Tag Archives: banks

Microfinance and European Crisis Management

11 Mar

Guest post by Phil Mader, a researcher at the Max Planck Institute for the Study of Societies in Cologne, Germany, and an editor of the Governance Across Borders blog, http://www.governancexborders.com

Microenterprises galore in India, soon too in Italy?

Microenterprises galore in India, soon too in Italy?

Well-established in low-income countries, microfinance is recently on the ascent as a crisis management tool in Europe. The parallels to Structural Adjustment in Latin America in the 1980s and 90s, where it played a key role in helping the bitter pill of austerity go down, are striking. But the experience of the global South over the past three decades warns against expectations of microfinance in the EU bringing anything but a glut of tiny, low-productivity, poverty-push enterprises which are likely to become entangled in debt traps.

2006 was the year small loans in developing countries were knighted as “the vaccine for the pandemic of poverty”, with the Nobel Peace Prize for Grameen Bank and its founder Muhammad Yunus bringing international fame to the idea that financial markets could effectively combat poverty. But loans for peace? Staunch supporters like Bernd Balkenhol (formerly ILO) argue the Nobel prize actually honoured the effectiveness of small loans at upholding social peace – an idea which is gaining new traction in erstwhile-affluent countries whose social peace is threatened by crisis and austerity.

As the “pandemic” of poverty spreads to Southern Europe, policymakers are seeking to apply the lessons learned in Asia, Latin America, and Africa, where microfinance has been established as a permanent pillar of social policy in many countries. As with prior aspects of neoliberalism, policies are often first tested in the Global South before their successive deployment in more advanced capitalist economies.

Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression,”

the Italian Ministry of Foreign affairs recently quoted its minister, Giulio Terzi di Sant’Agata. The ministry noted Italy acting as a forerunner in Europe, having adopted a law on microfinance. The EU runs a number of microfinance programmes, expanded since 2010, aiming at getting the unemployed – particularly youths and ethnic minorities – into work through self-employment. A 2012 report argued that EU public funding should catalyse “the entry of private capital in order to create a self-sustainable market in the long run” – building new markets in times of crisis whilst keeping the poor busy and mollified via private credit; a most practical combination.

“People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

Terzi, of Monti’s interim crisis management committee/government, could hardly have made the case for microfinance as a device for austerity facilitation more clearly. Tiny loans may not work at creating economic growth or significantly alleviate poverty, as the experiences of microfinance-saturated countries like Bangladesh or Bolivia show and numerous scientific studies have underscored; but they have certainly proven their worth at tempering redistributional demands while facilitating structural adjustment. They work to “contain public spending” while preventing “material distress from encouraging populist deviation” (Terzi), tiny loans are a handy “political safety net” to uphold consumption and provide alternative (self-)employment, as political economist Heloise Weber observed more than a decade ago.

Working – up to a point, that is. India, with its focus state Andhra Pradesh (AP), in 2010 joined the ranks of Nicaragua and Bosnia as countries whose microfinance sectors recently melted down. Popular unrest and agitation forced the government of AP to curb all microfinance operations following a wave of suicides among borrowers. AP used to be India’s most microfinance-friendly state, earning the nickname “Mecca of Microfinance”, to whose highly profitable lenders international investors flocked like pilgrims.

While the microloan industry – which is now in protracted decline in India – has accused the government of foul play, the crisis’ causes ultimately lay not in a political attack, but rather in the original political support for microfinance as a tool in facilitating AP’s ambitious neoliberal restructuring. The loans placated the affected populations for some time, while opening up new outlets for capital markets, this recent paper finds, which led to the widespread overindebtedness which ultimately caused the suicides.

Politically enticing as a tool for austerity politics as the tiny loans may be, the experience of the Global South with microfinance doesn’t bode well for European countries attempting to bolster low incomes and drive economic growth. Perhaps this is why Terzi only claims that microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”, rather than bringing real material benefits for borrowers. For the time it takes to embed reform agendas and austerity politics, at least, the expectation is that microfinance may serve as a regime-consistent tool of seemingly doing something for impoverished and precarious segments – keeping them busy and competitive as entrepreneurs – while preventing them from getting all too uppity.

The end of insolvency

10 Jan

An arresting fact published yesterday in the Financial Times: the lowest rates of insolvency in Europe in 2011 were in Greece, Spain and Italy, the countries that faced the brunt of the Eurozone economic crisis. The newspaper continues: fewer than 30 in every 10,000 companies fail in these three countries, at the same time as nearly one in three companies is loss-making. There couldn’t be a clearler proof of the fact that Schumpeterian creative destruction has taken leave of Europe.

There are various explanations for this. For instance, the low level of corporate insolvencies is partly a reflection of government action: companies that might otherwise have gone bust have been able to borrow from their governments at very low rates, making refinancing of existing loans possible. Fearful of the political fall-out from lots of businesses going bust, governments have kept them alive. The broader climate of cheap borrowing, made possible by central bank action, has also played its part.

According to the FT, however, action by public authorities is only partly to blame. The real culprit appears to be the banks. Faced with so much pressure on their balance sheets, and saddled with bad loans, banks have been very reluctant to force businesses into insolvency or restructuring procedures. Rather than take the hit, they have preferred to hang on, letting the bad loans sit on their balance sheets. This has been the case particularly in Spain, but also elsewhere across the continent. Here we obviously see the underlying causes of the crisis working their way back into its resolution. Central to the debt-financing that occurred prior to the crisis, it is the same debt that prevents a more decisive resolution of this crisis.

We should, of course, be wary of bullish talk about the constructive effects of insolvency. The FT quotes one company chairman who laments the fact that all the company’s revenues are being taken up by pension payments to retired employees. “We are unable to invest in new growth areas”, he complains, because of these pension obligations. One wonders what his solution would be: renegue on the payments and ask the pensioners to find alternative sources of income?

Clearly, the idea of creative destruction works less well in an age when corporations have welfare obligations. But is also rests upon an expectation that public authorities command enough authority to be able to weather restructuring storms. Evidently in Europe this is not the case. Alongside a fear of social unrest is also a fear and hostility towards change. In countries like Greece, Italy and Spain, and certainly in France, governments talk about supply side reform and a fundamental transformation of their economies but there is little idea of where they would like to go or of what they would like to do. This political impasse is matched at the corporate level. Creative destruction after all rests upon an optimistic attitude towards the future: something new can be built, new energies can be released if the old is torn down. Restructuring is often driven by hedge funds looking to buy up assets cheaply and sell them on for a profit. But in Europe’s current predicament, we also see hostility towards change present across the political and corporate elite. And the banks, supposedly the most gung-ho and reckless of the lot, are the most cautious of them all.

On politics and finance

30 Nov

Buried under the frenzy around the Leveson report was the British government’s coup of attracting Mark Carney, governor of the Canadian Central Bank, to London. Apparently ruled out of the running, much to the chagrin of those who felt he was the best man for the job, Carney has now been appointed as governor of the Bank of England and will take up the job next summer. For those who view these appointments as purely about expertise and experience, this is a great victory. Gone it would seem are the mercantilist days where nationality, wealth and government policy were so closely aligned. The cosmopolitan financial press, from the Financial Times to The Economist, are satisfied. Britain, it seems, is a pioneer in these international recruitments for national institutions: think of the English football team. That Carey was a Canadian certainly helped make him acceptable to the British establishment. He’s sort of one of us, after all, runs the sentiment. But the principle still stands that positions such as these are all about competence and expertise. There is no politics or partisanship here and the appointment of Carney, we are told, is proof of that.

It is also proof of a number of other things. One is that there is emerging a cadre of elite central bankers who move relatively seamlessly from one appointment to another. National boundaries seem less restrictive than in the past. This holds true to some degree at the global level, where competition for posts such as head of the IMF or the World Bank has become more intense. The old Bretton Woods division of the spoils between Europe and the United States is coming under serious pressure and may not survive the next round of appointments. And nationally, central banks are opening up with Britain leading the way. Curiously, the European Central Bank in this regard is behind the times: its appointments are rigidly based upon the principle of achieving balance between nationalities. The unfortunate Lorenzo Bini Smaghi was edged out of the ECB executive board because it wouldn’t do to have two Italians in there and no Frenchman. Draghi became director, Smaghi was out, and Benoit Coeuré was in. This seems rather old hat and overly political compared to the forward looking Bank of England. Whether other central banks follow Threadneedle Street’s example is unclear but the principle has been established and there is no short supply of expert central bankers.

It is also proof that the way we understand banking, finance and monetary policy today is entirely free of political principle. The struggle between banking and financial interests and those of elected representatives is a long-standing and epic struggle. There is nothing new there. But central banks have often been seen as exceptions. They are, after all, lenders of last resort and in that respect are eminently political institutions. Those critical of the ECB in the current crisis have often suggested that it’s role should become more, not less, political in so far as it needs to act in order to save the Eurozone from collapse. Yet the implication of Carney’s arrival is that the tie between central banks and national politics should be cut. This is a mistake. Carney may be Canadian but the Bank of England remains firmly part of the functioning and survival of the British economy. And the Bank of England should still be understood as an agent of national capital, in spite of who is running it.

Carney’s appointment also chimes with a more general feeling that politics is seeping out of macro-economic policy as a whole. Illustrative in this regard is the debate underway at the moment around who might replace Tim Geithner as US Treasury Secretary. One name that has been floated around, and who the FT considers a realistic outside contender, is Larry Fink. As head of the biggest asset management group in the world (BlackRock manages around 3.7 trillion US dollars of assets), Fink is a heavy-weight figure, as important as those running the big Wall Street banks. However, his entire background is in finance. He certainly has views about how the US economy should be run but to appoint Fink would be to give the job to an expert. And this is not a job as central banker but as Treasury Secretary, an ostensibly political appointment. Of course, experts have long been appointment to this position. There is even talk of Geithner stepping down and joining BlackRock and Fink moving in to take his place. Were this to happen, it would illustrate how firmly financiers dominate economic policymaking and how expertise in finance has become the baseline for political appointments within the US Treasury.

As we’ve argued before on this blog, expertise does matter in politics. But the overwhelming tendency today is to view macro-economic policy as a purely technical realm, rather than as one where technical questions co-exist alongside fundamental differences of political principle and alongside important moral questions. Such a tendency has the effect of shielding economic policy from public criticism and gives to public financial institutions like central banks a veneer of political and social neutrality. In fact, no amount of expert knowledge can obviate the need to make political choices. The most honest experts will say that various scenarios are possible and that the choices depend upon what outcomes we want. It is these outcomes that we should be debating, not which expert can magically solve our ethical and political dilemmas about what sort of society we want to live in.

The state of European banking

5 Oct


In his assessment of a new report published on banking reform within the EU, Martin Wolf starts off with an arresting statistic. In 2010, he writes, US banks had assets worth 8.6 trillion Euros. Banks in the EU had assets worth 42.9 trillion Euros. For the US, those assets represented 80% of GDP; in the EU, they represented 350% of GDP. The EU’s banking sector, claims Wolf, is too big to fail and “too big to save”.

Wolf’s fact raises interesting questions. Can we say that in Europe the expansion of the financial sector has been so significant that it dwarfs developments in the US and gives us an explanation for Europe’s current sovereign debt crisis? Explanations of the Eurozone crisis have in recent months increasingly focused on governance issues tied to the Eurozone itself and to poor economic performance of many Eurozone economies. Is the implication that the crisis is a European affair?

A useful place to look in order to answer these questions is the report that Wolf cites, put together by a group of experts and led by Errki Liikanen, governor of Finland’s central bank. Most of the coverage of the report has been about its recommendations: ones that are not so different from those of the Vickers report in the UK (see here for a comment on Vickers). However, the report itself gives a detailed account of the crisis and of the transformations in the European banking sector.

In general, it implies that whilst there is variation, there is no “European exception”. The origins of the crisis lie in the collapse in the sub-prime mortgage market in the United States, which put a number of lending institutions into serious difficulty. This localized crisis quickly fed through an internationalized financial system to affect non-US institutions. Many European banks were left with very bad loans on their books: the German bank, Deutsche Industriebank IKB, was one of the first to be bailed out by the Bundesbank. As early as August 2007, the interbank lending market in Europe dried up altogether: the ECB had to step in with an injection of 95 billion Euros. In December of the same year, it injected a further 300 billion. At issue here is the generalized dependence of US and European financial institutions on what turned out to be very bad loans.

On the size of the assets of European banks, compared to other parts of the world, the report also has a lot of good information. The report notes that the EU banking sector is very large when compared with other countries and regions, as the figures above make clear. However, it notes that this reflects the fact that bank intermediation plays a bigger role in Europe than elsewhere. What this means is that banks are the principal source of private sector financing in Europe in contrast to the US for example. Banks in Europe also have mortgages on their balance sheets, whereas in the US Fannie Mae and Freddie Mac soak up these mortgages and are government-sponsored institutions. The staggering difference in the assets of banks in Europe and the US is not automatically a sign of different trends in financialisation but points also to some more long-standing differences in the nature of private sector financing. The report also notes that the restructuring of the banking sector which occurred in the US post-Lehman, in particular the collapse of small and medium-sized banks, has not occurred in Europe. The level of total assets has thus remained constant, propped up by ECB and national government intervention in Europe. Here there is a marked difference between Europe and the US: interventions in Europe have prevented restructuring, in the US they were a conduit for change.

There is no particular European story to the growth of the financial sector in Europe. Some specific features of bank intermediation have interacted with more generic features of financialisation that we can observe in Europe and elsewhere. What is less clear from the report itself is whether the growth of the financial sector has been the result of changes within the non-financial sector, a freer regulatory environment or simply the working out of a speculative frenzy within financial institutions aiming to make more money in the short term, with little regard for longer term consequences. The recommendations of the report suggests it believes that the latter two factors are the most important.

On the LIBOR scandal

17 Jul

A feature of economic crises is that they propel into the spotlight the more obscure parts of markets and of capitalism. The Eurozone crisis has made everyone roughly conversant about government bonds and sovereign debt. Acronyms like the EFSF and the EFSM, triple A ratings and CDSs (credit default swaps), are regularly bandied about. The BBC’s website now has a handy online dictionary, the crisis jargon-buster, that defines various economic terms, from base rates through to liquidity traps. The murky world of lenders of last resort and the practices of seignorage have also entered into public discussion. Most recently, it has been the turn of LIBOR, otherwise known as the London inter-bank offered rate.

LIBOR, as its name would suggest, is the rate at which banks in London lend to each other. It is determined as a kind of average of the different estimates given by the banks of how much they think they would need to pay by way of interest to borrow money. Those estimates are given daily and LIBOR is calculated for different kinds of loan instruments and in different currencies. Banks in a bad way and likely to pay more for their loans would be expected to submit higher estimates. Banks with solid balance sheets would submit lower estimates. One would expect LIBOR in good times of financial calm to be low and steady. One would expect it to rise in dangerous moments of finance crisis (see here for the late 2008 movements of LIBOR).

The scandal is based on the rather intuitive idea that given that banks are setting themselves the rate at which they have to borrow and lend, they have a strong incentive to fiddle those rates. The discussion underway at the moment has a strong whiff of the unreal about it. Complaints are made about the temptation to manipulate and the lack of honesty in setting LIBOR. But what else do we expect to see? Are we meant to be surprised that banks are not the best judge of their own financial health, a least when such judgements will have self-fulfilling knock-on effects for them? And that they should shy away from honestly communicating the state of their balance sheets to other competing banks within the City? Is it not obvious that banks in a bad way would tend to systematically propose rates that are lower than what their troubled loan book would suggest? At the very least, the indignation betrays a seriously naïve view of how markets work. It is also not surprising that the Bank of England should have been complicit in the manipulation of this inter-bank rate given its proximity to the government’s involvement in mopping up the massive losses made by British banks after the Lehman collapse. It was after all in the Bank of England’s interest to make it as easy as possible for British banks to have access to liquidity. Otherwise, claim Bank of England officials, the inter-bank loans market would have dried up altogether and brought some banks down with it.

Making sense of this kind of scandal needs more than a bout of shoulder-shrugging “well, what do you expect?” from cynics. It needs a strong done of realism about the nature of markets and of capitalism. Redirecting private accumulation towards public ends has always been a matter of political struggle and state coercion. Political control over economic activity did not happen by accident. The indignation we see today about the LIBOR scandal needs to be transformed into a political movement capable of articulating a vision that goes well beyond the myth of munificent and self-regulating markets.

If in doubt, regulate…

13 Jun

Another idea that has gained traction in recent days is that of a European-wide banking union. This idea, as with Eurobonds, is not new but the most recent bail-out of the Spanish banking sector has put it back onto the agenda. Key figures – from the President of the European Commission to the head of the European Central Bank – have come out in favour of a banking union. The fact that the bank at the centre of Spain’s difficulties, Bankia, was for so long able to hide its problems, even to the point of being fêted as a success story until not very long ago, has made many doubt the ability of national regulators to properly keep a tab on what their banks are doing. Ergo, the turn towards a pan-European regulatory solution.

Exactly what a European banking union would look like or what powers it would have depends on who you ask. Maximalists tend to hover around the EU institutions as they believe such a union would further strengthen the EU. According to Commission President, Jose Manuel Barroso, a banking union could include an EU-wide deposit guarantee scheme, a rescue fund financed by banks themselves and the granting an EU authority the power to order losses on banks. Minimalists, from within national regulatory bodies, claim that only a small set of powers need be transferred to a Brussels-based body. They also stress that a European banking regulator already exists in the form of the London-based European Banking Authority. The EBA already has powers to make rules and to force banks to comply. It was behind this year’s stress tests of Europe’s biggest banks and the demand that they boost their capital ratios. Minimalists also say that only a small number of big banks should be supervised. What Merkel called the “systemically important banks”.

Over the weekend, two heavy-hitters (of a sort), Niall Ferguson and Nouriel Roubini, weighed into the debate. They noted that for two years now inter-bank lending in Europe has been replaced by a singular reliance on ECB financing. And some countries – Greece and Spain – are experiencing a steady rise in withdrawals from their banks. As well as a direct recapitalization of the European banking system, Ferguson and Roubini argue that an EU-wide system of deposit insurance needs to be established, alongside a European-wide system of banking supervision and regulation.

Some of the same criticisms made of Eurobonds can be made of the banking union idea. That the political conditions for its creation are absent is evident from the kind of discussions being had about how such a banking union would be set up. Cognizant as ever that national publics are unlikely to wave through any forward movements in integration, some suggest that instead of creating a banking union via an EU treaty change – a slow and complex process, fraught with opportunities for sabotage by recalcitrant domestic populations – it would be possible to simply give over the regulatory power to the ECB. And this could be done without a treaty change but just by a unanimous vote of the European Council. As Alex Barker on the FT Brussels blog writes, this “avoids the political headache of more treaties” and “is faithful to the unsaid rule of this crisis: central bankers should win more power, regardless of whether they deserve it”. That so much thought is given about how to push through such a banking union without going through democratic procedures of ratification suggests the solution itself lacks the public support it would need to be a success. Even short-term fixes such as providing banks directly with extra capital raise big questions about how the money being provided will actually be used. There is always a balance to strike between politics and expertise and giving new institutions the powers to make decisions based on expert judgement is not necessarily anti-democratic. But when the democratic authorization is entirely absent, or when new institutions are created in ways that explicitly avoid any wider public debate about their merits, we can be confident that the stick has been bent too far in the direction of expertise.

Another problem is that – in line with another unsaid rule of the present crisis – the banking union seems to represent a case of “if in doubt, regulate”. As already mentioned, a European Banking Authority already exists. But critically, a more muscled Brussels-based variant wouldn’t necessarily address any of the more fundamental questions about the financialisation of Europe’s economy and the way this financialisation has interacted with some of the structural features of the Eurozone. More regulation can simply mean refusing to look more closely at the root of the problem. It is unsurprising that the EU’s kneejerk reaction to a problem is to try to create new regulation. We should resist the temptation to regulate and think instead about the fundamental causes of the present crisis.

The problem with Eurobonds

7 Jun

As the Eurozone crisis deepens, some new ideas are emerging. Some have been aired for a while but are only beginning to be taken seriously. In this post, The Current Moment considers the issue of Eurobonds. In future posts, we will consider some of the other solutions being suggested, such as the idea of a banking union, the plans for which have been recently floated by the European Commission.


In a continued deepening of the Eurozone crisis, attention is focusing on Spain. Rather than investing in production during the boom years, bank capital in Spain was mainly channelled into property development. As the bottom fell out of the property market, Spanish banks have been left with worthless loans on their balance sheets. The regionalized nature of its banking system has made these problems less transparent than elsewhere and the scale of the problem has only recently emerged. Even now, there is considerable speculation about exactly how much it would take to stabilize Spanish banks. The IMF’s most recent estimate is that Spanish banks will need at least 40 billions Euros of new capital. In the meantime, loans are drying up for business and Madrid is being shut out of the international bond market.

There is some debate about whether in the longer term the Spanish economy will be able to raise competitiveness levels. The boom years were not entirely devoid of productive investment and optimists point to a weaker Euro boosting the country’s exports. Portugal, according to the FT (29/05/12) specializes in high end shoes and black toilet paper. Spain may find some of its exports benefiting from a falling Euro. But these competitive gains are not shared across the Eurozone as a whole: countries dependent on exporting to within the Eurozone will not benefit from a falling Euro. Any Spanish gains in competitiveness in the medium to long term are likely to come at the expense of the French, the Italians and other Eurozone member states.

For many, this all points to Eurobonds as the solution to the crisis. Far from exaggerating the differences between national economies within the Eurozone, Eurobonds are seen as a way of mobilizing these differences (especially German competitiveness) for the common good of the Eurozone as a whole. The basic idea of Eurobonds is that instead of national governments issuing bonds, the EU as a whole would do so. Those countries currently facing punitively high interest rates on new bond issues would find their borrowing costs falling. German bonds, currently serving as safe havens for international investors, would see a rise in interest rates, costing the German taxpayer but stabilizing the Eurozone as a whole. This idea was raised back in 2010 by the Bruegel think tank with its blue bond proposal. The idea here was that a Eurobond could be issued for debt of up to 60% of GDP for Eurozone members. Debt in addition to that would have to be financed by purely national government bonds. This would mean lower rates for sustainable debt levels and higher rates for excessive debt levels. The idea was batted away by Chancellor Merkel as a poor substitute for supply-side reform in crisis-stricken countries.

As opposition to austerity politics as strengthened, consolidated in recent months by the election of François Hollande in France and the inconclusive Greek elections, Eurobonds have come back onto the agenda. The term is used by Hollande as a rallying cry and as a measure of his success in Europe: if he is able to get the topic onto the EU agenda, he will have won his battle of wills with Merkel. Ever supportive of measures that may increase its own powers, the European Commission supports Eurobonds, as do leaders such as Mario Monti in Italy.

The more technical discussion about the exact modalities of any Eurobond issue asides, there are two major problems with this idea. The first is that as a solution to the Eurozone’s economic crisis, Eurobonds essentially rest upon the idea that borrowing more money can help Europe grow out of its current recessionary state. Given the performance of this particular growth model, that seems unlikely. As already argued on The Current Moment, Europe faces an impasse on growth: stuck between Hollande’s European neo-Keynesianism and Merkel’s insistence on national supply-side reforms, there are few alternatives to these two positions, neither of which inspire confidence.

The second problem is that Eurobonds present us with a direct clash between technocratic rationale and political reality. From the technocrat’s perspective, Eurobonds appear as a sensible solution to a thorny problem. Politically, they run against almost all the trends in place today in Europe. They would imply wealth transfers across national boundaries, something that is firmly resisted by national publics who would be expected to pay more. They would require considerable institutional strengthening at the European level in order to put in place the mechanisms needed to make decisions about how Eurobonds should be issued and how the funds raised should then be distributed. This comes at a time when the EU, according a recent Pew poll, is experiencing a “full blown crisis of public confidence” (see here for an overview of the poll).

Eurobonds would only exacerbate the democratic failings of European integration whilst at the same time they fall short of answering key questions about Europe’s growth model.


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