Much of the hype surrounding last month’s meeting in Moscow of G20 finance ministers and central bankers was dedicated to so-called “currency wars,” which some developing-economy officials have accused advanced economies of waging by pursuing unconventional monetary policies. However, another crucial issue — that of long-term investment financing — was largely neglected, even though the endgame for unconventional monetary policy will require the revitalization or creation of new long-term assets and liabilities in the global economy.
The collapse of Lehman Brothers in 2008 drove up risk premiums and triggered panic in financial markets, weakening assets in the US and elsewhere, and threatening to provoke a credit crunch. To avoid asset fire-sales — which would have led to the disorderly unraveling of private-sector balance sheets, possibly triggering a new “Great Depression” or even bringing down the eurozone — advanced countries’ central banks began to purchase risky assets and increase lending to financial institutions, thus expanding the money supply.
While fears of meltdown have dissipated, these policies have been maintained or extended, with policymakers citing the fragility of the ongoing economic recovery and the absence of other, equally strong policy levers — such as fiscal policy or structural reforms — that could replace monetary policy quickly enough.
However, several years of ultra-loose monetary policy in the advanced economies has led to significant liquidity spillover abroad, putting excessive upward pressure on higher-yielding developing economies’ currencies. With developing countries finding it difficult to deter massive capital inflows or mitigate the effects — owing to economic constraints, like high inflation, or to domestic politics — the “currency wars” metaphor, coined in 2010 by Brazilian Finance Minister Guido Mantega, has resonated widely.
Moreover, only a small portion of the liquidity created by unconventional monetary policy has been channeled toward households and the small and medium-size enterprises that generate most new jobs. Instead, crisis-affected global financial entities have used it to support their efforts to deleverage and to rebuild their capital, while large corporations have been building large cash reserves and refinancing their debt under favorable conditions. As a result, economic growth and job creation remain lackluster, with the availability of investment finance for long-term productive assets — essential to sustainable growth — severely limited.
Some believe that the elimination of macro-financial tail risks, the gradual strengthening of global economic recovery and the increase in existing asset prices will eventually convince cash hoarders to increase their exposure to new ventures in advanced economies. However, such optimism may not be warranted. In fact, at the recent G20 meeting, the World Bank presented the Umbrella Report on Long-Term Investment Financing for Growth and Development. The report, based on analysis from various international organizations, highlights several areas of concern.
For starters, banks’ current retrenchment of long-term investment financing is likely to persist. After all, many of the advanced-economy banks, especially in Europe, that dominated such investment — for example, financing large-scale infrastructure projects — are undergoing deep deleveraging and rebuilding their capital buffers. So far, other banks have been unable to fill the gap.