Leveraging the World Bank to Fund a Global Rescue

This article is an on-site version of the Trade Secrets Newsletter. Subscribe here to get our newsletter sent straight to your inbox every Monday

Hello and welcome to the Trade Secrets website, a day later than usual due to Queen Elizabeth’s funeral yesterday. The British civil servants we know who were pressed into service last week to honor the crowds of mourners in London, or to welcome visiting dignitaries at airports, have returned to their offices and resumed their regular policy-making service, which will increase in the coming days. Today we will look at a bold attempt to mitigate the effects of Covid-19 and the energy shock on middle and low income countries by strengthening the lending power of multilateral development banks (MDBs). hanging water A canary is seen in the mine, FedEx.

As always, I’m at alan.beattie@ft.com for anything globalization that comes to your mind.

keep in touch. Email me at alan.beattie@ft.com

Political capital for development lending

Supporting businesses during Covid lockdowns, protecting households from rising energy prices, and financing the massive investment costs of a green transition: Government finances around the world are under extraordinary pressure. It is enough for the rich economies to bear this effort. In middle and low income countries, few debt defaults threaten to spill over into flood.

On the whole, poor countries managed their finances well in the years before Covid. But spending to cope with a succession of crises has created enormous pressures at a time when high US interest rates have increased the cost of borrowing from the capital markets and through banks. The average public debt-to-GDP ratio in emerging markets has risen from 5 percent before the pandemic to 67 percent now, and as the graphs show, the IMF believes it will rise in the coming years.

Chart showing rising debt levels in emerging markets

Accordingly, the demand for publicly supported concessional financing (or grant aid) has increased. Unfortunately, the aid promised by rich countries to fund green transitions did not materialize. (I was also amazed.) And one of the biggest sources of cheap infrastructure financing, China, is backing away from the Belt and Road Initiative after disappointing returns and political backlash.

Enter, she hopes, the Multilateral Development Banks (MDBs), led by the World Bank, to bridge the gap. Unfortunately, the World Bank in particular doesn’t have anything like enough capacity based on its well-established practices, and going back to shareholder countries to demand more capital may not go down well.

Instead, there is a move afoot, which has been gaining momentum among the Group of 20 leading economies, for MDBs to be more aggressively tapped to increase their firepower. This includes changing banks’ risk assessments and capital adequacy rules, and relatively small adjustments that can have material impacts on lending capacity. Technical details are here in a report commissioned by the G-20, and there is an excellent discussion hosted by the Center for Global Development which is a think tank here.

A paper from the Italian Central Bank (Italy pushed this issue while hosting the G-20 last year) estimates that the four major multilateral development banks – the International Bank for Reconstruction and Development (the International Bank for Reconstruction and Development, the commercial arm of the World Bank), and the Asian Development Bank (the Asian Development Bank can (ADB), African Development Bank (AfDB), Inter-American Development Bank (IADB) – Increase their excess group lending capacity from $415 billion to $868 billion without hurting their Triple A credit rating if they want to go ahead and accept a lower credit rating One at AA+, its lending capacity could be close to $1.4 trillion.(You’re talking now.) The New Development Bank, set up by the BRICS nations, has done just that with its credit rating and is a staunch defender of others who follow suit.

This apparent miracle includes a lot of technical detail, but is based on the idea that agencies underestimate the extent of MDB support by putting their preferred creditor in default and their ability (not yet operational) to report “callable capital” From its contributors in times of trouble. Banks need to convince rating agencies to take a more supportive view and rely more on their capital adequacy judgments.

It sounds like an easy call, but any change involves embracing a well-established corporate culture in the World Bank in particular, which protects its Triple A rating with the tenacity of an emperor penguin protecting its egg. Bank employees often say that this is due to political economy as well as financial reasons. They are always concerned that the US Congress may suddenly withdraw its support for the bank, and the need to keep Capitol Hill on the side is one of the main reasons why the bank presidency has traditionally gone to an American. It’s unlikely that Congress would be keen on the idea of ​​a bank starting some funny stuff with its balance sheet and taking risks with its credit rating.

It’s a valid concern. Multilateral development banks are essentially political institutions in the sense that their existence depends on their legitimacy among the governments of their shareholders. For example, MDBs’ preferred creditor status is a market habit rather than a matter of contract: it is based on debtors’ belief that the cost of isolating shareholder governments is too high. Leveraging multilateral development banks cannot be just a technical exercise. Banks need to ensure that shareholders are prepared to wholeheartedly support their decision and advocate on their behalf to bond investors, credit rating agencies, and potentially nervous legislatures.

In addition to this newsletter, I write a trade secrets column for FT.com every Wednesday. Click here to read the latest and visit ft.com/trade-secrets To see all my previous columns and newsletters too.

hanging water

FedEx’s success in becoming a postie to the world means that when things turn south for the company, the world – and in particular anyone interested in global trade – should stand up and take notice. That’s why the announcement of preliminary results last week – a week before the company is scheduled to release the numbers – triggered the biggest daily drop in the stock price ever.

Line graph of stock price, in US dollars, showing FedEx Group one of the biggest drops recorded after an earnings warning

One swallow doesn’t make a summer, nor a woody bird a winter, but FedEx is sending a warning message to those who still think the world is headed for a smooth landing. (Jonathan Mulls)

A proposed text is being floated around (first reported by Politico) to review the controversial Energy Charter Treaty, an agreement that has been criticized for making governments open to litigation to phase out fossil fuels.

South Korea joins the European Union in a list of economies that cross with the United States on tax credits for electric vehicles that discriminate in favor of North American suppliers.

The Financial Times provides details of the progress toward “fortress China,” Xi Jinping’s bid for economic independence.

It turns out that Russia and China do not have a strong, unconditional alliance after all, and it rested on the mill of my belief that the world is, in fact, not divided into geopolitical blocks.

The quiet and fierce global war over technology standards setting sees another battle in the coming weeks as the International Telecommunication Union elects a new leadership.

The government welcomes Intel’s plans to build chip manufacturing in the United States after being dumped with taxpayers’ money, but not its shareholders.

Europe Express Your essential guide to what matters in Europe today. Register here

Britain after Brexit Keeping abreast of the latest developments as the UK economy adjusts to life outside the EU. Register here

Related Posts

Leave a Reply

Your email address will not be published.