IR304 The Politics of International Economic Relations by dffhrtcv3

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									Innovations in Financing:
A New Paradigm?
Recovery Towards What?
Bretton Woods Project Conference

Dr Lauren Phillips
London School of Economics
6 November 2009




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Starting assumptions
   Some large developing countries are newly
    empowered in international finance
       They hold large currency reserves, predominantly
        in US dollars
       They are still growing strongly, or are weathering
        the financial crisis relatively well
       The perception of their global importance is
        growing on a number of other metrics



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Innovation without paradigm shift
   The innovations in alternative financing
    mechanisms are still few, and small in
    monetary terms, thus do not add up to a new
    paradigm
   But there are some notable characteristics
       They are growing in number
       They are strongly regional in nature
       But they enjoy only moderate in-region credibility,
        as well as weak external credibility

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Asian initiatives
   Chiang Mai
       ASEAN swaps
           Still small in global terms, especially in a region rich
            with reserves
           Too political to be viable (requires consensus)
       Bilateral swaps
           Bigger and less complicated to access, but linked to
            IMF’s “deep pockets” and conditionality
           Japan has made $27.8bn available to Indonesia in
            current crisis through the bilateral programme

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Attempts to decrease $ dependency
   Recent Chinese proposals
       SDR / Basket of currencies approach
       The remembi as alternative?
         Capital controls and nature of Chinese financial sector
          (deep but not broad, lack of extensive domestic bond
          market) makes this a difficult short-term goal
         Small steps: Brazil / Russia and China to denominate trade
          in local currencies, extension of RMB swaps with ASEAN
          neighbours, RMB bank accounts in Hong Kong
         China hopes 50% of its trade will be RMB denominated in
          3-5 years
   China continues to be the “lender of last resort” for
    the US, treasury purchases continue
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Latin American initiatives
   Early repayments to the Fund
   Banco del Sul
       Chavez proposal for an alternative financing mechanism
        for Latin America
       Support regional integration via financing cross-border
        projects
       Funded by borrowing states: Argentina, Brazil, Venezuela,
        Ecuador, Bolivia, Uruguay and Paraguay
       Has not been without controversy, progress slow
   Venezuelan aid / lending

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The Bono del Sur
   The announcement of an Argentine /
    Venezuelan joint sovereign bond in 2006 was
       Dismissed out of hand as a pipe dream
       Anticipated to be a disaster
   Yet there have been three successful
    tranches of debt issued
       ~ $3 billion value
       Purchased by local and international investors
       Has performed rather conventionally
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Political Commitment: Venezuela
   The project was highly consistent with
    Venezuelan foreign policy
       Reduce dependence on Washington
       Assist friendly governments
       Promote regional integration
   $5.5 billion aid programme
       Loans and cheap petrol to Central and South
        American governments
       $3.4 billion purchase of Argentine bonds +
        purchase of Ecuadorian bonds

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Linked to institutionalisation of other
regional instruments

   Was announced the day that Venezuelan
    joint the South American customs union,
    Mercosur
   Financing programme was linked to a new
    institution, the Banco del Sur, Venezuela was
    constructing with South American partners
   Further step from Venezuelan purchases of
    Argentine debt

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Political Commitment: Argentina
   Fit with Argentine domestic political and
    economic objectives
       Kirchner government built domestic credibility
        around autarky from the international capital
        markets and IMF
       Also fit need for non-int’l market based financing
   More convenient than convinced – not
    particularly supportive of South American
    integration

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Hypotheses
   Reduction of Argentine risk – convergence
    towards Venezuelan risk rates
   Bono del Sur should have risk of “less than
    sum of the parts”, except in times of crisis
    when risk multiplies
   Changes to pricing should be reactive to
    news about Venezuela’s ongoing
    commitment to regional integration

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Argentine risk declines…
                         JPMorgan EMBI Sovereign Risk Ratings, in basis points

 600


 500


 400

                                                                                                                     Venezuela
 300
                                                                                                                     Argentina

 200


 100


  0
                                                                                                   Nov-06
                                                               Jul-06
       Jan-06




                                                      Jun-06
                           Mar-06
                Feb-06




                                             May-06
                                    Apr-06




                                                                        Aug-06

                                                                                 Sep-06




                                                                                                            Dec-06
                                                                                          Oct-06




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Ven. / Arg. co-trading
   JPMorgan’s EMBI is highly correlated
       Correlation coefficient = 0.71 for 1994-2001
   Venezuela and Argentina pre-Bono del Sur
       Correlation coefficient = 0.78
   Venezuela and Argentina after Bono del Sur
       Correlation coefficient = 0.97




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Bono del Sur trading patterns

 5000
 4500
 4000
 3500                                                                                             Venezuela
 3000
                                                                                                  Argentina
 2500
                                                                                                  BonodelSur
 2000
 1500                                                                                             Ven+Arg
 1000
  500
    0
                                   Jul-07




                                                                       Jul-08
                 Jan-07




                                                     Jan-08




                                                                                         Jan-09
                          Apr-07




                                                              Apr-08
        Oct-06




                                            Oct-07




                                                                                Oct-08




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Venezuelan politics strong
influence on pricing
                          I. Short Model      II. News Controls    III. Market Controls
                          Coeff.    Stand.E    Coeff.    Stand.E    Coeff.      Stand.E
Mean Equation
Delta S&P500                -          -         -          -      -0.782**      0.060
Constant                  0.107      0.114     0.120      0.118      0.112       0.110
Variance Equation
Ven. Domestic Politics      -          -       0.042      0.101     -0.015       0.104
Ven. Commit to Region    -0.413**    0.114    -0.452**    0.127    -0.403**      0.101
Ven. Economics              -          -      -0.214*     0.101     -0.034       0.081
Arg. Domestic Politics      -          -       0.041      0.074      0.017       0.069
Arg. Economics              -          -       0.190      .0136      0.277       0.035
Constant                 0.133**    0.024     0.164**     0.030    0.147**       0.035
Symmetric ARCH term      0.120**     0.011    0.145**     0.023    0.145**       0.026
Asym. ARCH term          0.181**    0.038     0.192**     0.040    0.152**       0.035
GARCH term  0.947** 0.010 0.937** 0.011 0.932**
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Conclusions
   Experiments in new finance mechanisms
    have been successful to date
   But scaling up might be difficult
       Technical reasons: ability to weather shocks;
        changes to practice and construction of
        institutions
       Political reasons: requires high degree of political
        cooperation; prioritisation of international, rather
        than national, financing goals

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