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1. The new international context 2. Features of international capital markets; procyclicality

Comments on Financial Architecture – Crisis Prevention FFD UNDESA, CBC, Com Sec 6 th March 2007 Stephany Griffith-Jones (Institute of Development Studies) s.griffith-jones@ids.ac.uk www.stephanygj.com. 1. The new international context

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1. The new international context 2. Features of international capital markets; procyclicality

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  1. Comments on Financial Architecture – Crisis PreventionFFD UNDESA, CBC, Com Sec 6th March 2007Stephany Griffith-Jones(Institute of Development Studies)s.griffith-jones@ids.ac.ukwww.stephanygj.com

  2. 1. The new international context 2. Features of international capital markets; procyclicality 3. Need for counter-cyclical intruments a. Banking regulation b. Market instruments e.g. GDP-linked bonds c. The provision of IMF counter-cyclical liquidity i. Middle-income (proposed RAL) ii. Low-income (better compensatory finance)

  3. Benefits of GDP-linked bonds for borrowing countries • Stabilize Government spending and limit pro-cyclicality in good and bad times • Reduce likelihood of defaults and debt crises • Could benefit both emerging and developed economies

  4. Benefits of GDP-linked bonds for investors • Opportunity to take position on countries’ growth rates. Provide valuable diversification opportunity • Lower frequency of defaults and crises, which can be costly and result in large losses

  5. Benefits of GDP-linked bonds for the global financial system • Externalities: For other investors For other issuers For multilaterals • Justifies public action to help initially develop this instrument • Possible roles for IFI’s, MDBs and RDBs

  6. Ways forward on addressing concerns: • Investors • Sufficient liquidity and scale • Potential problems of GDP measurement being overstated • Initial issues of pricing • Issuers • Perceived benefits to exceed additional cost

  7. An idea whose time has come • Large investor appetite for EM risk and abundant liquidity in financial markets • Financial markets innovative in creating instruments that offer antecedents for GDP-linked bonds • Favourable experience with Argentine warrants • Potential consistency with Islamic finance

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