International Finance: Legacy of 2015

International Finance: Legacy of 2015

Despite their varied nature, when viewed as a whole, the mechanisms at work in 2015 in international finance were so significant that they could alter the entire architecture of the global financial system in 2016. And it is unlikely that there is along period of transition ahead. Chances are that the global financial transformation will happen quickly and dramatically.

These days are very reminiscent of the 1930s-1940s. At that time, the global economic crisis triggered several events, such as the economic and financial disintegration of the world, the fragmentation of the global financial system into currency zones and blocs, and the erosion of global trade and other forms of international economic ties. The monetary and financial disintegration was only halted in the summer of 1944 at the international conference at Bretton Woods, where the decision was made to establish a global monetary system based on gold and the US dollar. Shifting the global monetary and financial system to this new mode required a 15-year cycle of work, beginning with the onset of the crisis in October 1929. And even after the Bretton Woods conference, at least another five years passed before the new system was operational. Overall, the transition cycle to move the system from its old state to its new one took about two decades.

Now fast forward to our era. The starting point of the transition of the global financial system to its new role can be dated to 2007, when the global financial crisis began. Almost nine years have passed since then. The beginning of the “new era” of global finance can be seen as the point at which the process of financial globalization came to an end, and it was no longer possible to build the Tower of Babel of global debt any further. A retrenchment began, which took the form of a crisis, and multitude of “excessive” debts burned up in its flames.

The first wave of the financial crisis (2007-2009) has already led to significant financial disintegration worldwide. But judging by the statistics from the International Monetary Fund, the Bank for International Settlements, and other international institutions, higher levels of trading were seen on global financial markets in 2015 than in 2007. According to the assessments by the renowned consulting firm McKinsey & Co., debt in early 2015 also surpassed its pre-crisis levels –worldwide as well as in individual countries and groups of countries. McKinsey & Co. identified three potential epicenters of the second wave of the global financial crisis – the US, the European Union, and China. The world is anxiously awaiting an imminent financial tsunami. Worrying signs emerged in August in China, where the stock market indices began to fall sharply. Chinese officials succeeded in halting the destructive developments (primarily through direct administrative actions), but the bubble in the Chinese stock market hasn’t gone anywhere.

Bubbles in the financial markets continued to expand in 2015 in the US and EU as well. This is the first time that the world of global finance has been faced with bubbles that have been growing for so long, and it can be explained by the fact that the central banks’ printing presses have been working more energetically than ever before. Plus, the Federal Reserve, ECB, and other central banks in the industrialized world have been keeping their interest rates close to zero. This kind of free money was not available even at the height of the economic crisis in the 1930s.

Many experts had predicted other upheavals for last year as well, including the collapse of the dollar-based system, the full or partial destruction of the eurozone (the exit of a number of countries from the euro area), a full-fledged default in Ukraine, the paralysis of the International Monetary Fund, the dissolution of the G20, etc. Most of these predictions did not come true in 2015, but no one has given up on them – they have simply been held over until 2016.

Allow me to briefly characterize what I feel are the most important events in the life of international finance in 2015.

1. The end of the London Gold Fix on March 20, which had existed intermittently since 1919, and the transition to a new system for determining prices for gold. This event has not yet had a very significant impact on gold prices, but its effects will be felt in the future.

2. The announcement by Greece that it was defaulting on its obligations to the International Monetary Fund (it did not make its scheduled payment of approximately 300 million euros). In July Greece again defaulted and the fund did not receive about 1.5 billion euros that had been slated for debt repayment. In August, after negotiations between the Greek government and the Big Three creditors (the ECB, European Commission, and the IMF), an agreement was reached to provide Greece with a third bailout package worth 85.5 billion euros. That package will be distributed over the course of three years, assuming that Greece does not deviate in any way from its program of austerity, reforms, and privatization of state assets (totaling 6.2 billion euros).

3. The creation of the Asian Infrastructure Investment Bank (AIIB). China spearheaded the project and is its biggest shareholder. The first phase of its creation ended in the spring of 2015. A total of nearly sixty states have joined the bank. It is worthy of note that 20 of these states lie outside of Asia (including the United Kingdom and some other major European countries). In reality, the AIIB is not a regional organization, but a global one. The bank should begin its operations in 2016.

4. China’s yuan acquired the status of an official reserve currency. That decision was made by the International Monetary Fund on Nov. 30. The yuan became the fifth official reserve currency, joining the US dollar, euro, Japanese yen, and British pound sterling. It is telling that based on the weight set for it, the yuan was immediately ranked third in the IMF’s basket of reserve currencies, ahead of the yen and pound sterling.

5. The change to some of the basic principles of the International Monetary Fund. Dec. 8 decision allows the fund to finance countries that do not meet their obligations to their sovereign (official) creditors. The fund’s decision was timed to coincide with the impending Dec. 20, 2015 repayment of Ukraine’s debt to Russia. On one hand, the fund’s decision encouraged Ukraine not to meet its obligations to Russia; but on the other hand, it also shattered decades-old precepts that guide the work of global finance.

6. The Dec. 18 announcement by officials in Kiev of a moratorium on the repayment of Russia’s $3 billion loan. For all intents and purposes, this means a full-fledged default by Ukraine. After the New Year’s holidays, the story of Ukraine’s default will probably blow up in the global media.

7. Congressional approval in the US of the budget for the next fiscal year. Washington passed a spending package that includes an important clause agreeing to reforms for the International Monetary Fund (the review of the quotas of capital and voting shares assigned to its member countries, as well as the doubling of the fund’s capital). This was a significant event, since the decision to reform the fund had been approved back in 2010, but had been blocked by the United States for five years.

8. On Dec. 17, the IMF’s managing director, Christine Lagarde was summoned to appear in a French court. She is suspected of abusing her official position when she served as finance minister under President Nicolas Sarkozy. This démarche against Christine Lagarde looks like psychological pressure against the fund’s highest officer in order to make the IMF a more obedient tool in the hands of Washington.

My list of events is quite varied. Many of them might not currently seem very significant. For example – the elimination of the famous London Gold Fix. Outwardly, this even looks like a weakening of the role of gold in international finance. However, this is merely an issue of the reorganization of the system for managing the global market for the yellow metal, under the auspices of the same Rothschild family.

The biggest struggle for influence in the world of international finance will develop between Washington, which is attempting to salvage the dollar system, and Beijing, which is trying to squeeze American banks and corporations out of global financial markets. Some experts see this confrontation as a tussle between the two biggest clans of money masters – the Rockefellers, who are using the state power of the US, and the Rothschilds, who are seeking to establish control over China.

Returning to potential changes in the global monetary and financial system, I cannot rule out the fragmentation of a unified system into separate zones and blocs, which is exactly what happened in the late 1930s, on the eve of World War II. At that time trade and economic ties within the zones and blocs were maintained with the help of the currencies of the suzerain states (the British pound sterling, French franc, US dollar, etc.). Trade between the blocs fell by a huge ratio and inter-bloc ties were based on barter, clearing accounts, and gold.

The second wave of the global financial crisis will wreak only minimal damage on countries that are able to navigate the global financial chaos and protect their economies using import duties and restrictions on the cross-border movement of capital, sheltering themselves behind the walls of their regional economic, financial, and currency blocs.

Tags: AIIB  European Union  FRS  IMF  China  US