Discussion of:
Crises and International Policy Coordination
Sizing Official Reserves
Gian Maria Milesi-Ferretti
IMF, Research Department and CEPR
Crises and International Policy Coordination
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Causes of financial turbulence
Global imbalances
Yen carry trade
Traditional policy coordination?
Role of coordination in supervision?
A few general points
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Global Imbalances
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Agree that they are not the direct driver of current
financial turbulence
Direct impact: portfolio shock (decline in demand
for US assets--securitized debt)
Together with decline in ST interest rates, big
decline in USD
Sizable correction of CA balance underway
Global Imbalances (continued)
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Importance of valuation changes
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US has liabilities in domestic currency, assets in FX
Large USD depreciation, underperformance of US
stocks imply that…
US position at end-2007 broadly similar to external
position at end-2001
The yen “mystery”
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Broadly agree with analysis
Carry trade very profitable when implied FX
volatility is very low (as it was for many years)
Not just Japanese residents investing
overseas….
…but also foreign investors limting non-equity
exposure (ie, reserves)
As MP “normalizes”, reasonable pattern of
portfolio diversification should resume
Policy coordination
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What appetite for it?
Importance of perceptions of past episodes
(particularly in Asia)
Criticism of Multilateral Consultations
overstated (not a standard G-7 communiqué)
Key measures in countries’ best interest
Supervision and coordination
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Agree that coordination of supervision key
No illusions on what can be achieved with
regulation
Securitization and risk—the (presumed)
advantage of securitization and much
financial innovation was shifting risk to those
better able to bear it
Emerging markets
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Stronger net external position
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Reduced FX exposure
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Only “traditional” EM region: emerging Europe
(growth, CA deficits). Importance for euro area
performance for vulnerabilities
60%
40%
Net foreign asset position, emerging markets
(ratio of GDP)
Middle East
20%
0%
Asia
-20%
Emerging Europe
-40%
Latin America
-60%
-80%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Discussion of “Sizing official
reserves”
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Dramatic increase in stock of FX reserves in many
EMs
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Change in the composition of K-inflows to EMs –
increase in portfolio equity flows (and FDI)
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Validity of traditional indicators of reserve coverage:
changing nature of vulnerabilities/risks?
Increasing stock of reserves….
40%
Foreign exchange reserves
(ratio of GDP)
35%
Asia
30%
25%
20%
Middle East
15%
Emerging
Europe
10%
Latin
America
5%
Advanced economies
0%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Falling external debt…..
70%
External debt, emerging markets
(share of GDP)
60%
Emerging
Europe
Latin
America
50%
40%
30%
Asia
20%
Middle
East
10%
0%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Equitization?
45%
40%
Portfolio equity liabilities (ratio of GDP)
Advanced
economies
35%
30%
Latin
America
25%
20%
Middle
East
Asia
15%
10%
5%
Emerging Europe
0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Role of FDI…
45%
40%
FDI liabilities (ratio of GDP)
Emerging
Europe
35%
30%
25%
Asia
20%
15%
10%
Middle East
Latin
America
5%
0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Some general points on reserve coverage
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Openness up significantly…but a lot of trade
is in intermediates (inputs for re-export)
Comparing FX to (total liab – FDI) is extreme
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It may require EMs to be creditors (there are
increasing “private” holdings of foreign assets)
Currency risk characteristics of portfolio equity
very different from ST for. curr. debt
Reserves increasing, but foreign assets of
EMs take other forms as well
35%
30%
Foreign exchange reserves
(ratio of total external assets)
25%
Emerging Markets
20%
15%
10%
5%
Advanced
0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006