Liberalizing capital accounts – lessons from emerging EuropeDaniela GaborUWE Bristol

Background Two waves of liberalization post 1990, fast (Czech

Republic and Baltic States by 1996) and gradual liberalizers (Hu, Ro, Bg, Sk by 2006).

KA liberalization - condition for EU membership

Similar sequencing: first FDI, last ‘hot’ interest-sensitive flows (non-resident access to money markets instruments)

KA liberalization with FDI targeting bank privatizations

Background

IMF(2009): Eastern Europe abandoned socialism to embrace financial globalisation + benign tolerance of real ER appreciation

larger CA imbalances funded by capital inflows (consumption-driven growth model)

Large capital account surpluses

Post-Lehman hard landing

Sharp economic contraction

Sharp currency depreciation

Vienna Initiative – foreign-owned banks threatening to leave

Three lessons

Lesson 1: actors intermediating global liquidity matter!

Lesson 2:financialization of currency/money markets + cb liquidity management as CFM tool (during sudden stops)

Lesson 3: the IMF’s new institutional view ineffective, structural changes + normalized KK

Lesson 1:cross-border interconnectedness

Lesson 1: Bank-driven global carry

Cross-border funding of

Sterilization games with the central bank (Christensen 2004)

Aggressive fx HH lending

Intra-financial system activity

Alban

ia

Czech

Rep

ublic

Turk

ey

Polan

d

Serbia

Lith

uania

Roman

ia

Bulgar

ia

Hungar

y

Latv

ia

0

20

40

60

80

2008:Q3 2012:Q3

Cross-border loans from BIS banks

Lesson 1: banks also intermediate non-resident carry in local currency assets

Lesson 2: financialization of currency and interbank money markets

McCauley and Scatigna (2011): EMEs currency markets trading driven by financial motives, off-shore

Financialization of currency markets spills into money markets Structural surplus of

liquidity, asymetrically distributed

Sterilizations as asset class for banks/non-residents

Sudden stops = inflicting liquidity shortages on (state-owned) patient banks

Non-resident holding of LC assets, Hungary

Interbank costs of reacting to sudden stops

Jun.

199

7

Sep.

199

7

Dec. 1

997

Mar. 1

998

Jun.

199

8

Sep.

199

8

Dec. 1

998

Mar. 1

999

Jun.

199

9

Sep.

199

9

Dec. 1

999

Mar. 2

000

Jun.

200

0

Sep.

200

0

Dec. 2

000

0

250

500

750

1000

0

40

80

120

160

transactions between banks

transactions with the cen-tral bank (s-terilizations)

sterilization interest rate (RHS)

interbank in-terest rate (RHS)

‘restrictions on nonresident access to funding in local currency can at times make currency speculation more difficult’ (IMF, 2013: 18). The challenge is to ensure that non-speculative domestic demand for liquidity is satisfied at normal market rates (IMF 1997).

Lesson 3: IMF does not have the right answer to global fin. cycles Ambiguous effects of macro-first steps

approach (Blanchard et al. 2012)

How to respond to global financial cycles?

Regulatory restrictions on internal capital markets of global banks: local banking model

Careful management of ‘porous’ capital controls

Liberalizing capital accounts – lessons from emerging EuropeDaniela GaborUWE Bristol