liberalizing capital accounts – lessons from emerging europe daniela gabor uwe bristol
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Liberalizing capital accounts – lessons from emerging EuropeDaniela GaborUWE Bristol
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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
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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)
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Large capital account surpluses
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Post-Lehman hard landing
Sharp economic contraction
Sharp currency depreciation
Vienna Initiative – foreign-owned banks threatening to leave
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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
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Lesson 1:cross-border interconnectedness
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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
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Lesson 1: banks also intermediate non-resident carry in local currency assets
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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
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Non-resident holding of LC assets, Hungary
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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).
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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
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Liberalizing capital accounts – lessons from emerging EuropeDaniela GaborUWE Bristol