Residents of Bangalore, India, who live in extreme poverty. Credit: bandarji/ CC by 2.0

By Jim Lobe
WASHINGTON, Oct 26 2013 (IPS)

Key multilateral institutions charged with improving regulation of the international financial system are failing to democratise their governance and adequately consider the impact of their actions on the world’s poor, says a new report by anti-poverty groups.

The 68-page study, entitled “Global Financial Governance & Impact Report”, gave higher marks on both counts to the International Monetary Fund (IMF) and the World Bank than to other institutions, notably various rule-making bodies on international taxation, the Group of 20 (G20), and the Basel-based Financial Stability Board (FSB).

Overall, however, the study, which was released by the ten-year-old Washington-based New Rules for Global Finance Coalition, found all agencies’ governance and impact on poor countries “very disappointing”.

“Too much of the governance of global finance remains ad hoc, with non-transparent, non-inclusive, largely unaccountable and un-responsible institutions wielding great power,” according to the coalition, which includes ActionAid, the South African Institute of International Affairs, and the Jubilee USA Network."Those who are often most affected by the rules aren't there when these rules are being made."
-- Jo Marie Griesgraber

Despite increased integration of poverty reduction into the work of the IMF and the Bank, in particular, “there are huge gaps between declarations and actions,” according to New Rules, which also includes the Institute for Agriculture and Trade Policy, the Tax Justice Network, the South African Institute of International Affairs, Germany-based World Economy, Ecology & Development (WEED), and the Heinrich Boell Foundation of North America.

“All have a very long way to go before they can confidently declare that they are having a strong positive impact on equitable and sustainable development,” the report said.

“The problem is that all of the wealthy countries have a seat at the table in these institutions, while those who are often most affected by the rules aren’t there when these rules are being made,” New Rules executive director Jo Marie Griesgraber told IPS.

“What we’re trying to do is make room at the decision-making table for excluded peoples and thereby ensure that their decisions and processes benefit everyone,” she added. “This is an initial attempt to assess how these institutions are performing in that regard.”

Most experts believe that the 2008 financial meltdown was caused primarily by key national and international institutions’ failure to adequately regulate increasingly sophisticated transactions in an ever-more globalised financial marketplace – a product of the neo-liberal orthodoxy that guided many of the world’s economic policy-makers, including in the IMF and the World Bank, in the 1980s.

In the wake of the crisis, however, world leaders decided that greater regulation was required to keep the global economy from falling into a 1930s-like depression and to impose greater discipline on financial markets.

So they replaced the G8 with the G20 as the key forum for global financial policy-making; boosted lending resources and modified strategies of the IMF and the Bank; and created the Financial Stability Board (FSB) to develop and coordinate global financial regulatory policies to promote stability.

The new report marks the first effort to assess how well these rule-making agencies have performed with respect to their own internal governance, including their “transparency” in internal processes; accountability to all governments and to civil society; involvement of the poor in decision-making; and responsibility to promote “more just and economically sustainable global development, especially for people in low income countries.”

The institutions were given scores ranging from 1 (poor) to 4 (excellent) on each of the four criteria, as well as an overall score.

For the aggregate scores, the IMF, the World Bank, and the FSB all rated a 2 (moderate), while the G20 and the new tax authorities were given 1.5. On transparency, the IMF and the World Bank scored highest at close to 3 (good), while the G20 was the lowest at 1.5.

The IMF also scored highest (2.5) on inclusiveness, higher than the World Bank (2), despite the latter’s long-standing commitments to consult closely with civil society. But with respect to responsibility, the IMF and tax-related agencies received the lowest possible score.

Regarding the impact of these institutions on the world’s poorest, New Rules said it was not possible to use a common framework such as the one it applied in assessing governance. Instead, it used independent specialists and experts from within the coalition’s member organisations to evaluate each institution.

The IMF gained the highest score on impact at 2.6, followed closely by the World Bank (2.4) and the G20 (2.1), which was praised for its coordinated stimulus package devised at its 2009 London Summit, its establishment of the FSB, and its efforts at reducing transfer costs of remittances by migrants from poor countries.

The FSB received a 1.4 score, while the tax authorities received the lowest possible score in large part because none addressed the problem of “offshore” tax havens, or secrecy jurisdictions that are estimated to hold 21 to 32 trillion dollars of the world’s private wealth.

That failure, according to the report, is due primarily to the fact that the status quo powers continue to control the OECD and that the IMF and have deliberately weakened the U.N. Tax Committee.

The World Bank strongly criticised the study. “This report is deeply flawed, and it misses the mark on the World Bank’s increased push for results, our huge strides in openness, and our strong focus on accountability,” David Theis, a Bank spokesman, told IPS by email.

He noted that the “2012 Aid Transparency Index: Publish What You Fund” rated the Bank, along with the British aid agency DFID, first among all donors at the country level on transparency.

Requests to the IMF for reaction to the report went unanswered.

Griesgraber said the new report was “an initial attempt, and we know there’s a lot of room for improvement.…Our report is a challenge to the institutions. If you don’t like our data and conclusions, show us where we’re wrong.”

But, she suggested, the report’s focus on the inclusion of the poor in the governance of institutions that oversee the global financial system and the poverty-reduction impact of these same institutions offered important insights that call for greater study.

“The fact that the voices of low-income countries and the world’s poor citizens are rarely heard in the forums governing global finance almost certainly explains why they have disappointingly low impact on improving their lives,” said the report.

Ho Chi Minh Stock Exchange, Ho Chi Mihn City, Vietnam. Credit: creative commons

By Samuel Oakford
UNITED NATIONS, Sep 18 2013 (IPS)

The concerns of developing countries about credit rating agencies (CRAs) risk going unheard as regulatory bodies around the world tackle questions raised after the 2008 financial crisis.

The Financial Stability Board (FSB) and the Basel III global accords, formed in the wake of the crisis, have each called on governments to reduce their regulatory reliance on ratings.

At the recent G20 conference in Moscow, world leaders called for similar limitations.

During the market collapse, ratings often proved inaccurate and are perceived by many as negatively contributing to the cascading series of events of the past five years.

But while wealthier countries are quick to recognise a need for redefining their use in markets like mortgage-backed securities, the “issues and concerns of many emerging and developing countries preceded the crisis period”, according to Merli Baroudi, director and chief credit officer of finance and credit risk at the World Bank, speaking before a U.N. General Assembly forum on CRAs.

Concerns are mounting that once more, the specific condition of poorer countries will be ignored.

Necessary debt

Countries, advanced and developing, rely on debt financing through the bond market to foster growth. Sovereign credit ratings are used by investors to predict the likelihood that a country will default on its obligation to pay them an agreed upon yield. The higher the perceived risk, the higher the yield.

Ratings are composed of publicly available economic data coupled with subjective opinions on a country’s political situation. There is a near consensus that ratings in some form are necessary for developing countries to attract international capital. Questions remain, however, about the dependence on the three dominant CRAs – Fitch, Moody’s and Standard and Poor’s – all of whom profit handsomely from the process.

A problem in the wiring

For years, global and national regulations, as well as internal firm policies dictated that many investors could only hold sovereign bonds and other assets that were deemed “investment” grade by the CRAs.

“When downgrades occur, especially near the investment-grade threshold, forced sales are often triggered,” said John Kiff, senior financial expert at the International Monetary Fund (IMF), told IPS.

This can send assets “off a cliff” and yield premiums, the difference between yields a bond pays and the yield of a stable asset such as U.S. Treasuries, soaring, he said. This makes borrowing more expensive for countries.

The problem, according to Kiff, is “the way that ratings are hard-wired into the financial system. For example, they are baked into regulations, and they mechanistically drive investment and collateral eligibility standards.”

Due to international capital standards inscribed in previous versions of the Basel accords, the lower a bond is rated, the less a bank can leverage it and hence the likelier they are to unload positions in the event of a downgrade.

Under proposed regulation, investors would be better protected and markets kept from the wild, rating-induced fluctuations of the past, but what of the sovereign issuers themselves?

Sovereign risks

According to the World Bank, 56 developing countries remain unrated by any of the big three CRAs. The list includes nations like Haiti, Cote d’Ivoire, Mali and Syria, all of which are unable to access international capital markets. This can increase reliance on donors to fill gaps. In some cases, the cost of a acquiring a rating – which developed countries do not have to pay – is simply too high.

For many, at fault is the “issuer pay” model that could theoretically allow issuers to shop around for the best rating and which was abused by firms securitising mortgages during the crisis. In the developing world, however, the problem can be the opposite. For a poor country, an unsolicited rating is unwanted at best and extortionist at worst.

But the CRA model is unlikely to change and is a “necessary evil” for developing countries looking to access capital markets, Aldo Caliari, director of the Rethinking Breton Woods Project at the Centre of Concern, told IPS.

The lack of fundamental change in the rating process leaves the developing world in limbo. But the choice is not always clear for countries. “Being rated is not necessarily benign,” says Caliari.

The standards imposed by CRAs can favour austerity and punish countries that increase social spending, without regard to growth. That ratings are meant to predict a very narrow occurrence, sovereign defaults, is part of the problem, according to Caliari.  Many incorrectly assume that ratings reflect the overall health of an economy.

“The fact that you have a balanced budget doesn’t necessarily mean you have a well-run economy,” he noted.

Developing realities

Poorer countries often find CRA methodologies “advanced country-centric”, said Baroudi. They may question “the application of some of the metrics used by the major agencies” and find it “difficult to get their own point of view across.”

To make matters worse, investors considering emerging markets find “the information available may not be that great and they may quite heavily rely on the ratings.”

Even if a country isn’t issuing debt itself, a rating often acts as a benchmark for bonds issued by firms in the country.  This bias incentivises developing countries to adhere strictly to rules dictated by CRAs, says Caliari.

Steps taken to achieve a certain rating can have a “counterproductive effect” on the long-term prospects of the economy. The same is not true for wealthier countries which enjoy positive subjective analysis of their political climates but which often carry some of the highest debt loads. The paradox frustrates many leaders in developing countries.

Lessons learned

Emerging markets began to be rated by CRAs in the 1980s and 90s, a period that overlapped with the rise of market-based antidotes to the economic ills of the developing world. The mutually influential mix was not always fortuitous for borrowers.

In Latin America during the 1990s, when many countries in the region adopted the free market principles pushed by the “Washington Consensus”, growth rates slowed to half of what they were in the 1960s and 70s, a period when Latin American economies were actively managed and considered by many in the developed world to be profligate.

Before the 2008 financial crisis, CRAs’ most damning failures occurred during the Mexican Economic Crisis of 1994 and the East Asian Financial Crisis of 1997-98. In both cases, CRAs didn’t issue downgrades until the crises were well underway. In fact, their lagging ratings worsened the situation when they caused forced selling of assets and currency.

Despite evidence of their damaging effect from economists like Nobel Prize winner Joseph Stieglitz, “consensus” policies are still considered positive steps towards achieving higher ratings.

For developing countries facing the gauntlet of a rating process, history serves as a reminder that their voices are not always the loudest in decision rooms.

“If there is a difference of views, country authorities may find it difficult to get their own point of view across,” says Baroudi. “What do a country’s authorities do when they genuinely do not understand or believe the rating?”