Two Centuries of International Official Lending Sebastian Horn Kiel Institute Carmen Reinhart World Bank Harvard Christoph Trebesch Kiel Institute World Bank November 19 2020 ID: 1027510
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1. Coping with Disasters:Two Centuries of International Official LendingSebastian Horn(Kiel Institute)Carmen Reinhart(World Bank, Harvard)Christoph Trebesch(Kiel Institute)World BankNovember 19, 2020All views are personal1
2. The Covid-19 disaster: private capital flows“Sudden stop“ in private capital flows limited risk sharing2
3. The Covid-19 disaster: the official response“Sudden spike“ in official flows risk sharing (Horn 2020)3
4. The (unexplored) world of official capital flowsExtensive literature on private cross-border flows (see paper), but little work/data on official flows; narrower focus/time spansOur contribution: encompassing new database and analysis of official international lending, 1790-2015Definition: includes loans, grants and guarantees by governments, multilateral institutions and central banks across bordersSources: International treaty series (archives), creditor and debtor budget accounts, annual reports, post-1970: World Bank, OECD230,000 grants & loans by 134 governments, 50 intl. institutions, in total 15 trillion real USD (committments in 2015 terms)4
5. Who lends? The universe of official creditors5
6. Examples of sourcesHistorical budget accountsCIA reports on Sino-Soviet loans6
7. Disasters 1800-2015: A new databaseWe collect data on severe disasters from many sources:Financial crises: Banking, currency and sovereign debt crises from Reinhart & Rogoff (2009) and Meyer et al. (2019)Wars and military conflict: Inter- and intra-state wars from the Correlates of War project (Sarkees and Wayman 2010)Natural catastrophes: Earthquakes, storms, floods, volcano eruptions, famines, epidemics from EM-DAT since 1900. Dozens of historical and country studies for 1800-19007
8. Research questions and key take awaysScale of official lending: It is large, often larger than private flows Rescue lending common long before IMF/World BankMuch more institutionalized today (“globalization of assistance“)Interaction of private and official flows: When private flows retrench, official lending often steps in Private capital tends to be pro-cyclical, while official flows tend to be counter-cyclical (Covid crisis is a recent example)Patterns of official lending: trade and financial integration mattersWhat drives country rescues and official lending? (Tirole 2015, Gourinchas et al. 2019)Bailouts increase with economic exposure (selfish motive vs. altruism an intepretation issue)8
9. A panorama of international official lending9
10. Official international lending: 1790 - 2015World War IWorld War IIMarshall PlanOil CrisesGreat Financial CrisisNapoleonic WarsGreek War of IndependenceCrimean WarSino-Japanese War10
11. Official lending is much bigger than IMF & World BankRegional & othersBilateral (government to government)IMF and World Bank11
12. Central bank lending: credits then, swap lines nowGreat Depression:Short-term credits to CBs of Germany, Austria, Britain etc2008 crisis:US Fed emergency dollar liquidity12
13. Adding central bank lending across borders13
14. When private investors retrench, official lending often steps in(private capital tends to be pro-cyclical, while official flows tend to be counter-cyclical)14
15. Official vs private capital flows: 200 year viewOfficial international lendingPrivate international capital flowsCorrelation: -0.3615
16. Case study: Interwar and Great Depression16
17. Case study: Asian crisis (1997)17
18. Case study: Eurozone crisis (2010-2012)18
19. Why do countries extend rescue loans?(Who gets what and why?Altruism or self-interest?)19
20. Natural disasters: increasing odds of rescue lendingProbability of receiving official loans/grants in major natural disasters, by era, in %20
21. Why do countries extend rescue loans?Main hypothesis: economic integration matters. Sovereigns extend bilateral rescue loans to those countries with largest trade and finance exposure (Tirole 2015, Gourinchas et al. 2019)Interpretation: helping your friends vs. self-interest of preventing negative spilloversEmpirical approach: gravity model of bilateral rescue lending: … loans by creditor country j, to crisis country i, in disaster episode t in constant 2015 US; … pre-disaster shares of bilateral trade and bank loans 21
22. Trade and bank exposure predicts rescue loans
23. The more exposed you are, the more you lend1% higher trade exposure 0.34% more official loans23
24. ConclusionOfficial lending is much larger than previously known and existed long before the foundation of IMF and World BankOfficial lending rises in times of disaster, when private capital flows retrenchRescue loans and bailouts much more prevalent today (from exception to norm); economic integration matters24
25. Appendix25
26. Purposes of official cross-border lending26
27. Financial crises, wars, and natural disasters27
28. Rescue lending has become much more systematic28
29. Bilateral loans 1790-201529