SUERF Colloquia and Colloquia Publications 1969-2003 in Figures and Locations
Colloquium 10: International Lending in a Fragile World Economy
Vienna, April 1982
President of SUERF and Chairman of the Colloquium: Hans-Eckart Scharrer Colloquium Book
Editors: Donald E. Fair in co-operation with Raymond Bertrand
Authors:Jacques R. Artus, Helmut von der Bey, Adrian Blundell-Wignall, Jean- Claude Chouraqui, W. Peter Cooke, Richard Dale, Fritz Diwok, Hermann-Josef Dudler, Frans A. Engerig, Rainer E. Gut, Armin Gutowsky, Helmut H. Haschek, H. Robert Heller, Manfred Hothus, R. Barry Johnston, Stephan Koren, Alfred Kuehn, David T. Llewellyn, Joël Métais, Jeanne-Marie Parly, Tadeusz M. Rybczynski, Luigi Spaventa, Alexander K. Swoboda, Tom de Vries, David Williams.
Publishers:Martinus Nijhoff Publishers, The Hague, Boston, Lancaster, 1983, xii, 421 pp.
– Heading towards an international financial crisis?
“Risks to the Stability of the International Financial System: gloom without drama.” (Title of the contribution of Luigi Spaventa, Professor at the University of Rome, p. 324)
“There is a marked deterioration in the world economy’s macroeconomic performance in the 1970s as compared to the 1960s. The worsening of macroeconomic performance, is, however, not necessarily synonymous with increased fragility, The sequel of over fifteen years of rising inflation, of increasing payments disequilibria and, more recently, of high real interest rates and volatility of financial market variables do, however, leave the world economy more susceptible to further exogenous shocks. Combined with a deterioration of national and international financial relations, they may also lay the ground for endogenous instability and crises in the international financial system ... The present concern with the possibility of a serious financial crisis, followed by a collapse of the real economy goes beyond the usual gloom associated with every recessionary or stabilization phase ...”
(Alexander Swoboda, Graduate Institute of International Studies and the International Centre for Monetary and Banking Studies, Geneva, p. 396, 399)
– Those international bankers ...
“... Le rơle assumé par quelques dizaines de banques multinationales – notamment américaines – dans l’intermédiation financière internationale appelle une analyse théorique et empirique des stratégies et comportements de ces agents ... La spécificité de la firme bancaire n’est pas de nature à empêcher l’examen de sa multinationalisation à partir d’une extension de l’analyse des multinationales industrielles. Les résultats de quelques travaux empiriques limités aux banques commerciales américaines incitent à une certaine circonspection quant à la rentabilité des activités internationales. La détérioration de cette rentabilité pour 6 des plus grandes banques de l’échantillon, entre 1972 et 1979 fait redouter un désengagement relatif de ces banques...” (Joël Métais, Maỵtre-Assistant, Université de Paris Dauphine, pp.
65, 82, 83)
“... There has been a steady stream of new banks entering the market and it is estimated that the number of banks participating in syndicated lending has grown fivefold in the past decade. There are both good and bad aspects to this.
The number of new entrants has certainly helped to spread the burden and the risks of international lending to sustain the necessary recycling of funds. On the other hand, a large number of the new entrants have necessarily been smaller and relatively less experienced than the larger and older established banks, and therefore perhaps less well prepared to handle the specialised problems posed by international lending.” (W. Peter Cooke, Head of Banking Supervision, Bank of England, p. 20)
“The banks were flooded with sizable deposits from the oil producing surplus countries ... The banking system has for years accepted the deposits offered to it and has tried to find outlets for them only afterwards ... It is small wonder that in this process the solidity of the debtor as well as prudence suffered. The result has been twofold. On the one hand, a large number of countries have become saddled with a heavy debt burden ... The second result has been to reinforce international inflationary tendencies.” (Tom de Vries, Alternate Executive Director, IMF, p. 362, 363)
– A top international banker’s view:
“... There exists a curious conflict between bankers’ theoretical and practical approaches... The oil price hike created international payments and financing problems on an unprecedented scale. At the time, the banks seriously doubted their capacity to cope with this huge task. However, the governments which were called upon for support not only hesitated, but, moreover, were forced by domestic constraints to cut development aid precisely at a time when it was
needed more than ever. The IMF as well reacted only gradually to the changed circumstances. And what were countries to expect of a World Bank which, on the average, takes three years from credit application to disbursement? The international banking system had therefore to fill the gap, almost against its will ... Second, the banks had to meet these new financing requirements when political tensions and a monetary system with floating exchange rates considerably heightened the risks. The fear of the consequences of their own courage is understandable and has found expression in a banking climate which might be described as cheerful pessimism. Third, the oil shock brought about a change in the structure of international financing. Whereas bond issues and export credits guaranteed by supplier countries had previously been the chief instruments of international capital movements, the emphasis has since been shifted to ordinary bank credits. Instead of governments or buyers of foreign bonds, the banks have become the principal risk bearers ... Fourth, the geographical scope of the business has expanded considerably ... The widening of the geographical base has naturally boosted the opportunities for international financial operations.
But with the growth in foreign exposures, the appearance of payments difficulties in several countries, and various unexpected political developments, such as Iran, Poland or Argentina, the banker’s always acute sense for risk aversion has been noticeably sharpened of late.
... In uncertain times one of the bank’s traditional methods of averting risks is to grant financing for as short a term as possible in order to withdraw their investments rapidly in case of danger. They are well aware that such a procedure pursued collectively may bring about just that collapse of which all are afraid. But macroeconomic considerations of this type cannot seriously influence the attitude of institutions which in risky situations do not wish to be the last ones that – as a German saying goes – are bitten by the dogs ...”
(Rainer E. Gut, Chairman of Crédit Suisse, p. 8, 9, 14, 15) – Once again the‘mystery’ of Euro-markets
“... The substantial growth experienced in the Euro-dollar market ... is associated not with a high internal multiplier but with a similar rapid growth in monetary and financial aggregates in the United States. Thus, in line with standard portfolio balance theory, all markets share in the distribution of any increase in the total supply of dollar assets and through a learning process and a strong competitive position, the Euro-dollarmarket has tended to increase its share of the total. This is similar reasoning to that applied with the growth of non-bank financial intermediaries within domestic financial systems.
As the leakages are high and because interest rates adjust quickly a continuous flow of funds from the United States is unlikely, the concept of an internal multiplier is of limited value and, in any case, is likely to be low.”
– On the threat of the Euro-markets for national monetary policy
“The staticcredit effects of the Euro-markets are shown to be determined by the profit maximising strategy of both domestic and Euro-banks, and the competitive structure of the domestic market. The dynamiceffects relate to whether, from an initial competitive equilibrium between the domestic and euro-markets, the effect of monetary policy is offset by increased Euro- market intermediation... This depends upon the form monetary policy takes and in particular the extent to which it relies on non-market and control mechanisms and influences the competitive position of the domestic sector vis-à-vis the Euro-sector. If policy is conducted in terms of the interest rates and banks are not constrained in their liability management, and maximise profits in both the long and short run, the Euro-markets pose no threat to the conduct of monetary policy ...” (David Llewellyn, Professor of Money and Banking, Head of Economics Department, at the University of Loughborough, pp. 91-92, 106-107)
“The preliminary empirical (econometric) work finds evidence of close links between US non-bank transactions in domestic currency and euro-dollars and that to a large extent the growth of non-bank Euro-dollar deposits reflects wealth-holders’ general portfolio allocations. Euro-dollar deposits and borrowing are also related to trade transactions. Here the endogenous expansionary process in the Euro-market is more difficult to disentangle.”
(R. BarryJohnston, Economist with the Bank of England, pp. 50-51)
“(Le phénomène des opérations en eurodevises) procède de leur absence de réglementation et de leurs avantages fiscaux liés au statut ‘off-shore’ de ces activités sur les principales places financières internationales à partir desquelles elles sont menées. Il n’est dès lors pas surprenant que les opérations en eurodevises ne soient souvent que de simples substituts des opérations de crédit domestique.” (Joël Métais, op. cit., p. 74)
– On the political economy of international indebtedness
“Ce n’est pas tout à fait un hasard si les problèmes de stabilité sont de nos jours volontiers posés à propos du système financierinternational alors que récemment encore ils concernaient plutơt le système monétaire international.
Ce glissement conceptuel est en effet significatif d’une évolution profonde des relations monétaires et financières internationales ... Le développement
progressif d’euromarchés a permis de répondre à l’accroissement très rapide des besoins de financement qu’entraỵnait une intégration mondiale de plus en plus poussée des échanges et de la production. Ce mouvement a abouti à l’économie d’endettement international que nous connaissons aujourd’hui et qui repose pour l’essentiel sur l’activité d’intermédiation de très grandes banques commerciales à vocation internationale.” (Jeanne-Marie Parly, Professeur at the University of Paris-Dauphine, p. 310)
“The tranquil and unconcerned view of the situation which prevailed until recently enjoys now less widespread support and is held with far less certainty... why have such clouds appeared on the horizon of the international financial scene? There are, first, some specific facts. Foremost, of course the Polish case... In spite of rescheduling, Poland is in a state of ‘effective but undeclared default’.
... A deterioration of the liquidity situation of the LDCs in general and specifically of some of the largest borrowers from private sources has been noticeable in the past year or so ...
The (recent) reduction in the growth of the debt, far from being the welcome symptom of improved conditions of the borrowing countries, appears to be the result of increasing constraints on credit supply and also on credit demand.” (Luigi Spaventa, op. cit., pp. 326-328)
“... In the ‘new concept of international financial morality’ debtors are not expected ever to default, unlike in earlier periods of history. But the rules of the game also require that creditors cooperate to avoid the debtor’s default and by accepting those further commitments which allow everybody concerned to pretend that the debtor is not defaulting ... This is, after all, what rescheduling operations are about: both parties agreeing that formal default is to be eschewed, the outcome will depend on the bargaining power of the debtor.” (ibid, p. 334)
“May I leave to your imagination, to compare the immediate postwar period up to the mid-1970s with the fragile world we are living in now. Personally I have a strong belief that the present situation needs more cooperation on an international level; but the precondition for this cooperation is to restore confidence between lenders and borrowers. This confidence, which has deteriorated so much in recent years, is in itself indispensable for solving international problems.” (Stephan Koren, Professor, Governor, Oesterreichische National Bank, Vienna, p. 6)
“In spite of the talk about the importance of central banks and the necessity for closer cooperation between different institutions it was felt that the responsibility for their international lending remains with the participants in the market. Finally banks will ultimately have to supervise themselves and to rescue themselves.” (Fritz Diwok, Secretary General of the Austrian Bankers’ Association, in his general report of the Colloquium, p. 420) – The supervisors’ dilemma
“... On the one hand, the supervisory authorities have the responsibility for restraining banks from overreaching themselves and exceeding the prudent limits of lending, but on the other it is clear that to restrict the recycling capacity of the banking system, in the absence of any viable alternative intermediaries, might precipitate the very crisis which the prudential regime is designed to avoid. In playing their part in coping with this dilemma, the supervisors have to stand up and speak out for their first priority which must be to maintain a sound prudential framework for the international banking system.” (W.P. Cooke, cf. supra, p. 23)
Colloquium 11: Government Policies and the Working of