Crisis Talk - The World Bank Group

World Economic Forum Financial Development Report

The World Economic Forum has released its Financial Development Report 2009, which scores and ranks 55 of the world’s leading financial systems and capital markets according to their level of financial development. It analyzes the drivers of financial system development and economic growth in developed and developing countries to serve as a tool for countries to benchmark themselves and establish priorities for reform.

The United Kingdom replaced the US as this year's top performer. America's fall is largely due to lower financial stability scores and a weakened banking sector:

 

The report also highlights the impact of the financial crisis on the Millennium Development Goals. Erik Feyen, Financial Economist in the World Bank’s Financial and Private Sector Development Vice Presidency, has written a chapter in the report that highlights this impact.

Below is an excerpt:

IFC Distressed Debt Update: China's On Board

Last week I discussed IFC's new plan to launch a vehicle to purchase toxic assets in emerging markets. The initial report indicated that much of the financing was expected to come from private sector banks. Reuters is now reporting that China's Sovereign Wealth Fund, China Investment Corp, is interested in participating in the project:

China has shown interest in investing in a new International Finance Corp program to acquire and restructure distressed debt in developing countries, World Bank President Robert Zoellick said on Monday.

Zoellick, speaking at a ceremony to launch the program that that aims to mobilize more than $6 billion to help banks and companies sell or restructure troubled assets, said he recently discussed the program with China Investment Corp, Beijing's sovereign wealth fund.

"They're interested in investing in distressed debt. They told us 'we can do it in the United States, but we're a little wary of doing it in the developing world because we don't want to be accused of anything'," Zoellick said. "To come in with us in a real restructuring program, they have some significant interest."

Washington Update

Although much of the Washington-based development community is headed to Istanbul, there is quite a bit of news coming from headquarters.

First, IFC is teaming up with several private sector banks to launch a vehicle to purchase distressed assets in emerging markets. IFC will commit $1.5bn to the fund and is hoping to raise an additional $4bn from the private sector. A particular emphasis will be on Eastern Europe, which was home to 40 percent of pre-crisis foreign capital flows. Further details of the project will be announced in Istanbul. In the meantime, the FT reports:

The idea is to mimic the functions of a "bad bank" at an international level through a number of platforms rather than a single global investment vehicle.

As part of the initiative...the IFC is teaming up with HSBC to purchase and restructure distressed assets, in what it hopes will eventually be  $900m scheme.

IFC's chief executive, Lars Thunnel, is known for having managed Sweden's "bad bank" during its banking crisis in the early 1990s.

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'.

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:

Muhammad Yunus on the Crisis

Muhammad Yunus was in Washington this week to receive the Presidential Medal of Freedom from Barack Obama. He stopped by the World Bank on Friday to give a talk at the IFC which addressed, among other things, the financial crisis. (His own Grameen Bank has not been affected by the crisis).

Yunus argued that the current crisis is actually an amalgam of many crises which came to a head in 2008: finance, food, energy, environmental (ongoing) and social (income, poverty, health; also ongoing).  He believes that the crisis offers a tremendous opportunity to change the modern financial system, and warns against trying to re-implement the old system.

Trade Finance in Times of Crisis Revisited

Editor’s Note: Jean-Pierre Chauffour and Thomas Farole are, respectively, Lead Economist and Senior Trade Specialist in the World Bank’s International Trade Department. They are authors of an upcoming paper, "Trade Finance in Crisis: Market Adjustment or Market Failure?" and have been invited by Crisis Talk to share their thoughts on trade finance and the crisis.

World leaders at their April 2009 G-20 Summit agreed to massively support trade finance. Yet, little is known about the singularity of the issues related to trade finance in the context of the global economic crisis. Why should international trade finance be a particular issue of concern in the current circumstances? Are there specific market or government failures associated with trade finance that justify a special and differential treatment of the issue by policymakers? If so, what would then be the most appropriate policy instruments to address those concerns?

Weekend Reading (and Listening)

What exactly is quantitative easing, and how do we measure its effectiveness? Buttonwood explains.

Is the Credit Crisis the largest outlay in American History? Some are arguing it is more costly than WWII. (via Ritholtz)

Zero Hedge shows us the Fed's balance sheet:

Foreign holdings of USTs and Agencies increased by $23.5 billion monthly to $2,810 billion from $2,787 billion in the prior month. This is now less than 20% of the comparable increase in Securities Held Outright by the Federal Reserve, implying foreign purchasers are starting to fall far behind in their purchases of US securities relative to the Fed's monetization rate.

Our East Asia blog writes on China's import surge.

Simon Johnson discusses bubbles and Goldman Sachs.

The IMF's new blog asks, "After averting a second Great Depression, what should policy makers do to foster recovery?"

The New Yorker's James Surowiecki and Ryan Lizza discuss the state of the stimulus (audio).

IMF and BIS Weigh in on US Response, Prognosis

The IMF has just released its annual economic review of the United States, which is prepared by staff economists in consultation with their US government counterparts. The paper provides an extremely thorough, technical overview of the birthplace of the crisis, with several case studies ranging from labor productivity to the performance of the dollar (which it finds "moderately overvalued"). It analyzes several fiscal indicators at the national and state level, concluding that America's fiscal (im)balance poses the greatest challenge to the nation's economic health.

Not surprisingly, the American authorities interviewed for the study were more optimistic about the prospects for quick recovery.

World Bank VP: Recovery Uncertain

In an interview yesterday with Reuters, Marwan Muasher, the World Bank's senior vice president for external affairs, called any type of recovery "uncertain", and warned that the poorest nations are just starting to feel the worst of the crisis.  Muasher called for rich nations to set aside 0.7 percent of their stimulus packages for poorer countries, adding:

There are other measures that need to be taken, including the cleaning of the banking sector, putting in place new financial regulations, concluding the Doha round of trade talks so we don't end up in protectionist measures and makings sure that the poor are not left behind

The road out of the crisis risks leaving the world's poor behind, no matter what shape it takes.

Currency Swaps: Fed=>Brazilian Central Bank=>Real Sector

Last week, the IMF held a discussion entitled "From Lombard Street to Avenida Pauista: Foreign Exchange Liquidity Easing in Brazil in Response to the Global Shock of 2008-09". The presentation highlighted the Brazilian Central Bank’s FX swap agreements with the Fed in the aftermath of the Lehman Brothers collapse.

These swaps had several unusual features.

Europe: The Biggest Loser?

The IMF just released a revised survey of its global economic outlook, which is generally less pessimistic than the one it originally released in April, particularly for GDP growth in 2010. There is one obvious exception amidst this "optimism": Europe.

Of all advanced economies, only Japan is expected to perform worse in 2009 (though the German economy, Europe's largest, should contract more). The Eurozone is the only entity forecasted to experience negative growth in 2010. The recovery in Central and Eastern Europe, when it arrives in 2010, is forecasted to be slower than in any other emerging market.

Crisis Roundup

Here's a roundup of some of the more interesting crisis-related discussions in the blogosphere:

1.  Simon Johnson, former Chief Economist of the IMF, summarizes his main points from last week's World Bank conference in Seoul, "Lessons from East Asia and the Global Financial Crisis":  

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution. At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs. More likely, the Mother of All Bailouts is storing up serious problems for the near-term future

2.  Should we be promoting access to finance in the developing world, even in the midst of a financial crisis? CGAP Microfinance

3.  Is the next bubble in emerging markets? FT Alphaville

4.  Nouriel Roubini discusses China's waning dollar appetite...

Our creditors' nervousness about the eventual debasement of the US dollar has some increasing validity.

5.  ...while others are less convinced.

Bosnia: The Latest IMF Client

Bosnia just announced a $1.6 billion package from the Fund. Who is next?

Hedging the Fund

On 04.23.09 I attended the second day of a conference here in Washington on “New Ideas in Development After the Financial Crisis,” jointly presented by the Center for Global Development and the School of Advanced International Studies.  A number of the economic illuminati spoke:  e.g., Dominique Strauss-Kahn, Kemal Dervis, Sebastian Mallaby, Santiago Levy, Jose-Antonio Ocampo, Benno Ndulu, Justin Lin and others. 

In this first of two blog posts, I report on the presentation of the Fund’s Managing Director, dealing both with his views on the crisis and how the IMF has changed - and should further evolve - to deal with it.  The second will recount the views of other presenters on what the crisis means for the international financial institutions in general, and the Fund in particular.

What a difference a crisis makes!  Eighteen months ago the IMF was on the ropes.  A highly critical clientele had repaid the bulk of outstanding loans, resources were dwindling, staff were demoralized and diminishing, and there was not much of a purpose in sight.  Today, said Mr. Strauss-Kahn, the need for and relevance of the IMF was “manifest.”  Why?  Because the crisis has shown that “the links between the financial sector and the real economy are deeper” than had been thought, and that “global financial interactions” were both more prevalent and important than foreseen.  The IMF, with its capacity to quickly help poor countries deal with a sudden loss of crucial capital inflows, and middle and high income countries (e.g., Poland, Iceland, Ukraine) cope with crisis and financial collapse, is very much back in business.  Mr. Strauss-Kahn did his commendable best to deplore the dreadful circumstances leading to the Fund’s revival, but I thought I detected the tiniest hint of satisfaction - the IMF is definitely not going under on his watch.

IMF Gets a Deserved Boost

A big outcome of the ongoing G20 meeting is a commitment to triple the amount of money the IMF has for lending (see the BBC story), to $750 billion. This is welcome news. Of all the possible things the G20 leaders could have done, this one would ease the crisis the most.

The G20 has also committed about $250 billion to boost global trade. This one I don't get. Exactly how will this money be used? Perhaps for trade finance. If so, there is no evidence this is a real bottleneck to trade. Or, alternatively, the money could be used to buy products and thus spur demand. But what to buy? This reminds me of one of my first visits to Ukraine. I went to a heavy machinery factory and was shown a huge tank. So huge, in fact, that it couldn't leave the factory - the doors were not large enough. The manager was very proud of it nevertheless.

Will The West Bail Out the East (in Europe)?

Absolutely. No question. Over the weekend, the heads of European Union states met in Brussels to voice their unity against protectionism and to discuss a possible aid package for the badly-hit Eastern members. Neither goal was fully achieved. (Read the BBC article on the meeting.) 
 
On the aid package, there were vague statements of support but no specifics. This will undoubtedly come. Western European banks cannot afford to have a collapse in the East. Their exposures are too large. So lobbying will be intense. And in the grand scheme of European things, the aid package would not represent a large part of what has already become a year of dishing out money left and right. Might as well do it. It will be good for a united Europe, and it will be good for business too.
 
So the question is when, not if.

The Man with the Two Trillion Dollar Plan

On Monday, World Bank Chief Economist Justin Lin proposed the establishment of a $2 trillion Global Recovery Plan. A new Marshall Plan, of sorts. You can listen to his presentation and read about it here.
 
The issue is that the United States of today is in a different position than the United States after the Second World War. It is hard to imagine Congress giving much money for causes abroad when the domestic economy is hurting. The same applies to the other rich economies. If anything, one may expect some lean years in development aid.

Aid to the Suffering World

William Easterly, of The White Man's Burden fame, has just started a blog on the market for development aid. His first entry discusses president Zoellick's recent proposal to have a small percentage of stimulus packages in the West be dedicated to aid for developing countries. Easterly argues that besides being unrealistic, this proposal does not offer any increased responsibility for how the money would be used. Read on.