Economy & Trade, Headlines, Latin America & the Caribbean

FINANCE: From Crisis to Crisis, Until Reforms Arrive

Estrella Gutierrez

CARACAS, Sep 3 1998 (IPS) - Ever more frequent crises with increasingly global effects demonstrate that what is in crisis is the international financial system itself, and any solution must entail in-depth reforms, according to the secretary of the Latin American Economic System (SELA), Carlos Moneta.

The phenomenon already has a name, poetic for once, and without any reference to alcohol: the “butterfly effect.” Economy ministers from eight Latin American countries and International Monetary Fund (IMF) authorities are meeting Thursday and Friday in Washington to discuss how to put things right in the wake of the butterfly’s erratic flight.

“The international financial system is undergoing a systemic crisis which is hard to admit,” Moneta told IPS in an interview at SELA’s headquarters in the Venezuelan capital. “But if we fail to do so, measures for resolving it will be merely patches, rather than the in-depth restructuring that is needed.”

“What is happening in various regions should give rise to a systemic analysis, because while each crisis has specific characteristics, there is a recognisable pattern,” added the Argentinian expert in the phenomena of globalisation.

The economies of Latin America have been hit hard in the past few weeks by the overlapping effects of the Asian and Russian crises, which the region “has withstood quite well,” said Moneta, who added that the region had carried out in-depth reforms of its financial sector since 1994 and demonstrated its readiness to adopt the measures necessary under whatever circumstances.

“But capital of colossal dimensions is moved in a question of seconds, while central banks have limited reserves,” he pointed out. “It is like defending a fort with 20 soldiers against 10,000 aggressors.”

Figures circulated since mid-August indicate that the capital moved on the global financial market in a single week is equivalent to the world’s combined gross product for one quarter.

In Moneta’s view today’s financial processes must be looked at within the broad framework of globalisation, because it is the financial sector “that has advanced the farthest in that direction.”

The deregulation of the system so as to facilitate capital movements, considered fundamental to growth and development by the predominant economic paradigm, has brought a swelling of investment currents above the level of any other sector.

The flows of capital brought not only constructive investment, but also capital that is highly speculative in character, for which the banking systems of countries in the developing South were not sufficiently prepared, Moneta noted.

The abrupt deregulation in combination with weak banking systems and poorly developed capital markets led to situations in which countries financed growth with significant inflows of foreign capital, part of which was volatile in nature.

In that scenario, the crises have become shorter. In the 1980s a major crisis hit Europe and Latin America, followed by another in the United States. Then came the late 1994 financial collapse in Mexico. Three years later the turmoil in Asia broke out, and with that fire still smouldering the crisis reached Russia.

“The timeframes involved are shortening and the impact of the crises is growing, because the systems are connected,” said Moneta. He stressed that the contagion affected both the developing and industrialised worlds.

The Asian crisis which broke out in July 1997 showed that the system was functioning in an imperfect manner and that the risk of contagion ran high. It also demonstrated “problems of information, transparency and of analysis of such phenomena by the actors involved.”

Russia’s troubles, which heightened in August, show up to what point lack of confidence is generated in all emerging markets of the developing South, without any distinction between weak and strong, and without it being taken into account whether economies are connected to the place where the fuse was lit.

The indirect transmission of the crisis arises from investors whose operations are “carelessly worked and unspecific” and who base their actions on the premise that if one developing country or region is in trouble, it is better to pull out of all emerging markets.

“It is a very hasty and uncritical sort of generalisation,” which has led to Latin America being affected by what is occurring in Russia, when while there are connections with Asia, there are few with Russia, said Moneta.

He added that there is not yet sufficient awareness regarding one specific element: perception. On one hand there is technical work by credit-rating agencies and other entities, “but on the other there is this kind of panic, which although it has a technical basis it is guided by emotions, fears, strong images which do not correspond to reality.”

That apparently technical game perturbed by variables that are not such leads to governments continuing to be blamed for any crisis when the figures clearly show in the case of Asia, for example, that it was the private sector that committed the errors, while the state failed in its oversight duty.

Another element that marks the crises is that adequate policies and macroeconomic situations are no longer sufficient to ward them off, because the markets have the capacity to quickly and profoundly modify economic realities.

“There is a clear transfer of power from the governments to the markets and a loss of autonomy for the state to control and confront such situations,” Moneta summed up. To that is added the fact that the high level of volatility does not respond to a cause- effect relationship based on risk-country variables, but on emotionally and psychologically-based factors instead.

Moreover, credit rating agencies and other oversight entities sometimes have superficial visions, detached from global realities.

Multilateral lending institutions should provide a counterweight, but they are not prepared for that task, for which they were not designed. They end up imposing mechanical formulas which at times must be revised, with a high additional social cost for the countries in question.

Another characteristic of the waves of crisis is that while capital is hastily and immediately withdrawn, the restoration of the flows of credit and investment is slow, part of a vicious cycle of waiting for recovery – which requires the return of financial flows.

“Financial support comes after the attack has finished, but not before,” summed up the head of SELA, which groups 28 countries in the region.

One more factor is that the financial system was designed to protect investors, “but when the trouble hits it is distributed throughout society by those who originally felt the losses, and society pays the damages,” said Moneta.

“There is a clear vacuum in the non-participation of the governments in the system’s mechanisms of management,” he added.

In Moneta’s view, the waves of crisis all lead to the same conclusion – to the need to think “without fear and with prudence” about reforms of the global financial system which entail “the supervision of capital, rules for granting credit and what to do in the case of bankruptcy.”

A number of formulas have been proposed. But the important thing is that if the situation “just continues without any kind of supervision, the risks increase at a planet-wide level, because it is clear that the markets of the North themselves are being affected and can be hit even harder.

“The later it is done, the worse it will be. It is a fact that there are enormous interests at stake, but as long as we go on with neither yes nor no, we will live in the midst of fires with firefighters running along behind and with only partial results,” he concluded.

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