Daniela Gabor UWE Bristol 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 ID: 1029396
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1. Liberalizing capital accounts – lessons from emerging EuropeDaniela GaborUWE Bristol
2. BackgroundTwo 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 membershipSimilar sequencing: first FDI, last ‘hot’ interest-sensitive flows (non-resident access to money markets instruments)KA liberalization with FDI targeting bank privatizations
3. BackgroundIMF(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)
4. Large capital account surpluses
5. Post-Lehman hard landingSharp economic contractionSharp currency depreciationVienna Initiative – foreign-owned banks threatening to leave
6. Three lessonsLesson 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
7. Lesson 1:cross-border interconnectedness
8. Lesson 1: Bank-driven global carry Cross-border funding ofSterilization games with the central bank (Christensen 2004)Aggressive fx HH lendingIntra-financial system activity Cross-border loans from BIS banks
9. Lesson 1: banks also intermediate non-resident carry in local currency assets
10. Lesson 2: financialization of currency and interbank money marketsMcCauley and Scatigna (2011): EMEs currency markets trading driven by financial motives, off-shoreFinancialization of currency markets spills into money marketsStructural surplus of liquidity, asymetrically distributed Sterilizations as asset class for banks/non-residents Sudden stops = inflicting liquidity shortages on (state-owned) patient banks
11. Non-resident holding of LC assets, Hungary
12. Interbank costs of reacting to sudden stops‘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).
13. Lesson 3: IMF does not have the right answer to global fin. cyclesAmbiguous 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 modelCareful management of ‘porous’ capital controls
14. Liberalizing capital accounts – lessons from emerging EuropeDaniela GaborUWE Bristol