A Push to Free Capital for Emerging Markets

The New York Times
By MATTHEW SALTMARSH
Published: February 4, 2009
PARIS — With governments focused on shoring up domestic lending, the world’s major financial businesses are pushing to help the flow of financing to subsidiaries in emerging markets like Eastern Europe.
The Institute for International Finance, which represents major financial institutions, intends to lobby world leaders ahead of meetings in London involving the Group of 20 finance officials, central bankers and top private bankers, the institute’s managing director, Charles Dallara, said.
Among other things, the large banks would like to see the establishment of a global financial regulation committee, which they consider crucial to improving rules, Mr. Dallara said.
“We have seen very negative consequences from the measures taken since the fall by governments and central banks,” he said by phone from Zurich. “There has been no sense of coordination.”
He referred to the numerous capital injections, deposit guarantee plans, bad asset purchases and nationalizations undertaken by governments to try to shore up lenders hurt by sharp drops in asset values, write-downs and the collapse in confidence.
In some cases there is strong political pressure on banks to favor lending at home, making it “more difficult for bank headquarters to transfer funds to overseas subsidiaries and extend credit overseas,” Mr. Dallara said.
This has been especially hard on lenders in Central and Eastern Europe, he said, many of which are subsidiaries of larger banks based in Western Europe.
Analysts agree that difficulties have been building. “The problems at the parent banks means they have halted offering credit to their subsidiaries in this region,” said Piotr Bujak, an economist at Bank Zachodni WBK in Warsaw.
Walter Demel, a senior analyst for Central and Eastern Europe at the Austrian bank Raiffeisen, said, “There is a risk to the economic advances that the region has made if there is not more support for the region.”
The institute intends to press its case at the meetings in London in mid-March, which will prepare the ground for a summit of G-20 leaders, also in London, on April 2. The institute is based in Washington and comprises more than 380 banks, asset management firms and insurance companies. Its chairman, Josef Ackermann, is also chief executive of Deutsche Bank.
The institute has just issued a report warning that the outlook for private capital flows to emerging markets has deteriorated significantly. Those flows are projected to fall to $165 billion this year, from $466 billion last year. The largest component of the decline would be bank lending, which would shift to a net outflow from emerging markets of $61 billion this year from a net inflow of $167 billion in 2008.
Mr. Dallara said there was “an urgent case” for better coordination among the International Monetary Fund, the World Bank and major central banks to provide more liquidity to emerging markets through existing facilities or the establishment of credit lines between central banks. One template for such help could be a plan, announced by the Federal Reserve in October, to establish temporary reciprocal currency arrangements to support dollar liquidity with the central banks of Brazil, Mexico, Singapore and South Korea.
Europe has announced similar pacts with its partners. In the fall, the European Central Bank announced agreements with the central banks of Hungary and Poland to support liquidity in those countries.
Mr. Dallara said he hoped that the European Central Bank and the Swiss National Bank would announce similar, expanded arrangements for Central and Eastern Europe soon.
Another issue is that the International Monetary Fund was provided with a short-term lending facility in autumn for members facing temporary liquidity problems, but it has yet to be used.
“We need to explore the liberalization and improvement of this facility and to increase funds for the I.M.F. from surplus countries,” Mr. Dallara said. Countries that might benefit include Brazil, Chile, the Czech Republic, Mexico and Poland.
In November, the fund approved more money in loans to governments than in any other month in its history, committing nearly $50 billion. In addition to Iceland, it has also come to the aid of Ukraine, Latvia, Hungary and other Eastern European countries.