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Liberalizing capital accounts – lessons from emerging Europe

Liberalizing capital accounts – lessons from emerging Europe. Daniela Gabor UWE Bristol. Background. Two waves of liberalization post 1990, fast (Czech Republic and Baltic States by 1996) and gradual liberalizers (Hu, Ro, Bg , Sk by 2006).

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Liberalizing capital accounts – lessons from emerging Europe

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  1. Liberalizing capital accounts – lessons from emerging Europe Daniela Gabor UWE Bristol

  2. Background • Two waves of liberalization post 1990, fast (Czech Republic and Baltic States by 1996) and gradual liberalizers (Hu, Ro, Bg, Sk by 2006). • KA liberalization - condition for EU membership • Similar sequencing: first FDI, last ‘hot’ interest-sensitive flows (non-resident access to money markets instruments) • KA liberalization with FDI targeting bank privatizations

  3. Background • IMF(2009): Eastern Europe abandoned socialism to embrace financial globalisation + benign tolerance of real ER appreciation larger CA imbalances funded by capital inflows (consumption-driven growth model)

  4. Large capital account surpluses

  5. Post-Lehman hard landing • Sharp economic contraction • Sharp currency depreciation • Vienna Initiative – foreign-owned banks threatening to leave

  6. Three lessons • Lesson 1: actors intermediating global liquidity matter! • Lesson 2:financialization of currency/money markets + cb liquidity management as CFM tool (during sudden stops) • Lesson 3: the IMF’s new institutional view ineffective, structural changes + normalized KK

  7. Lesson 1:cross-border interconnectedness

  8. Lesson 1: Bank-driven global carry Cross-border loans from BIS banks • Cross-border funding of • Sterilization games with the central bank (Christensen 2004) • Aggressive fx HH lending • Intra-financial system activity

  9. Lesson 1: banks also intermediate non-resident carry in local currency assets

  10. Lesson 2: financialization of currency and interbank money markets • McCauley and Scatigna (2011): EMEs currency markets trading driven by financial motives, off-shore • Financialization of currency markets spills into money markets • Structural surplus of liquidity, asymetrically distributed • Sterilizations as asset class for banks/non-residents • Sudden stops = inflicting liquidity shortages on (state-owned) patient banks

  11. Non-resident holding of LC assets, Hungary

  12. Interbank costs of reacting to sudden stops ‘restrictions on nonresident access to funding in local currency can at times make currency speculation more difficult’ (IMF, 2013: 18). The challenge is to ensure that non-speculative domestic demand for liquidity is satisfied at normal market rates (IMF 1997).

  13. Lesson 3: IMF does not have the right answer to global fin. cycles • Ambiguous effects of macro-first steps approach (Blanchard et al. 2012) • How to respond to global financial cycles? • Regulatory restrictions on internal capital markets of global banks: local banking model • Careful management of ‘porous’ capital controls

  14. Liberalizing capital accounts – lessons from emerging Europe Daniela Gabor UWE Bristol

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