According to conventional wisdom, capital flows are fickle. They are fickle more or less independent of time and place. But different flows exhibit different degrees of volatility: FDI is least volatile, while bank-intermediated flows are most volatile. Other portfolio capital flows rank in between, and within this intermediate category debt flows are more volatile than equity-based flows.
Sovereign credit ratings assigned by the major rating agencies (such as Fitch, Moody’s and Standard and Poor’s) play a major role in determining the government’s access to international capital markets. Although sovereign ratings relate to debt and creditworthiness of the central government, in effect they serve as a barometer of confidence and a ceiling for creditworthiness for the private sector as well. They influence the borrowing costs of private entities and in a wider sense overall investment flows. The sovereign rating is often a benchmark and sub-sovereign entities, such as companies and banks, rarely get a rating higher than the sovereign’s.
With spectacular growth of microfinance institutions (MFIs) in Bangladesh, there is a growing concern that borrowers might be borrowing from multiple sources and more than they are able to repay, and hence, they are trapped in poverty and debt. Microfinance programs, operating in Bangladesh for more than two decades, have reached more than 10 million households in 2008, nearly half the rural population, with an annual disbursement close to US$1.8 billion and an outstanding balance of US$1.5 billion. Multiple program membership has increased over the years: it was nonexistent in 1991/92, 11.9 percent in 1998/99 and 36 percent in 2010/11.
However, a recent study shows that increased borrowing, even from multiple sources, has not lowered loan recovery rates.
Also, another recent study observes that microcredit borrowers are not necessarily trapped in poverty and debt. This study analyzes data from a long panel survey over a 20-year period, and finds that although many participants have been with microcredit programs for many years they are not necessarily trapped in debt as the accrued assets due to borrowing outweigh accumulated debt for many borrowers.
Jackson Hole was abuzz last week as top economists rubbed shoulders with central bankers, but the stuffed bears in the lobby of the venue seemed symbolic of the angst permeating world markets.
In spite of this, the participants got down to business and I was not alone in thinking that today’s financial market turmoil and the anxiety over high unemployment in the United States and over European debt should be treated by the economics profession as an opportunity to think differently about solutions for kick-starting growth.
Today’s uncertainty should spur policymakers to take new economic ideas and build a social consensus for action. An ambitious, innovative approach is needed otherwise the crisis will likely be with us for some years. Indeed, the US and EU could face a Japan-style scenario, with prolonged recession and a high level of public debt.
Given the urgent need for policymakers in Europe and other advanced economies to tackle current debt challenges, there is a frantic scramble for suitable policy tools that will help resolve the Greek conundrum.
One policy tool – a form of debt restructuring known as ‘financial repression’ that focuses on establishing a tighter relationship between government and the financial industry by setting caps on interest rates and regulating cross-border money flows – has largely been overlooked. The Petersen Insitute’s Carmen Reinhart recently delivered a
As snow covers ground in Washington, D.C., debt markets swoon, and another year comes to a close, it seems like a good time to look at what actually happened to international capital flows to developing countries last year and what that might portend for flows in 2010, as this year’s numbers will be finalized in coming months.
At a time when the global economy has seen the most severe slowdown since the end of WWII, capital flows to the developing world—including private flows (debt and equity) and official capital flows (loans and grants from all sources)—are in an overall slump, well below their level in 2007 ($1.1 trillion). According to the just-published Global Development Finance: External Debt of Developing Countries, which contains detailed data on the external debt of 128 developing countries for 2009, net capital flows to these countries fell by 20 percent from $744 billion in 2008 to $598 billion in 2009.
The volume of public domestic debt issued in developing countries has grown substantially in recent years, but consistent data on the domestic debt of developing countries have not been generally available until now. As part of the Open Data Initiative, the World Bank is launching an online, quarterly, Public Sector Debt database developed in partnership with the IMF, which will allow researchers and policymakers to explore questions about debt management in a comprehensive manner. The database promotes consistency and comparability across countries by standardizing the treatment of public sector debt, valuation methods, and debt instruments, and by identifying, where possible, the debt of central, state, and local governments as well as extra-budgetary agencies and funds.