Look who's misbehaving
Tuesday, August 20, 2002
HONG KONG The headlines tell us that Brazil's currency is still struggling despite a $30 billion support package from the IMF. Smaller news items tell us more about what lies behind the fragility of a global system at the mercy of hot money flows and unsustainable deficits. Why is Brazil in trouble? The marketplace attributes it to the threat of a left-wing electoral victory. Wall Street and Latin democracy are uncomfortable with each other. But who has really been the driving force in the fall of the real and a vicious cycle of rising interest rates and government deficits? Answer: the financial institutions which purport to be interested in stability but have been repeating their earlier behavior in Asia - lend thoughtlessly when times look good, then pull it out at the first sign of trouble.
According to Bloomberg, Citigroup alone reduced its exposure to Brazil by $2.1 billion to $9.3 billion in the first quarter of this year. J.P. Morgan cut its exposure by around 20 percent. Assume that 10 other big banks do likewise and you have an international crisis based not on assessment of actual or likely policies in Brazil but on the herd instincts of Wall Streeters.
Citigroup has two men on its payroll who not long ago were at the epicenter of financial power - a former U.S. Treasury secretary, Robert Rubin, and a former IMF deputy managing director, Stanley Fischer. Fischer was the IMF's key player during the Asian crisis. After that crisis, experts were supposed to lead the creation of improved international financial architecture. Now they seem to be participants, indirectly, in the violent flows that call out for regulation.
Like other major banks, Citigroup has made big profits from providing channels for capital flight from Latin America, as earlier from Asia, to tax-free locations offshore. Insistence, backed by the IMF, on the right to free flow of short-term capital remains at the root of global instability. Meanwhile, the diplomatic implications of a recommendation that America view Saudi Arabia as an opponent have been well aired. Less noticed was the suggestion of a freeze on Saudi financial assets. Other countries are sitting up. China is thinking about why it holds $200 billion in U.S.-domiciled securities. Other major foreign owners of the U.S. debt mountain may do likewise. Are those assets politically secure? Saudi Arabia may not be a big enough dollar holder to be of major concern to the global system. But any talk of asset freezes will make other countries worry about their holdings. The economic costs of excessive dollar reserves are already under scrutiny in China, Japan, South Korea and even India. Now there is a political dimension.
Conspiracy theorists claim that bouts of currency instability force developing countries to finance U.S. deficits by holding much bigger reserves than they would need if short-term flows were regulated. That is an overestimation of Wall Street's strategic thinking. However, there is no doubt that the world is far away from addressing its two major financial problems: the damage done by short-term financial flows, and the inability of the world's largest debtor to pay its way other than by printing dollars. International Herald Tribune
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