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THEONGOINGGLOBALFINANCIALMELTDOWNTHEONGOINGGLOBALFINANCIALMELTDOWN
ANDLESSONSFORBANGLADESHANDLESSONSFORBANGLADESH
PresentationbyPresentationby
Dr.Dr.DebapriyaDebapriya BhattacharyaBhattacharyaPermanent
Representative
and
Ambassador
ofBangladesh
tothe
UN
Permanent
Representative
and
Ambassador
ofBangladesh
tothe
UN
Office,
Office,
WTOandotherInternationalOrganizationsinGenevaandViennaWTOandotherInternationalOrganizationsinGenevaandVienna
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Butbeforeallthat MeetMRS.JONES
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I.TheFinancialMeltdown:ADiagnostics
First:Whydidthecurrentfinancialcrisisbecomea
globalone?
USfinancialinstitutionsforwardedbadmortgagestoforeignbanks,foreignbankseventuallyconfronteddeterioratingbalancesheets.
FinancialcrisiscausedaneconomicslowdownforUSeconomy decreasedUSdemandforforeigngoods+declineindemandduetofallindollar.
Persistenceofglobaleconomicimbalancesexacerbatesnegativeeffectsofthefinancialcrisisontherealeconomy.
LargecurrentaccountdeficitmirroredbylargecurrentaccountsurplusofChina.
FallingdemandbytheUSisyettobebalancedbyan
increasingdemandofsurpluseconomies.
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I.TheFinancialMeltdown:ADiagnostics
Second:Couldwehaveseenthecrisiscoming? Internationalfinancialinstitutions,particularlyIMFhavefailedto
foreseeandpreventoutbreakofmajorfinancialcrisis,andthus wasunabletoserviceitsmandate.
TheFinancialStabilityForum foundedfollowingtheAsianfinancialcrisistodetectonsetoffinancialinstability failedtofulfillitsobjective.
Wheydidtheyfail?Because:i. Theyhaveastrongbeliefintheselfcorrectingmechanismsofthe
market,theyareblindtomarketfailures,andreluctantaboutstrongermarketregulation
ii. Theyfocusedonreformingmarketsindebtor(developing)countries,butwasobliviousabouttransparencyandreforminthefinancialmarketsofcreditor(developed)countries
Result:
They
failed
to
detect
difficulties
associated
with
US
housing
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I.TheFinancialMeltdown:ADiagnostics
Third:Didwehaveearlywarningsignals? Criticalmacroeconomicliteraturehasrepeatedlystatedthat
theremustbesomethingwrongwithafinancialmarketthat
endsupincrisiseveryfiveyear. Beyondgeneralwarningitwasdifficulttodetectthecurrent
financialcrisisasfinancialinstrumentslackedtransparency.
In2006 tipoftheicebergemerged:Between2004/2006,US
interestraterosefrom1%to5.35% housingmarketbegantosuffer pricesfallingandriseindefaultingmortgages defaultonsubprimeloansreachesrecordlevel.
InApril2007,subprimeloancrisisbecomeevident estimatedlossesbetween$50billionto$100billion.
NewCenturyFinancialfiledforChapter11,butitinfecteddebtpurchasingbanksaroundtheworld.Forinstance,BearStearns.
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I.TheFinancialMeltdown:ADiagnostics
Fourth: Could the crisis have been as severe if it had
not coincided with other crises, especially rise of
commodityprices?
Risingcommoditypriceshardlyaffectedthemagnitude
ofthefinancialcrisis,butdefinitelyimpededitseffectiveresolution.
Upwardpressureonproducer/consumerpriceshaspromptedmanycentralbankstotightenmonetarypolicytoavoidinflation.
Itwashastyandcounterproductiveforinvestmentandrealeconomy.
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I.TheFinancialMeltdown:ADiagnostics
Fifth:Wasthecrisisencouragedbyalackofliquidity,solvencyand/orconfidence?
Whatemergedin2007asanapparentLIQUIDITYPROBLEMin
anobscurecornerofasophisticated,highlyleveragedandapparentlyriskfreefinancialmarkethasacquiredadimensionbeyondanypessimisticprognosis.
WeaknessoftheUShousingsectorisbeinggraduallyexposed
asnotonlyLIQUIDITYPROBLEMoftheUSfinancialmarkets,butalsoemergedasSOLVENCYPROBLEMofbanksandfinancialenterprisesinternationally(threatening,insomecases,solvencyofnationaleconomies).
ThecrisiscontinuestobereinforcedbyalackofCONFIDENCEandTRUST.Itisupto therescuepackagestorestoremarketconfidenceandtrustamongbanksandreviveinterbanklendingandtoincreaselendingtoprivatesector.
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I.TheFinancialMeltdown:ADiagnostics
Sixth:Wastheproblemcreatedbyweakregulationand
oversight?Atnationalorinternationallevel?
Theprincipalfactorthathasencouragedthecurrent(aswell
asprevious)financialcrisisistheattemptofthefinancialinvestorstomakedoubledigitprofits(CASINOMENTALITY!).Althoughmostenterprisesinrealeconomytendstohavesingledigitprofit.Itisnotpossibleforallfinancialinvestorstooutperformtheeconomyatalltimes. Infullspeculativeswing,uniformityofbehaviour ofallmarketparticipants (HERDMENTALITY!)createsmaniasandpanics.Ifexpectationsarenotcorrectedinatimelyfashion,itresults
inbubblesandburst,seriouslyaffectingrealeconomy.WearecurrentlywitnessingtheMotherofallbubblesandbusts.
Complexityoffinancialinstruments,andassociatedlackof
transparency,haspreventedtimelycorrectionsofexpectations.
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I.TheFinancialMeltdown:ADiagnostics
By not spreading the risk in a transparent way, marketoperators chose ways to securitize risky assets. Credit
rating
agencies
failed
to
understand
these
products.
As
they were rarely traded, approximate value of thesestructuredfinancialproductswasnotknown.
Todays financial crisis has been facilitated by the
RELUCTANCEofcountriesaswellas internationalfinancialinstitutions to better regulate and monitor financialmarkets.ItwasbasedonirrationalcompetencywithrecentGLOBAL ECONOMIC TRENDS and FREE MARKET
ENGINEERING.
Outcome: A trillion dollar (non) worth of toxic waste
handed
down
to
the
tax
payers!
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II.TheFinancialMeltdown:TrackingtheEffects
First:Whatisthelikelyeffectoftheglobalfinancialcrisis?
ThecurrentcrisisrepresentsthelargestfinancialshocksincetheGreatDepression.IthasthepotentialtotriggeraDEEPGLOBALRECESSIONif
countercyclicalpoliciesarenotappliedinacoordinatedfashion.ButconsiderableUNCERTAINITYremainastoitsextentandscaleaswellaseffectonrealeconomy.
Butthefollowingareexpectedtohappen:
Deleveraging ofsecuritizedfinancialinstrumentswillstartaffectingnonhighriskassets leadingtoliquidityproblem.
Creditcrunchisimminentifbailoutpackagesfailtoabsorballbadloansandrestoresoundbalancesheets.
Ifrevivalofrealeconomyisdelayed,financialcostsofbailouts willcontinuetoincrease
EndoftheperiodofGreatModerationcausingsteepslowdown,if notworstrecessioninadvancedeconomics.
IMFWEO2008predictsonaverageazeronominalgrowthrateinG7countries.Debapriya:GlobalFinancialMeltdown 13
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II.TheFinancialMeltdown:TrackingtheEffects
Source: Economist Intelligence Unit and IBGE.
2005 2006 2007 2008
CIS 6.8 7.7 8.6 7.6
Africa 5.7 5.6 5.8 6.0
East Asia 7.5 7.9 8.1 7.2
South Asia 7.7 8.2 8.5 7.0
South-East Asia 5.7 6.0 6.4 5.4
West Asia 6.8 5.7 5.1 5.7Latin America and the Caribbean 4.9 5.6 5.7 4.6
Developing countries 6.6 7.1 7.3 6.4
Developed countries 2.4 2.8 2.5 1.6
Source: TDR 2008, table 1.1.
Quarterly GDP growth rates, selected countries, annual percentage change, 20062008
GDP growth rates, selected country groups, 20062009
4
5
67
8
9
10
11
12
Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08
Brazil China India Russia
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II.TheFinancialMeltdown:TrackingtheEffects
Developingcountriesgetaffectedby:
Reducedworlddemandfortheirproducts
Diminisheddemandfortheirservicesandfallinremittances Increasedcostofborrowingthroughhigherspreadsand
higherrisksforrolloverofexistinggovernmentdebts.
PotentialdropinODA
ThequestionisnotWHETHER,butratherWHENandHOWthe
developingcountries
will
be
hit
by
the
crisis
emanating
from
theadvancedeconomies.
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II.TheFinancialMeltdown:TrackingtheEffects
Second:WhatisthenatureoftheTHREECHANNELSof
likelyeffects?
Trade
Privatecapitalflows
Officialdevelopmentassistance
AllthreearerelevantforBANGLADESH!BangladeshasaSmall
openeconomyismorepronetoexternalshocksincomparisontobiggerandmorediversifiedeconomies.
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II.TheFinancialMeltdown:TrackingtheEffects
TRADE:i. Deteriorationofforeignexchangeearningsdueto
slowdowninadvancedeconomies.ii. Increasedcostoffinancingaffectingsupplyside
expansion.
iii.CountrieslikeBangladeshwithhighshareofmanufacturesinitsexportbasketwillmorereadilyaffectedthancommodityexportingdevelopingcountries.Butwillalsodependon
(a)Incomeelasticityofdemandforexports
(b)Extentofdecoupling fromtraditional(crisisstricken)exportmarkets.
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II.TheFinancialMeltdown:TrackingtheEffects
PRIVATEFLOWS:GlobalFDIpeakedin2007andisforecastedtodecline,butwillremainrelativelystable.Uncertaintiesand
reducedbusinessconfidencewillbemoderatedby:i. Anumberofprivateequityfunds(PEFs)havebeen
establishedindevelopingcountries,butastheyrelyheavily
ondebtfinancingarelikelytoreduceinvestmentinshortterm.
ii. SovereignWealthFunds(SWFs)increasinglyinvestingthrough
FDI(includingGreenfieldFDI),insomecases,indevelopingcountries.Theywillnotgetaffectedinshortrun.
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II.TheFinancialMeltdown:TrackingtheEffects
iii. DevelopedcountriesTNCs (MNCs)maycontinuetoinvestbasedonretainedearnings.Buttheymay
engageinrepatriationofalargeshareoftheirprofits.iv. SouthernTNCs (MNCs)alsolargelyinvestbasedon
profitswhichishighatthismoment,butmaydeclineif
crisisisprotracted.v. Remittancesfromexpatriateworkersmayfallas
demandforimportedlabour declinesalongwith
recessioninadvancedeconomies.ButsourcesofBangladeshsremittancesaredecoupled fromdevelopedeconomies.
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II.TheFinancialMeltdown:TrackingtheEffects
OfficialDevelopmentAssistance(ODA):ThenetODAdeclinein2006/07alreadyposesalargeriskforMDGachievement.
Tensioninpreparing2009budgetsofdonorgovernmentsandpossiblecrowdingoutofresourcesforODA.
Strictfiscaldeficitlimitswillpotentiallyneedtoreschedule
theiraid
flowsLaggedresponseoffallinODAdisbursementisprobable
withincreaseduringcrisisperiod(particularlygrantdisbursement)
Noimmediatesharpdeclineinaidflowduetoitsstickiness,butprolongedslowdownindonorcountrieswillaffectODAdisbursement.
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II.TheFinancialMeltdown:TrackingtheEffects
Third:Whatarepossibleeffectsondifferentcountry
groupsandregions?
Theeffectswillvarysubstantiallyacrosstheglobedependingonsizeandstructureofthenationaleconomy,aswellaslevel
andnatureofglobalintegration(includingexposureto
financialmarketupheaval).
USA:Continuestodeclineinfinalquarterof2008andfirst
quarterof2009,stabilizesinsecondquarterof2009andthen
startprogressiverecovery.
EuroArea:Growthtofallfrom2.6%(2007)to1.3%(2008)to
0.2%(2009),beforereturningto1.4%(2010)
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II.TheFinancialMeltdown:TrackingtheEffects
China:Sofarthoughttoberelevanttothecrisis,newfiguresshowthatdemandforlabour slowingdownreflectingrelaxedexports.Butoveralldomesticdemandgrowthandinvestmentactivity
steady.OtheremergingeconomiesinAsia:Slowdownofgrowthfrom
9.25%(2007)to7.75%(2008)to7%(2009).Consumptionwillbeloweraffectedbystillhighpricesoffuelandfood.
Africa:Effectstobedeterminedbyevolutionofcommodityprices.CushionprovidedbyChinaandIndiamaynotlast.Whilecommoditypricesareexpectedtoremainabovehistoriclevels
andvolatile,butsharpdeclineisnotexcluded.Butlargedisparitybetweenoilexportingandnonoilexportingcountries.
LatinAmerica:Impacttobedeterminedbyinterplayofseveralfactorsgiventheirrelativelyadvancedfinancialintegrationandrelativelydiversifiedexportcomposition.
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II.TheFinancialMeltdown:TrackingtheEffects
Fourth:Howcandevelopingcountriesreducetheirexposureto
globaleconomicmeltdown?
Thefull
effects
offinancial
crisis
on
developing
countries
have
notyetbeenregistered.Lackofrealtimedataisaproblem.
Factorscontributingtorelativeresilienceofdevelopingeconomiestotheglobalfinancial:
i. Domesticdemandhasassuredamoreimportantroleingrowth
ii. Increaseinprimarycommoditypriceshasstrengthenedthe
externalaccountandreduceddependenceonforeigncapitaliii. Maintainingacompetitiverealexchangeratethrough
exchangeratemanagement
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II.TheFinancialMeltdown:TrackingtheEffects
Fifth: Are these factors true for BANGLADESH ?
Slowdown
in
past
12
months,
but
remain
strong
by
historic
standards.Decoupling takingplace?
WestAsiaandAfricaaswellasCISfeltlittleadverseeffects,East&SouthAsiaandLatinAmerica,CaribbeanandCentral&
EasternEuropemoreaffected.
LDCsaretobeaffectedmore,butgiventhetraderelationship.
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II.TheFinancialMeltdown:TrackingtheEffects
Sixth:Isdecoupling feasibleandmeaningfulfor
lowincomecountries?
Evidencetodateshowsthatemergingmarketeconomieswereabletodecoupletheirbusinesscycles fromadvancedeconomies,eventhoughtheyaremoreinterlinkedtodayin
comparisonto1990s. Butrecentslumpsinstockmarketinemergingeconomies
(alsoinBangladesh?)areaclearsignalthatthereisasomedichotomybetweentherealandfinancialsector,oratleasta
timelagbetweenthetwosetsofeffects.Theprospectofcontinuousconfidencecrisisinadvancedmarketseconomiesmightaffectfinancialsectorsinemergingmarkets.
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II.TheFinancialMeltdown:TrackingtheEffects
Therisksforlowincomecountriesareratherdifferentandsevere.Theirrealeconomydecouplinghasneverbeenstrong.
Largeexternaldemandshockswillimmediatelyhavereal
economyimpactastheycannotbecushionedbyinternaldemand.
Financialsectorsareweakandshallow,thuswillnotbeable
toaccommodate
large
external
shocks
and
substantial
increaseinborrowingcosts.
Globalboomofcommoditypriceshascometohalt.
DetrimentaleffectsinODAmayaccelerateeconomicslowdowninLDCs.
HowrelevantaretheseprospectforBANGLADESH?
Decouplingfromadvancedeconomiesnotfeasible,but
reorientationtoemergingeconomiesismeaningful.Debapriya:GlobalFinancialMeltdown 26
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III.TheFinancialMeltdown:CatalogingtheResponses
First:Werethereanygeneralpatterninresponses?
Governmentsacrosstheworldhavetakenmultipleeffortsto
mitigateimpactoffinancialcrisisinmainlyfourareas:i. Liquidity:
(a)Increasingshortandmediumtermliquidity ininterbank
markets,largelythroughcentralbanks directinvolvementinrefinancingoperationsofcommercialbanks.
(b)Grantinggovernmentguarantees tointerbankoperationsto
reducecounterpartrisks.(c)Governmentsestablishandwidendepositinsuranceschemes
toavoidbankrun.
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III.TheFinancialMeltdown:CatalogingtheResponses
ii. Solvency:
(d) Governmentsareincreasinglywillingtoinjectcapital
directlyintocorporationstherebyfacilitatingbank
restructuringprogramme inthefaceofsolvencycrisis.
(e) Governmentscommittobuybadassetstoeasefinancial
restructuringofbanks balancesheets.
iii. ConfidenceandTrust:Overturesandgestures(across
regions)ofpoliticalleadersandmarketregulatorstorestore
marketconfidence.
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III.ThefinancialMeltdown:CatalogingtheResponses
Second:
What
are
the
differences
between
EU
and
US
rescue
packages?
Inonewayorother,theUSandEuropeancountries,ledbythesocalledBritishModel alaGordonBrown,haveagreedtotackletheproblemsofliquidity,solvencyandconfidenceinvariousways onebeingmorecomprehensivethanotherwithdivergingemphasis.
UnitedStates: TheEmergencyEconomicStabilizationAct(3October2008)
putsmoreemphasisonpurchaseofdistressedassetsbuying$700billionworthofpackage.
FederalReservetoprovideliquiditytotheinterbankmarket whichremainedparalyzedinfearofcounterpostrisk.Fedwasanintegralpartofglobalratecut(3October2008)
involving7majorcentralbanksoftheworld.Debapriya:GlobalFinancialMeltdown 30
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III.ThefinancialMeltdown:CatalogingtheResponses
EuropeanCountries:
On12October2008,agreedtofollowtheBritishmodeloffinancialrescuebywayof(i)liquidityprovisioningthrough
centralbanksandstateguaranteesforinterbankoperationsanddepositinsurances,(ii)capitalinjectionstorestructurefinancialinstitutions.
Asmaybeseen,purchaseoftoxicassets notthefocushere,ratheritisonliquidityinjection.UShaslateraddedontheprovisionofcapitalinjectiontodistressedbanks(14October2008)
Aselsewherenosystemrelevant bankwillbeallowedtofail,nodepositorwilllosemoney.Attheendof2009,thelifesupportsystemistobeswitchedoff.
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III.ThefinancialMeltdown:CatalogingtheResponses
Third:Whataretheresponsesinemergingeconomies?
Brazil Tryingtostabilizecurrency(Real).SaoPaulostockExchangesuspendedtradingonoccasionsinoneweek.
China Joinedtheratecutoffensive.Secondsuchcutin3
weeks. India Unexpectedlycutitskeyinterestrates(20October)by
onepercentagepoint from9%to8%.
Mexico Sellingreservetopropupnationalcurrency(Peso).Proposed$4.4billionpackagetoboosteconomy.
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III.ThefinancialMeltdown:CatalogingtheResponses
Fourth:Anyregionalresponsebydevelopingcountries?Asia:
ChiangMai(selfhelp)initiativeofpostAsiancrisis(1997/98)
reinforced
by
ASEAN+3
(China,
Japan
and
ROK)
will
have
a
meetingon2425October2008inBeijing.
AsianCrisisFundhamperedasWorldBankisnotreadytocontributeaclaimof10billion.Implementationofanearlier
decidedcurrencyswaysSchemeof#80billionisbeingaccelerated.
LatinAmerica:
InterAmericanDevelopmentBank(IDB)approvedrecord
volumeofloans. Settingupfastdisbursing$6billionliquidityfacility MoreliquidityfacilityfromCanadianDevelopment
Corporation(CDF) $1.5billionandLatinAmericanFundofReserve(FLAR) $1.8billion
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Fifth:Whatareappropriateresponsesatinternationallevel?
Fordiscouragingfinancialspeculation,countriesneedbettercoordinationofeconomicpoliciesincludingrulesandregulationsgoverningthemonetaryandexchangeratepolicies.
NEEDTOHAVEAFULLFLEDGEDMONETARYANDFINANCIALSYSTEM Theideaofcooperativeglobalmonetarysystemisascompellingastheideaofamultilateraltradingsystem.
Exchangeratedeviationscreateexternalitiesandmultilateral
repercussionsasisdone
by
tariff
and
export
subsidies.
Thus,
weneedtopromoteasystemwithacodeofconductfor..ofXRsystem willdiscouragecompetitivedevaluationaswellasoflargeglobaleconomicimbalances.
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INTHEABSENCEOFSTRONGERECONOMICPOLICIES,COUNTRIESTODEPLYOTHERTOOLSASSECONDBEST.ForExample,capitalcontrolsandothereconomicpoliciestodiscouragefinancialspeculationsaswellasreductioninexposuretofinancialcrisis.
NEEDFORGLOBALLYCOORDINATEDMEASURESTOIMPROVESYSTEMATICIMPACTOFNATIONALPOLICYMEASURES.
Temporaryfiscalsupporttostimulateeconomyandavoidrecession
Provisionofliquiditytoavoidcreditcrunch
Facilitateanorderlyunwindingofglobalimbalances
rebalancingofdomesticdemandwithsupportiveexchangerate
Tightenupregulationstodealwithsuchfinancialinnovationsassecuritizationandoffbalancesheetfinancing.
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III.ThefinancialMeltdown:CatalogingtheResponses
Sixth:IstheBushinitiativegoingtomeetthedemandformultilateralcooperationandcoordination?
TheCurrentInitiative
BushSarkozyBarroso meetingon18Octoberproposedaseriesofglobalmeetingtodealwiththefinancialcrisis.
SecretaryGeneralBanKimoonbackedtheideaandproposed
to
hold
in
New
York. PresidentBushhasnowsettledfor15NovemberinWashingtonDC.
ScopeoftheInitiative
Mr.Bushtakesaratherrestrictedviewregardingmodernizationoftheinternationalfinancial.Hedoesnotseetheneedfortakingasystemicscrutinyabouttheroleofstate
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Mr.Sarkozy seemstohaveabroadervision.Hemaintainsthatinteralia,hedgefunds,taxhaveandfinancialinstitutionsoperatingwithoutsupervisionshouldberethought.
Whatsoever,thecurrentapproachremainslimitedintermsofitsscopeasfundamentalsystemicconcernsareyettoberecognizedupfront.Moreover,asexperiencewithG7+showsthatparticipationofemergingandmarginalstakeholdersare
limited.NopoorcountryamongthenewG20!AnotherBretton Wood?
Indeed,thecurrentfinancialcrisishasexposedthe
entrenchedtheoreticalandoperationalfaultlinesoftheBrettonWood approach. TherewouldbealsoseriousconflictofinterestinhavingeitheraUS/EUleadinitiativeofIMF/WBguidedprocess.Thenewmultilateralismwillfindamore
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III Th fi i l M ltd C t l i th R
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P S Al F Th G ld P h f CEO !
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P.S.AlmostForgot TheGoldenParachuteforCEOs!
TheformerCEOofthebankruptLehmanBrothers,Richard
FoldbecametheporterboyforWallStreetgreedtodayashe
defendedthe$484millionhereceivedinsalary,bonusesandstockoptionsince2000.
Thatis$5millionpermonthforrunningthecompanytobankruptcy!
Fourdaysbeforethefirmfiledforbankruptcy,Fold
recommendthattheboardgivethreedepartingexecutives
over$20millioninSpecialPayment.
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IV.TheFinancialMeltdown:ImplicationsforBangladesh
First:DoweknowhowBangladeshwillbeaffected?
It is tooearly to conclusivelyassess the impactonBangladeshas
theglobal
financial
crisis
continues
torage
across
the
world. We are yet to know the width/depth, latitude/longitude of the
crisis.
We do not have fuller understanding of the transmission
mechanism. Wedonothavetherealtimedatatoassessthesituation.
Yetapplyingouranalyticaltechniquesontheexistingknowledge
base,itcanbededucedthatintheglobalspectrumBangladeshliessomewherebetweentheemergingeconomiesandthelowincome
(nonoilexporting)countries. So itwillhaveamixofthepossibleimpactsofthebothsetsofcountries.
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Itwillbenotimmunefromthenegativespillovers.Thestockmarketgotaffected(possiblyduetoconfidencedeficit),beforetherealeconomy.
TheexternaldemanddependentnatureofBangladesheconomysupportsitpotentialareasofvulnerability
Revenuefrommerchandiseexports
Remittancesfromservicesexports(fromdeveloped)countries
Impactoftwootherareasremainmoreambiguous
Flowofforeignaid NetflowofFDI
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IV.TheFinancialMeltdown:ImplicationsforBangladesh
Duetolowerglobaldemand,pricesofoilwilldecline.Foodandothercommoditypricesremainsstable.Theremaybea
fallininflationrate. Growthslowdownisyettosetin.
THEREISANEEDTOSETUPACOMPETENTTASKFORCETO
ASSESSTHEEFFECTSANDIMPACTTODESIGNAN
ADJUSTMENTPACKAGEWITHBOTHSHORTANDMEDIUM
TERMPOLICYANDINSTITUTIONALMEASURES.
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IV.TheFinancialMeltdown:ImplicationsforBangladesh
Second:HowappropriatearetheimmediatestepstakenbytheBangladeshBank?
BangladeshBankhasactedswiftlyandintherightdirection.
BangladeshBankhasmoved250crore investmentfromdifferentforeignbanks.
BangladeshBankhasshifteditsreservefromevenleastrisky
foreignbanks BangladeshBankadvisedcommercialbankstobringback
theirinvestmentskeptinnostro accounts.
BUTTHEREAREMORETOBEDONEIMMEDIATELY
Scrutinizetheroleofcreditratingagencies.Havetheysolvedinformationproblemsandincreasedtransparency,orhavetheymadethemarketmoreopaque?
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Reviewthesophisticated(andexotic)financialproducts,e.g.derivativeinstrumentsandinterestswapswhicharepoorlyunderstoodbythemarket.Thecurrentregulatorystances
create
a
bias
against
simpler
financial
instruments
(i.e.
cash
instruments).
Addressmaturitymismatchesinnonbankingfinancialinstitutionsandlimitinvolvementofbankswithweakly
regulatedagencies. Focusonlimitingcreditdeteriorationlinkedtosecuritization.
Keepsomeloansonthebalancesheet.
Improvetransparencyofcorporategovernance,operationalmodalitiesandproductportfolioandfundmovementsofforeignbanks.Brandnamesarenomoreguarantees!
RememberENRONbankruptcyduetooffbalancesheetfinancing!
44Debapriya:GlobalFinancialMeltdown
IV.TheFinancialMeltdown:ImplicationsforBangladesh
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IV.TheFinancialMeltdown:ImplicationsforBangladesh
NEEDFORMACROECONOMICPOLICYADJUSTMENT
i. TocompensatepossiblefallinexternaldemandforBangladeshsgoodsandservices,measuresneedstobetakentoaugmentdomesticdemand.
byreviewingpublicexpenditureportfoliotoaccelerateimplementationofinfrastructureprojects.
bystrengtheningcreditflowtobuildproductivecapacities,e.g.inagriculture,nonformactivities,smallandmediumenterprises.
ii. Takingadvantageofsoberingtrendininflation,expansionarymonetarypolicymaybepursued.
iii. Considerloweringinterestrateinlinewithinflationarytrend.
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IV.TheFinancialMeltdown:ImplicationsforBangladesh
iii. Activemanagementofexchangeratesothatitdoesnotfallvictimofensuingcompetitivedevaluation.
iv. Intensificationofexportmarketexplorationinemergingeconomieswhereeconomicslowdownwillbeless.
v. Consolidationoflabour marketsinthenonOECDcountries,particularlyinMiddleEastandSouthEastAsia.
vi. TOBUILDPUBLICINSTITUTIONALSTRUCTURETOSYSTEMATICALLYMONITORGLOBALTRENDSANDPROVIDEPOLICYFEEDBACK.
vii. ENCOURAGETHEPOLITICALPARTIESTOTALKABOUTTHEIRPOLICYPACKAGETODEALWITHTHENATIONALIMPLICATIONSOFGLOBALCRISIS.
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Thank Youhank Youforor
Your Attentionour Attention