Financial Crisis Impacts

Sargon Nissannef (the new economics foundation)

Analysing the Crisis Impact

• 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

• Market valuation of risk is good at shutting the door after the horse bolts

• The worst time to invest in banking stocks was not now but 12 months ago!

Run-up to the crisis

Liberalisation’s Logic

• Increased investment

• Stability

• Better targeted investment (efficiency)

• Growth

Justify financial market and banking sector de- or re-regulation

Exposure and Vulnerability

• Exposure; direct– Direct consequences in terms of financial and asset

positions• Lost income from exports, currency exposure, increased

debt servicing costs

• Vulnerability; contingent – 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

– 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– Net private inflows vs gross outflows– FDI outflows, including from ‘non-official’ sources

Exposure and Vulnerability

Vulnerability, not just exposure • 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– Need to examine which sort, e.g. oil vs luxury cars

Reliance on international finance– 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– Raises issues of home bias, lack of local knowledge,

regulatory power of domestic authority

Analysing Crisis Impact

Reliance on exports: Trade

• 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

• 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

– Ability to offset foreign shortfalls• Currency denomination of foreign exchange reserves

– Impact of falling US dollar• Correlation of domestic and international interest rates

– Impact on domestic cost of capital

Analysing Crisis Impact

External penetration of the financial system

• Foreign ownership of banking system – 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 – Slowdown in growth expectations affecting revenue

assumptions– Raised financing costs

Key issues• Equity• Efficacy• Sufficiency (to reach e.g. $50 bn)

Implications for advocacy• 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 proposalDomestic Scheme• Involves auctioning emission permits to the private sector entities • 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 • Opportunity to overcome some of the ‘domestic revenue problem’• Auctioning by member states who will also determine the use to

which proceeds are put to. • 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)

• 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

• 0.5% of GDP will be paid by developed countries on top of existing ODA, to help address climate change in developing countries

• This would amount to around $185bn per annum

• Focus on equity via GDP as proxy

Issues raised by crisis

• Pressure on additionality• Revenue estimates out of date• Equitable principles to be tested

Implications of Crisis Impact

Solidarity• 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• 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’

– Risk of a technocratic approach being taken

Implications of Crisis Impact

Institutional power

• 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?

• New countervailing centres of financial power• Should the deat of old centres of power be proclaimed?

• OR will the name-plates change?