of GDP will be paid by developed countries on top of
existing ODA, to help address climate change in developing
countries
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This would amount to around $185bn per annum
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Focus on equity via GDP as proxy
Issues raised by crisis
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Pressure on additionality
Revenue estimates out of date
Equitable principles to be tested
Implications of Crisis Impact
Solidarity
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Different countries will be impacted differently, challenging in
novel ways the capacity to develop a collective response from the
South
Vulnerability and agency (or lack of) reveal new cracks in
collective bargaining positions
Regulation without Governance
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Potential for renewed emphasis on bilateral forms of influence
versus multilateral structures of negotiation, such as collective
trade or finance rules
– Implications for FFD process of EU
– Altered regulatory regimes, both de jure (e.g. Basle II) and de
facto (ratings agencies and other institutional gatekeepers)
– Unclear what will emerge subsequently to ‘hold the ring’
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Risk of a technocratic approach being taken
Implications of Crisis Impact
Institutional power
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Outflow of nations from IMF/World Bank influence may now be
checked
Potentially reinvigorating consequences for these institutions as
political and economic actors.
Governance issue had waned as their significance and centrality
contracted but could once again be a crucial component of any
new settlement
Changing of the guard, not the system?
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New countervailing centres of financial power
Should the deat of old centres of power be proclaimed?
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OR will the name-plates change?