Crisis Talk - The World Bank Group

Deposit Insurance, Blanket Guarantees and Exit Strategies

The World Bank held a discussion yesterday on the role of extraordinary deposit insurance schemes in the crisis. Fred Carns from the FDIC and David Walker from the CDIC (Canada) outlined the lessons learned, measures taken, and future policy recommendations for the world's deposit insurance schemes.

The main crisis driven deposit insurance arrangements include:

• More than one-third of deposit insurance programs around the world have adopted some form of enhanced deposit insurance protection during the crisis.
• Less than 20 percent of deposit insurance jurisdictions have provided blanket guarantees. Yet this minority is significant, and includes the United States. Some schemes apply only to selected categories of deposits, while a handful take the form of political promises as opposed to changes in law or regulations.
• Among jurisdictions that did not provide blanket guarantees but raised their coverage limits, the extent of the increases varies widely.

Crisis Talk Readers: Participate in Next Week's Annual Meetings

The World Bank Group and IMF are descending upon Istanbul for their annual meetings. One of this year's highlights will be a panel on the post-crisis world, led by World Bank Group President Robert Zoellick.

In addition to Mr Zoellick, the panel will feature Sri Mulyani Indrawati, Minister of Finance, Indonesia; Mahmoud Mohieldin, Minister of Investment, Egypt; Eleni Gabre-Madhin, CEO, Ethiopian Commodity Exchange; and Professor Paul Collier, Department of Economics, University of Oxford.

As part of the program, the panelists will be answering questions from the audience, including those sent by the online audience. The debate will be recorded on Friday, October 2, and will be broadcast over the next two days on France 24.

Crisis Talk readers can submit their questions here.

China Can't Do It Alone

As rich countries, led by the Untied States, prepare themselves for a tepid recovery, can the BRICs, led by China, pick up the slack?

In a new paper for Vox, Deutsche Bank's Markus Jäger discusses China's prospects for becoming the de-facto engine for global growth. His concussion: China already is the decisive engine for global growth. 

By 2014, assuming things are back to normal, China and the US will account for around 30% and a little over 10% of global growth, respectively – and this assumes relatively optimistically US growth of more than 3% per annum. In this sense, China will be the global growth “engine”. But this is nothing new. China’s contribution to global growth amounted to 20% during the better part of this decade, almost twice size of the US contribution.

Crisis Roundup: Trade and Finance Edition

Chinese car sales are up 35 percent this year.

A look at tariffs over the past eight years. In 2008, they were significantly below the eight-year average.

The Baltic Dry Index is down, i.e. shipping costs have plummeted. Does this mean less trade, and lower growth? Or just increased capacity?

Global capital markets are entering a new era, with a greater role for emerging markets. The McKinsey Global Institute explains why.

Should the ratings agencies be downgraded?

Tensions are high at the G20 over how to reform the IMF. Simon Johnson's solution? Move it to Europe.

The World Bank is boosting its support to Eastern Europe and Central Asia. This past week Hungary, Ukraine and Latvia received a combined $2bn in assistance.

In other World Bank news, Robert Zoellick will be leading a discussion on the financial crisis next Monday (the 28th) from 1100-1230 EST. Crisis Talk will be Tweeting the event live.

The IMF's Medium-term Outook: Anything is Possible

The IMF released the latest chapters of its World Economic Outlook, which focuses on building a sustainable recovery. The first chapter addresses lessons for monetary policy from asset price fluctuations, while the second deals with the impact of the crisis on medium-term output.

The IMF believes that the crisis has not yet struck a dagger into the heart of medium-term growth prospects, but it does pose serious risks. Historically, the seven-year impact of banking crises reduces output levels by 10 percent of their pre-crisis trend. Things tend to improve afterwards, and a permanent decrease in medium-term output growth is rare.

Yet this has been an a-typical banking crisis, and as such, governments face a complex juggling act in shielding the global economy from acquiring a few scars:

China's Crisis Response Goes Global

China has been an essential player in fostering a global economic recovery. As one of the first countries to announce a massive stimulus package last November, China brought increased stability to markets when it was dearly needed. Today's conventional wisdom holds that in order to ensure a stable global recovery, Chinese consumers must increase their consumption patterns to fill the economic void left by their battered American counterparts (see previous post).

Can the Chinese government succeed in boosting domestic consumption? Are there other initiatives that China can take to put the global economy in motion?

The answer to both of these questions is a tentative 'yes'.

Better Credit for Brazil

Yesterday, I analyzed the prospects for decoupling during the recovery. Will a robust emerging market rebound boost OECD growth? Or, are we due to see a multi-speed global recovery? The rise of emerging market IPOs, and its positive influence on IPO markets in developed economies, provides one data point in favor of the first theory. Today's news from Brazil may support the second. 

Moody's announced that it has elevated Brazil's credit rating to investment grade. The ratings agency described Brazil as a "winner", primarily because of its quick rebound from the recession, and strong growth potential for the future. This in an important step for Brazil, as it allows many institutional investors, who are forbidden from investing in "junk" debt, the opportunity to invest in Brazilian bonds.

Which country is next?

Emerging Market IPOs: Leading the way

Two years ago, as financial markets in the United States and Europe began to break down, there was much speculation over whether emerging markets would continue to grow in spite of the woes in the West. A year ago, this idea of decoupling was quickly dispelled.

As emerging markets rebound from the crisis, will there be a new decoupling, where they grow, and OECD economies struggle? It is probably too early to tell, but in one area, IPOs, developed economies are profiting from emerging market successes.

Pity the Pound

A few weeks ago I wondered if Britain was back. According to the Bank of England, it's not.

The Times reports:

In its Quarterly Bulletin, the Bank tried to explain the reasons for the collapse in value of sterling since the final quarter of last year. It said: "It is possible that sterling's depreciation may be part of a more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate."

Zoellick's Pittsburgh Prescription

World Bank President Robert Zoellick has given his policy suggestions for this week's G20 summit in Pittsburgh. In an interview with the Financial Times, Zoellick urged world leaders to focus on adopting a responsible approach to global economic growth:

I would like the G20 to talk about responsible globalisation. That would capture balanced global growth, financial stability, climate change, help for the poorest including our proposal for a new facility to help countries cope with economic shocks not of their own making.

Zoellick also called for prudence, warning that a sustained economic recovery is far from certain, even in the brightest patch of the global economy, Asia:

China has expanded credit rapidly. As credit growth is moderated there is a risk that China could turn down again. Conversely, the strong rebound so far in east Asia could lead to increased interest rates that draw in a lot of capital – then what will the governments do in terms of currency policies, inflation policies, interest rate policies?

Sage, rather than sanguine, needs to be the running theme this week.

Weekend Reading

The European Central Bank's crisis efforts are laudable. The current account surplus is back in the black, and the euro is hitting one-year highs against the dollar.

Meanwhile, sterling continues to suffer.

An explanation of the new dollar carry trade.

The American manufacturing sector is rebounding.

The jobless recovery has been kind to those with jobs. Wages are up.

California is investigating the ratings agencies.

Speaking of California and the ratings agencies, Moody's forecasts that California's real estate sector won't return to normal until 2030.

Finally, where is Paul Volcker?

Plus: In case you get lost in the thicket of financial jargon, the Devil's Dictionary is here to help. A taste:

STRESS TEST, n. 1. A measure of arterial blood flow to the head. 2. Alchemic process by which struggling, undercapitalized banks are transformed into paragons of modern finance. (See BANKS, GOOD.) Also known as the "Timothy F. Geithner Seal of Approval," which some bankers insist is good until it isn't anymore. (See BANKS, BAD.)

The Sino-American Economy: Mutually Assured Destruction

This week's New Republic has two interesting articles about China's economic rise, and its implications for the global economy.

In the first piece, This Giant Isn't Sleeping, Zachary Karabell argues that Chinese growth is both sustainable and here to stay, and that doubts about the Chinese economic model are overblown: 

China has produced more growth over the past 25 years than any country, ever (averaging more than 9 percent a year). And after stalling in the fall of 2008 and in the early months of 2009 along with the rest of the world, China has been growing at an astonishing rate in the past six months--manufacturing has been expanding, exports have been surging (more than $20 billion a month to the United States alone), property prices and activity have soared, and stocks are on fire. Interior cities have replaced the coastal provinces as the engine of growth, and that process has barely begun.

Karabell goes on to say that rising commodity prices (the price of copper has doubled over the past six months) mean that the Chinese economic engine is alive and well. 

The Fed's Next Move: Hibernation

Yesterday I commented on the role of inflation in the crisis, which was explored at length during a symposium on Dealing with America's Debt Overhang. Any good conversation about inflation has to be followed with a discussion about the Federal Reserve.

Liaquat Ahamed, author of Lords of Finance: the Bankers Who Broke the World, gave a summary of the Fed's exceptional role during the crisis, which can be broken down into three key areas:

1. Acting as a lender of last resort
2. Aggressively cutting interest rates
3. Lending against assets that would normally be considered unacceptable collateral

The Bernanke Fed has been lauded for having prevented another Great Depression, and many, including Barack Obama, consider Bernanke to have been the right man for the right job at the right time.

But times are changing, and now that we are no longer looking into the abyss, what's next for the Fed? What role should it play in the recovery?

The Case for Inflation; or, The End of Orthodoxy

I attended a symposium this morning on America's Debt Overhang, hosted by the non-partisan New America Foundation (NAF). There were several interesting discussions about the present and future implications of America's ballooning public, private and household debts. I will return to these debates in greater detail tomorrow.

One presentation in particular stood out: Christopher Hayes, a fellow at NAF, presented a controversial paper entitled Overcoming America's Debt Overhang: The Case for Inflation.

Hayes argues that America's debt burden has become crippling. Indeed, household debt has risen from 48 percent of GDP in 1981 to 97 percent today. Meanwhile, corporate debt has grown from 22 percent in 1981 to 120 percent in 2009. The federal government is borrowing and spending at unprecedented peacetime rates. This toxic cocktail may spiral out of control:

One Year On

On the one-year anniversary of the Lehman Crisis, the biggest names in financial punditry have been voicing their thoughts and concerns on the most important issues facing the world economy.  Let's take a look:

Martin Wolf, who spent most of the crisis bringing attention to global imbalances, has become a China bull:

China has emerged as the most significant winner from the global financial and economic crisis. At the end of 2008, many questioned whether China would achieve its growth target of 8 per cent in 2009. Who now dares to do so?

Crisis Roundup: Anniversary Edition

Is another boom around the corner?

Or has the real pain only begun?

Fedex can't find any green shoots in the US...

...and American consumers can't find any more credit.

Is the end near for the dollar? Probably not.

Hank Paulson doesn't use email. Can he be trusted?

The upside to rising foreclosures.

Trade Finance and the Curse of Soft Commodities

There is a fascinating article in this month's Africa Investor on the difficulties many African commodity exporters face in securing sufficient trade finance. The IMF estimates that, as a result of the crisis, there is a trade finance shortfall of $100-$300 billion, with Africa being the most affected by this dearth in funds.

Soft commodity products, such as cocoa and flowers, typically require advance financing to fund cultivation and production, which is repaid once crops are harvested and exported. Most African producers prefer dollar loans, as their costs are primarily denominated in dollars. Yet, because Europe is Africa's largest export market, most export revenues are denominated in pounds and euros. This creates a currency mismatch, which discourages lenders.

The situation is further complicated by an overall shortage of dollars, and Africa's dependence on commodity exports:

Declining Consumer Credit + Weaker Dollar = Time to Export

There are two noteworthy stories in the economic blogosphere, aside from the exciting news coming out of the World Bank.

The first has to do with the sharp decline in consumer credit in the United States. Buttonwood reports:

While governments round the world clock up more debts, American consumers are finally cutting back. The volume of consumer credit fell by $21.6 billion in July, the sixth monthly decline in a row. According to Lombard Street Research, this was the second largest percentage decline since World War Two. The 3-month annualised rate of decline is now running at 7%.

It appears that the recession has actually succeeded in frightening the American consumer into saving. This is not an insignificant feat.

Doing Business 2010: Reforming through Difficult Times

The World Bank Group has released its annual Doing Business Report, which provides quantitative measures of regulations of the life cycle of a small or medium-size enterprise. Regulations related to registering property, employing workers, dealing with construction permits, and paying taxes are measured. Getting electricity and worker protection were added to this year's metrics.

In spite (or because) of the crisis, governments worked hard at improving the business climates within their borders:

In 2008/09 more governments implemented regulatory reforms aimed at making it easier to do business than in any year since 2004, when Doing Business started to track reforms through its indicators. Doing Business recorded 287 such reforms in 131 economies between June 2008 and May 2009, 20% more than in the year before.

Reformers focused on making it easier to start and operate a business, strengthening property rights and improving the efficiency of commercial dispute resolution and bankruptcy procedures.

Crisis Roundup: Financial Bureaucrats Edition

Tim Geithner wants tougher capital requirements...

...and seven of his European counterparts want to end banks' bonus culture.

Claude Trichet has a plan. So does Geithner.

Bernanke is the dollar's new father.

Volcker and Soros discuss innovation.

Finally, did miscommunication between the US and UK Treasuries push Lehman over the edge?

Sovereign Wealth Funds: A Stabilizing Force?

I attended a discussion at the IMF today on the effects of sovereign wealth funds (SWFs) on financial market stability, particularly during the crisis*. It was hosted by two resident economists, Tao Sun and Heiko Hesse, who presented the results from their paper on Sovereign Wealth Funds and Financial Stability. The study analyzes whether or not the introduction of the massive financial resources behind sovereign wealth funds destabilizes capital and equity markets. 

The answer, for now, appears to be no. 

Systemic Risk and the Financial Sector

I'm being called Mr. Bailout. I can't do it again.

-Hank Paulson, September 2008.

The IMF held an unofficial conference yesterday on systemic risks in financial systems. Kay Giesecke from Stanford University presented a paper which argues that the the spillover effects from the failure of a financial firm play a prominent role in systemic risk, far greater than the failure or default of an industrial giant:

We find strong evidence for the presence of spillover effects in the US financial system during 1987-2008, after controlling for the exposure of firms to common or correlated risk factors.  The fraction of systemic risk explained by spillover effects can be substantial, and tends to be higher during periods of economic stress.

Bank failure clusters do not arise solely from exogenous shocks; rather, they are pushed over the edge by the failure of their peers. 

While it may seem obvious that bank failures pose a greater systemic risk threat then other sectors, it wasn't obvious enough to Mr Paulson.

Or, he just let it happen anyway.   

Wall Street's Premature Exuberance

I've been wondering lately if investment banks are experiencing a bout of irrational exuberance with respect to a recovery. Bullish advice on China comes to mind in particular.

There is growing momentum behind the idea that many banks are getting the recovery wrong. From Bloomberg: 

Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.