The Financial Crisis and the Global South by Akyüz Yilmaz;

Author:Akyüz, Yilmaz; [Akyüz, Yilmaz]
Language: eng
Format: epub
ISBN: 5390789
Publisher: Pluto Press

Source: IMF, GFSR various issues, and IFS.

Increased international financial instability and sharp declines in risk appetite also gave rise to an appreciation of the dollar vis-à-vis other major currencies, notably the euro, even though the US was at the centre of the crisis. The US Treasury Bills provided a safe haven and the reversal of carry-trade benefited the dollar. The surge in dollar funding costs and currency mismatches in the balance sheets generated by losses on dollar securities also added to the demand for dollar assets (McCauley and McGuire 2009).

3. The current boom

Both the strength of the dollar and the contraction in capital inflows to DEEs were short-lived. The dollar started to weaken during the first half of 2009. Simultaneously private capital inflows to DEEs started to recover, led by portfolio equity while FDI inflows remained weak. Asia, particularly China, has been receiving a larger share of inflows than other regions. According to IMF estimates, after falling from $1720 billion in 2007 to $820 billion in 2008 and $535 billion in 2009, inflows would reach $760 billion in 2011.101 Current estimates put net inflows at 4 per cent of GDP of DEEs, compared to 6 per cent during the pre-Lehman boom (IMF GFSR January 2011). Again, according to the latest estimates by the IIF (January 2011), net private flows to the 30 most important emerging economies are now very close to the peak reached in 2007 (Table 4.1). Spreads on emerging-market sovereign debt have also declined sharply – in the first months of 2011 they were about one-third of the level reached after the collapse of Lehman Brothers in 2008.

As in previous episodes, a key factor in the current boom in capital flows is a sharp cut in interest rates and rapid expansion of liquidity in major AEs, notably the US. This was first done in a coordinated way, agreed in the April 2009 G20 summit in London as a countercyclical response to the crisis. In the US recovery started in summer 2009 but the strong growth of close to 4 per cent in the first quarter of 2010 was followed by deceleration to less than 2 per cent in the second quarter. The response of the Fed was to initiate another round of quantitative easing through purchases of long-term Treasuries and other securities. Although the declared objective was to stimulate private spending by lowering long-term rates and raising asset values, this move has also been widely seen as an effort to weaken the dollar and stimulate exports. It was followed by a similar plan in Japan to stem the ongoing upward pressure on the yen. Similarly, while major countries in the eurozone have started fiscal tightening to calm markets about sovereign debt difficulties, injection of large-scale liquidity has continued to support troubled governments.

However, rapid expansion of liquidity has not been translated into a significant increase in private lending and spending in the US because of problems on both the supply and demand sides of the credit market. As uncertainty

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