Currency War and Peace

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Much of the hype surrounding last month’s meeting in Moscowof G-20 finance ministers and central bankers was dedicated to so-called“currency wars,” which some developing-country officials have accused advancedcountries of waging by pursuing unconventional monetary policies. But anothercrucial issue – that of long-term investment financing – was largely neglected,even though the endgame for unconventional monetary policy will require the revitalization orcreation of new long-term assets and liabilities in the global economy.
The collapse of Lehman Brothers in 2008 drove up riskpremia and triggered panic in financial markets, weakening assets in the UnitedStates and elsewhere, and threatening to provoke a credit crunch. In order toavoid asset fire-sales – which would have led to the disorderly unraveling ofprivate-sector balance sheets, possibly triggering a new “Great Depression” oreven bringing down the eurozone – advanced countries’ central banks began topurchase risky assets and increase lending to financial institutions, thusexpanding the money supply.
While fears of meltdown have dissipated, these policieshave been maintained or extended, with policymakers citing the fragility of the ongoingeconomic recovery and the absence of other, equally strong policy levers – such as fiscal policy or structural reforms –that could replace monetary policy quickly enough.
But several years of ultra-loose monetary policy in theadvanced countries has led to significant liquidity spillover abroad, puttingexcessive upward pressure on higher-yielding developing countries’ currencies.With developing countries finding it difficult to deter massive capital inflowsor mitigate the effects – owing to economic constraints, like high inflation,or to domestic politics – the “currency wars” metaphor, coined in 2010 byBrazil’s finance minister, Guido Mantega,has resonated widely.
Moreover, only a small portion of the liquidity created byunconventional monetary policy has been channeled toward households and thesmall and medium-size enterprises that generate most new jobs. Instead,crisis-affected global financial entities have used it to support their effortsto deleverage and to rebuild their capital, while large corporations have beenbuilding large cash reserves and refinancing their debt under favorableconditions. As a result, economic growth and job creation remain lackluster,with the availability of investment finance for long-term productive assets –essential to sustainable growth – severely limited.
Some believe that the elimination of macro-financial tail risks, the gradualstrengthening of global economic recovery, and the increase in existing assetprices will eventually convince cash hoarders to increase their exposure to new ventures in advancedeconomies. But such optimism may not be warranted. In fact, at the recent G-20 meeting,the World Bank presented an UmbrellaReport on Long-Term Investment Financing for Growth and Development. Thereport, based on analysis from various international organizations, highlightsseveral areas of concern.
For starters, banks’ current retrenchment of long-term investment financing islikely to persist. After all, many of the advanced-country banks, especially inEurope, that dominated such investment – for example, financing large-scaleinfrastructure projects – are undergoing deep deleveraging and rebuilding their capitalbuffers. So far, other banks have been unable to fill the gap.
Furthermore, the effect of internationally agreedregulatory reforms – most of which have yet to be implemented – will be to increasebanks’ capital requirements while shrinking the scale of maturitytransformation risks that they can carry on their balance sheets. The “new normal” that results willlikely include scarcer, more expensive long-term bank lending.
The World Bank report also points out that, as aconsequence of banking retrenchment,institutional investors with long-term liabilities – such as pension funds,insurers, and sovereign wealth funds – may be called upon to assume a greaterrole in funding long-term assets. But, to facilitate this shift, appropriatefinancing vehicles must be developed; investment and risk-management expertisewill have to be acquired; regulatory frameworks will have to be improved; andadequate data and investment benchmarks will be needed. These investors mustfocus on the small and medium-size enterprises that banks often neglect.
Finally, local-currency bond markets – and, more generally,domestic capital markets – in emerging economies must be explored further, inorder to lengthen the tenure of financial flows. Local-currency government-debtmarkets have performed fairly well during the crisis, while local-currencycorporate-debt markets have played a more modest role as a vehicle forlonger-term finance. This suggests that domestic reforms aimed at reducingissuance costs, improving disclosure requirements, enhancing creditors’ rightsframeworks, and tackling other inhibiting factors could bring high returns.
Anxiety over unconventional monetary policies and “currencywars” must not continue to dominate global policy discussions, especially givenlast month’s pledge by G-20 leaders not to engage in competitive currencydevaluations. Instead, global leaders should work to maximize the liquiditythat unconventional policy measures have generated, and to use it to supportinvestment in long-term productive assets. Such an approach is the only way toplace the global economy’s recovery on a sustainable footing.

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关键词：currency Peace curr Ency War investment financing currency central finance

“currency wars,” which some developing-countryofficials have accused advanced countries of waging by pursuing unconventionalmonetary policies. But another crucial issue – that of long-term investmentfinancing – was largely neglected, even though the endgame for unconventionalmonetary policy will require the revitalization or creation of new long-term assets andliabilities in the global economy.

But several years of ultra-loose monetary policy in theadvanced countries has led to significant liquidity spillover abroad, puttingexcessive upward pressure on higher-yielding developing countries’ currencies.With developing countries finding it difficult to deter massive capital inflowsor mitigate the effects – owing to economic constraints, like high inflation,or to domestic politics – the “currency wars” metaphor, coined in 2010 byBrazil’s finance minister, Guido Mantega,has resonated widely.
Moreover, only a small portion of the liquidity created byunconventional monetary policy has been channeled toward households and thesmall and medium-size enterprises that generate most new jobs. Instead,crisis-affected global financial entities have used it to support their effortsto deleverage and to rebuild their capital, while large corporations have beenbuilding large cash reserves and refinancing their debt under favorableconditions. As a result, economic growth and job creation remain lackluster,with the availability of investment finance for long-term productive assets –essential to sustainable growth – severely limited.
For starters, banks’ current retrenchment of long-term investmentfinancing is likely to persist.The World Bank report also points out that, as aconsequence of banking retrenchment,institutional investors with long-term liabilities – such as pension funds,insurers, and sovereign wealth funds – may be called upon to assume a greaterrole in funding long-term assets. But, to facilitate this shift, appropriatefinancing vehicles must be developed; investment and risk-management expertisewill have to be acquired; regulatory frameworks will have to be improved; andadequate data and investment benchmarks will be needed. These investors mustfocus on the small and medium-size enterprises that banks often neglect.



Finally, local-currency bond markets – and, moregenerally, domestic capital markets – in emerging economies must be exploredfurther, in order to lengthen the tenure of financial flows

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