Coping in the subprime region

Monetary Management in Crisis

Daniela GaborDepartment of Economics

University of the West of England

The messages of this paper

• Central bank key in the reconstitution of the Romanian economy as neoliberal economy.

•What does the central bank do when neoliberal commitments to private finance under threat?

– A: it depends. IMF presence changed approach to monetary management, re-assigning the National Bank of Romania (NBR) a central role in the reproduction of neoliberal logics.

Structure

• The subprime region • A Romanian account of how Eastern Europe

became subprime– Shifting neoliberal rationalities and modes of economic governance– The crisis of neoliberal capitalism : October 2008

• The April 2009 IMF agreement: paradigm change?

• Conclusion

Features of the subprime regionFigure 1 Balance of payments (% of GDP),

average 2004-07

-20

-16

-12

-8

-4

0

4

8

CzechRepublic

Hungary Poland RomaniaSlovakiaBulgaria Latvia

Current account

Investment Income

Reserves

Figure 2 Asset share of foreign

owned banks, percent, 2007

Exchange rates correction?(2004 Jan = 100)

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90

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110

120

06/01/2004 06/01/2005 06/01/2006 06/01/2007 06/01/2008 06/01/200960

80

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C ZK H UF R ON P L N

Foreign loans to the banking sector (% of total funds)

Romania before the 2008 crisis

• Standard narration of macroeconomic developments– 1990 - 1997: politicized economic decisions prevented

implementation of stability orientated policies agreed with the IMF (4 failed SBA)

• Outcomes: high and volatile inflation, repeated balance of payment difficulties, massive transitional recessions

– After 1997: gradual institutionalization of separate economic and political domains

• Outcome: after a necessary contractionary stabilization, Romania growth leader by 2005, when it adopts inflation targeting

Alternative narration: process of neoliberalization

• Shifting neoliberal rationalities (Peck and Tickell 2002; Hay 2004)– Roll-back neoliberalism - destructive attack on the

Keynesian state during years of exceptional politics

– Roll-out, normalized neoliberalism: constructive mode, financialized accumulation as economic imperative (Dumenil and Levy, 2001)

Neoliberalizing central banks

• international policy advice, IMF in the first instance, constructed central bank as essential instrument of institutional change and neoliberal policy making in formerly planned economies: MONETARISM as legitimizing policy narrative.

1990-1996: roll-back neoliberalism

• Central bank key to the ‘disciplining of state owned enterprises’, the antithesis of allocative efficiency– Contractionary monetary policy (eliminate excess liquidity and contain

soft budget constraints)– Exchange rate flexibility: return to equilibrium key to competitiveness

• Policy practice vs. policy discourse– Liquidity crunches (typical outcome of IMF stabilization program)– Prohibitive loan rates affecting capital investment– Payment blockages – Industrial contraction– Exchange rate driven inflation (devaluations?)

1997 – 2008: Normalized neoliberalism

• 2 essential policy shifts (1997 IMF agreement)– Market financing of budget deficits– Exchange rate appreciation key to disinflation– sterilized

forex interventions (reserve targeting)– structural excess of liquidity on the money market driven

by capital inflows

• 1999 banking crisis: IMF private sector initiative + reduced appetite for emerging market + asymetric distribution of liquidity on the money market => reconfiguration of the banking sector.

Neoliberal regimes of monetary management

• (1)The transformation of the relationship between wholesale banking and the central bank, where management of liquidity tailors to speculative activity , working similarly under different policy regimes

• (2) An increasing reconfiguration of banking sector activity through neoliberal logics of financialized accumulation.

• (3) An increasing vulnerability to international sentiment, produced through practices of sterilized interventions, currency appreciations and expanding current account deficits in the context of a liberalized capital account, an outlook familiar to many Latin American countries (Massad, 1997).

(1) Management of liquidity: structural excess of liquidity on money market

- sterilization operations as vehicle for speculative returns - policy models legitimating rather than informing policy practice (monetary vs. Inflation targeting) (Mosse, 2005)

(2) Banking sector under neoliberal regimes

The changing configuration of credit, financed by loans from mother banks

Credit bubbles and carry trade households (the Swiss connection)

(3) Increasing vulnerability: private debt- Strategies of monetary management altered the term composition of debt-creating inflows, shortening maturity and increasing exposure to short-term foreign currency liabilities.

-banking sector financing credit expansion through mother bank loans and foreign owned businesses that preferred intra-company indebtedness. Private foreign debt doubled to 50% of GDP, reserve / short-term debt ratio fell from 170% in 2003 to 75% in February 2009.

-Capital flows as prime driver of exchange rate movements. Capital account liberalization - heterogeneous trader community - carry trade activity.

Volume

(daily avg.)

Derivatives

of which non-

residents

Instruments

with maturity

<7 days

US$ mil US$ mil % US$ mil % US$ mil %

Romania 2510 1508 60 1351 90 1224 81

Poland 8813 6820 77 5404 79 5274 77

Hungary 6715 4658 69 3945 85 3632 78

Czech Republic 4947 3631 73 2995 82 2110 58

Turkey 3362 3311 98 2456 74 1737 52

Source: NBR Financial Stability Report, 2007.

The October 2008 speculative attack

• Standard and Poor’s downgrade• EUR 2bn short positions opened, betting on depreciation –

settlement in domestic currency (overnight or swap)• NBR drained domestic liquidity: offshore players failed to

close positions, swap rates > 500%, overnight rates> 50%. Liquidity provision through discount window, collateral.

• Policy controversy: adequate management of liquidity during crisis– Stabilizing overnight interest rates vs. feeding speculative pressures

Crisis responses

0

2

4

6

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12

3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09

Euro area USA

CZ RO

Hu

-High policy rates to mitigate exchange rate pressures-Direct forex interventionsHowever….-Reserve losses yet domestic currency lost 20% in nominal terms btw. Nov. 2008 and February 2009-Concerns about roll-over of short-term debts.-Potential currency crisis: IMF

Narrating the crisis: the IMF agreement

• Applauded NBR for attempts to contain imbalances, glossing over its strategy of real appreciations and strerilized interventions contributed to financial fragility

• 2 pillar approach– A strong policy program : fiscal contraction, improved

bank supervision and regulation, continued exchange rate flexibility

– Large external financing assistance : into NBR reserves to stimulate foreign currency lending (reducing reserve requirements on long term forex liabilities)

• New approach to Private Sector Involvement - convincing mother banks to roll over debt

Monetary management before the agreement: What vehicle for speculative returns if no sterilizations?

Monetary management after the agreement : plus ca change

-Neoliberal quantitative easing: a guide for keeping banks happy (and deepen a recession)

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Rev ers e Repos

Repos

Conclusions

1. Neoliberalism's strength - the discursive struggle over the definition of the crisis

2. new opportunities: crisis as an opening for further marketization - pension law, public

sector law3. We are not all Keynesians now!