The World Bank’s State Finance Fiends
In its inaugural Global Financial Development Report released on the fourth anniversary of Lehman Brothers’ failure the World Bank examined the government’s post-crisis role in promoting competition, regulation, infrastructure and stability with a mixed scorecard for developing economies. It points out that less advanced countries allow more scope for state intervention amid lagging institutional frameworks and that banking and securities executives and policymakers remain at odds over the rationale and results of emergency actions. Globally the worst-hit systems since 2008 have common features, including broader capital definitions, and lower loan provision, audit and data standards. In addition to ranking the overall sector and credit and capital market components across a depth, inclusion, efficiency and safety matrix the work cites best practice examples in the categories from emerging regions. In Brazil corporate borrower is more developed than retail information, South Africa has consumer protection against unfair access and privacy moves, and Romania has adopted EU directives for mortgage offerings. In China, Russia and Mexico state development banks were ordered to provide liquidity lines to private participants, aid specific industries, and extend guarantees and trade finance to exporters and small firms. Their lending pattern has not been as pro-cyclical, but has also “worsened intermediation” with poor governance and risk-management records. Insurance schemes have been open-ended and failed to reach designated beneficiaries. Central banks injected funds to keep the payments network and over-the-counter derivatives activity functioning but stricter collateral and transparency treatment will obviate such future resort especially as swap transactions are directed toward open exchanges and central clearinghouses. These shifts are also important for settlement modernization in emerging securities markets which has struggled to match growth, according to the reference.
Through August debt fund flows of $32 billion have been almost double equity ones tracked by EPFR numbers, with two-thirds going to hard-currency versions. However local paper continues to dominate trading with a 70 percent share concentrated in Brazil, Mexico, and Russia, EMTA’s Q2 roundup reveals. Volume was down 17 percent on an annual basis for the period reflecting a “buy and hold” tendency amid the current Eurozone mess as well as decreased inventory for US dealers in particular under forthcoming Dodd-Frank provision representing another form of state influence. In Eurobonds corporate turnover at over one-tenth the total is approaching sovereigns, and CDS has also fallen with bans on “naked shorts” and other public and private rule changes, including ISDA modifications after Greece’s restructuring exercise. On the share side the BRICs have taken half of $17 billion in inflows despite uninspiring index outcomes, and ETFs are now their main conduit. Even where traditional vehicles recorded outflows as in Poland, Romania and the UAE the exchange-traded product moved in the opposite direction under a range of investor preferences often testing the integrity and sustainability of the post-Lehman innovations.
