Banco de España - Madrid, July 1 and 2, 2010
The conference of ‘Financial Globalization: Shifting Balances’, sponsored by Banco de España and the Office of the Chief Economist for Latin America and the Caribbean Region , with the academic support of Centre de Recerca en Economia Internacional (CREI), took place at Banco de España, Madrid, on July 1 and 2, 2010. The goal of the conference was to bring together academics and policy makers to discuss the links between the recent financial crisis and financial globalization, broadly focusing on two main themes:
1. The two-way relationship between global imbalances and the crisis.
2. The impact of the crisis on the process of financial globalization.
Among ideas arising during the conference, we can highlight the following:
Ø The recent crisis has highlighted important patterns of an international capital markets in a globalized world:
o During financial crises, there is a simultaneous retrenchment of financial flows by both domestic and foreign agents. In other words, both inflows and outflows retrench.
o The analysis of international financial linkages across countries requires a study of the gross financial positions, also at a bilateral level.
o The increasing financial integration has implied a greater transmission of international shocks. In the recent crisis, capital shortages in global banks lead to cross-country deleveraging and large financial outflows.
o The development of the local debt markets, following the last decade trend, can increase the financial system stability.
Ø The empirical evidence suggests that financial crises can generate important increases in public debt, increasing the risk of a sovereign debt crisis, which in turn, can also generate financial instability and affect credit more broadly.
Ø The debate on the origins and implications of global imbalances remains open:
o Global imbalances could reflect growth patterns that are not sustainable in the medium term, and that pose important risks.
o Global imbalances could be the consequence of the lack of safe haven assets in emerging markets, explaining the high level of savings invested abroad in these countries and the unexpected direction of international financial flows –from emerging to developed countries.
Ø Currently, global imbalances are on the rise again with the observed accumulation of the international reserve accumulation by emerging economies. And to some extent, the crisis has emphasized that these reserves have benefits. Nevertheless, this widespread accumulation across countries poses both global and domestic risks, in part, because related structural problems have not been adjusted.
Ø New empirical work has shown that the current international monetary system is asymmetric with the United States playing a central role due to the safe haven status of its currency, the dollar. With this, come costs and benefits. During tranquil periods, the United States benefits from a high return on its external asset while paying small returns on its liabilities. On the other hand, during crisis, it behaves as insurance provider, generating "exorbitant" payments on its liabilities while the return on its foreign assets decline.
Ø Preliminary evidence suggests that economic growth in emerging economies might have become less dependent on advanced economies, in part due to the growing importance of China in the world economy. However, financial co-movement in financial markets around the world has increased.
Ø Latin America has resisted the global financial crisis rather well if compared to other regions. Currently, it faces the traditional challenges associated with the large capital inflows and high growth. In this context, it is important to adopt counter-cyclical policies both in good and in bad times.
Banco de España: Enrique Alberola, Aitor Erce-Domínguez, Juan Ruiz
CREI: Fernando Broner
World Bank: Augusto de la Torre, Tatiana Didier