Globalization and crises

Transcription

1 Globalization and crises Luis Servén The World Bank Kuala Lumpur, November

2 Plan Stylized facts 1. Financial globalization 2. Currency crises 3. Bubbles 4. Sovereign debt and default 5. Financial crises, propagation and policy responses 2

3 Some stylized facts Fact 1: Big increase in the degree of international financial integration since

4 How is the growth of financial integration measured? De jure: Widespread removal of barriers to international financial transactions. De facto: Massive growth in cross-border asset holdings. [Some hybrid measures sometimes used as well; see Quinn, Schindler and Toyoda 2011 for full details] 4

5 Leading de jure measures (all based on IMF AREAER): Chinn and Ito (2007) KAOPEN: first principal component of individual 0/1 restriction indicators from AREAR table Underlying indicators are dichotomous (yes/no), hence rough Quinn (1997, updated) index of restrictions on financial transactions based on coding of text of AREAER; separates current and capital account. Schindler (2009) KA index more finely-graded version of Quinn w/ details by asset transaction type. Fernández et al (2015): update and extension of Schindler to 10 asset categories, adding 4 new ones Derivatives, comercial credit, financial guarantees, real estate 5

6 Quinn index of capital account liberalization, by income group Source: Reinhardt et al (2013)

7 Chinn-Ito index of financial openness (group averages) Index All Advanced Emerging Developing Year

8 Chinn-Ito index of financial openness (group averages) Index World Advanced Emerging Developing Year

9 Source: Milesi-Ferretti and Tille (2011)

10 Fernandez et al (2015) index of capital controls Controls on inflows (averages across 10 assets categories) Index Year World HI (rhs) UMI LMI LIC

11 Fernandez et al (2015) index of capital controls Controls on outflows (averages across 10 assets categories) Index Year World HI (rhs) UMI LMI LIC

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13 The various de jure measures are fairly highly correlated 13

14 De facto: Massive increase in cross-border asset holdings speeds up after 1990 especially large in advanced countries slows down after the global crisis ( deglobalization ) Most popular summary statistic: the sum of gross foreign assets and liabilities relative to GDP. 14

15 Source: Gourinchas and Rey (2013)

16 External Assets and Liabilities (percent of GDP) % of GDP Assets Liabilities A + L World Year CEMFI September (c) Luis Servén

17 External Assets and Liabilities (percent of GDP) Assets Liabilities A + L OECD Year % of GDP Assets Liabilities A + L Rest of the World Year CEMFI September (c) Luis Servén

18 External Assets and Liabilities (percent of GDP) Assets Liabilities A + L USA Year % of GDP Assets Liabilities A + L China Year

19 External Assets and Liabilities (percent of GDP) % of GDP Assets Liabilities A + L Eurozone Year CEMFI September (c) Luis Servén

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21 Source: Prasad (2012)

22 Fact 2: the composition of assets and liabilities differs systematically across advanced and developing countries. 22

23 In particular: advanced economies tend to be long in risky assets, other economies short. Rich countries hold equity assets, developing countries hold reserves. And the difference in portfolio composition between both groups of countries has widened over time 23

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25 Source: Prasad (2012)

26 Source: Prasad (2012)

27 Source: Prasad (2012)

28 These changes in the structure of countries portfolios reflect the shifting composition of capital inflows and outflows since 1990 FDI dominates inflows to emerging markets. Inflows to advanced countries are dominated by portfolio capital and banking flows. Emerging-country outflows have expanded greatly especially in middle-income countries and they are dominated by reserve accumulation. In contrast, reserves play a minimal role in advancedcountry outflows.

29 Emerging economies hold the bulk of international reserves 9,000 8,000 International reserves around the world (US $ bn) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 USA EU-15 Japan Emerging Asia China Oil Exporters LAC-6 Source: EIU

30 Why the massive reserve accumulation by emerging markets? Reserves as a hedge against external volatility (such as sudden stops) a strategy validated by the crisis, so likely to persist New mercantilism : defend exchange rate targets to support an export-oriented growth strategy (e.g., China and some East Asian countries) Adjustment lags to terms-of-trade windfalls (commodities)

31 Fact 3. Valuation effects capital gains and losses on gross foreign assets and liabilities account for an increasingly large part of the dynamics of countries net foreign asset positions

32 Large, heterogeneous gross asset positions create a big exposure to changes in asset prices and/or exchange rates The U.S. has consistently enjoyed very large valuation gains.

33 Source: Gourinchas and Rey (2013)

34 Source: Gourinchas and Rey (2013)

35 In most countries, the variance of the valuation effect is about as big (about 90% on average) as the variance of the change in net foreign assets. The correlation between the current account and the change in the net foreign asset position is fairly low

36 If changes in net asset positions are increasingly driven by valuation effects, and net flows are dwarfed by gross flows does the current account still matter?

37 Fact 4. Capital flows (and also the prices of risky assets) show a high degree of synchronization around the world

38 Source: Rey (2013)

39 Table 2 Average cross-regional correlations, (a) Gross capital inflows by foreign agents (CIF) North America Latin America and Caribbean Asia and Pacific Europe Middle East and North Africa Sub- Saharan Africa North America Latin America and Caribbean Asia and Pacific Europe Middle East and North Africa Sub-Saharan Africa (b) Gross capital outflows by domestic agents (COD) North America Latin America and Caribbean Asia and Pacific Europe Middle East and North Africa Sub- Saharan Africa North America Latin America and Caribbean Asia and Pacific Europe Middle East and North Africa Sub-Saharan Africa Source: Barrot and Servén (2016)

40 Table 2 Average cross-regional correlations, (a) Gross capital inflows by foreign agents (CIF) Advanced Emerging Developing Advanced Emerging Developing (b) Gross capital outflows by domestic agents (COD) Advanced Emerging Developing Advanced Emerging Developing Source: Barrot and Servén (2016)

41 Common factors (global and/or regional) account for a major share of the observed variation in asset prices and flows around the world. A global financial cycle asset returns move in unison across countries. Strong international propagation of financial disturbances and market turbulence

42 Mundell s trilemma : a country cannot have all three of An independent monetary policy A nominal exchange rate objective An open capital account The global financial cycle reduces it to a dilemma: exchange rate flexibility does not grant monetary independence

43 Fact 5. Large global imbalances (big current account gaps of opposing sign) opened up over the globalization era and grew bigger up to the global crisis. 43 CEMFI September (c) Luis Servén

44 Global imbalances ( )

45 Global imbalances are not a new phenomenon they were already seen in the 1980s, for example. But in the recent episode the magnitude was much larger. And there were new roles: Industrial countries (especially the U.S.) ran the biggest deficits Emerging countries (especially China) supplied most of the financing 45 CEMFI September (c) Luis Servén

46 Imbalances have narrowed post-crisis The U.S. has scaled back its deficit with the unwinding of the fiscal stimulus China s surplus has declined But they still remain large The U.S. still shows the biggest deficit (>0.5% of world GDP) Germany s surplus (about 0.4% of world GDP) now exceeds that of China 46 CEMFI September (c) Luis Servén

47 Are global imbalances a concern for world economic stability? Did they cause the global crisis? Risk of a sudden stop on high deficit countries Not the experience of the U.S. in the global crisis! No Risk of a sudden stop on high deficit countries 47 CEMFI September (c) Luis Servén

48 Large imbalances might pose a (global) risk due to externalities / spillovers: A sudden stop on a large deficit country (the U.S?) could propagate to the rest of the world. But the opposite happened during the crisis flight to safety Big surpluses in large countries detract from global demand and augment the deflationary effect of adjustment by deficit countries near the Zero Lower Bound 48 CEMFI September (c) Luis Servén

49 Fact 6. The incidence of crises tends to be higher in times of higher international capital mobility

50 Different varieties of crises: Sovereign default Exchange rate crashes Financial / banking crises Inflation explosions Often occur in combination; sometimes all at once. Crises do not happen at random times they typically follow booms in credit, asset prices, and/or capital flows

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52 Capital mobility is historically associated with the incidence of banking crises.

53 Source: Reinhart and Reinhart (2008)

54 Percent Defaults following capital flow surges Share of new defaults at peak capital inflows (stripe) Magnitude of capital inflow boom (dark) Share of defaults 1-2 years post-peak (pale) Peak 1-2 years later Size of boom Source: Reinhart, Reinhart and Trebesch (2016)

55 However not all capital flow booms (or broader financial booms) end up badly just some do The question is how to identify bad booms Scale? Persistence? Other features? And what are other contributing factors?

56 An aside: can we really trust the data on countries foreign assets and liabilities? Measures of global liabilities from conventional sources (e.g., IMF, Lane-Milesi) exceed those of global assets the world is a net debtor. Measures of global investment income show that reported payments exceed reported receipts every year. This points to significant amounts of unrecorded assets and unreported asset income. The missing wealth of nations : mainly assets held by households in tax havens (Zucman 2013).

57 International investment statistics are based on the residence principle : what matters is the residence of creditor and debtor, no the location of the custodian. Custodians located in tax havens cause a blind spot e.g., U.S. securities entrusted by a French creditor to a Swiss bank show up in the U.S. IIP but not France s. One way to overcome this would be to use data reported by the custodian country on the residence of offshore asset holders. Switzerland does this since 1998; no other tax haven does. It also reports the nationality of bank deposit holders.

58 In other advanced countries, most foreign securities held at custodian institutions are owned by residents Source: Zucman (2013)

59 The large share of bank deposits attributed to tax havens reflects the use of sham corporations to hide the true beneficial owners. Most deposits likely belong to EU residents in reality there is a clear negative correlation those from tax havens (particularly at the time of the 2005 Savings Directive).

60 To estimate global hidden assets, compute the difference between global recorded liabilities and recorded assets. It is positive every year.

61 The discrepancy is larger for equity assets than for bonds Source: Zucman (2013)

62 Overall, the hidden assets amount to 5-6 percent ($6 trn) of households global financial wealth double the total net debt of rich countries. Source: Zucman (2013)

63 The ownership of tax haven wealth is unknown, but likely overall hidden wealth likely makes the rich world a net creditor (as long as it owns at least 50% of all hidden wealth). In reality, the EZ is very likely a (major) net creditor, while the U.S. is a (modest) net debtor Net asset position (% GDP) under alternative scenarios, average Eurozone U.S. Source: Zucman (2013)