Coping in the subprime region

1
Coping in the subprime regionMonetary
Management in Crisis
Daniela Gabor Department of Economics University
of the West of England
2
The messages of this paper

• Central bank key in the reconstitution of the
  Romanian economy as neoliberal economy.
• What does the central bank do when neoliberal
  commitments to private finance under threat?
• A it depends. IMF presence changed approach to
  monetary management, re-assigning the National
  Bank of Romania (NBR) a central role in the
  reproduction of neoliberal logics.

3
Structure

• The subprime region
• A Romanian account of how Eastern Europe became
  subprime
• Shifting neoliberal rationalities and modes of
  economic governance
• The crisis of neoliberal capitalism October
  2008
• The April 2009 IMF agreement paradigm change?
• Conclusion

4
(No Transcript)
5
Exchange rates correction?(2004 Jan 100)

6
(No Transcript)
7
Romania before the 2008 crisis

• Standard narration of macroeconomic developments
• 1990 - 1997 politicized economic decisions
  prevented implementation of stability orientated
  policies agreed with the IMF (4 failed SBA)
• Outcomes high and volatile inflation, repeated
  balance of payment difficulties, massive
  transitional recessions
• After 1997 gradual institutionalization of
  separate economic and political domains
• Outcome after a necessary contractionary
  stabilization, Romania growth leader by 2005,
  when it adopts inflation targeting

8
Alternative narration process of
neoliberalization

• Shifting neoliberal rationalities (Peck and
  Tickell 2002 Hay 2004)
• Roll-back neoliberalism - destructive attack on
  the Keynesian state during years of exceptional
  politics
• Roll-out, normalized neoliberalism constructive
  mode, financialized accumulation as economic
  imperative (Dumenil and Levy, 2001)

9
Neoliberalizing central banks

• international policy advice, IMF in the first
  instance, constructed central bank as essential
  instrument of institutional change and neoliberal
  policy making in formerly planned economies
  MONETARISM as legitimizing policy narrative.

10
1990-1996 roll-back neoliberalism

• Central bank key to the disciplining of state
  owned enterprises, the antithesis of allocative
  efficiency
• Contractionary monetary policy (eliminate excess
  liquidity and contain soft budget constraints)
• Exchange rate flexibility return to equilibrium
  key to competitiveness
• Policy practice vs. policy discourse
• Liquidity crunches (typical outcome of IMF
  stabilization program)
• Prohibitive loan rates affecting capital
  investment
• Payment blockages
• Industrial contraction
• Exchange rate driven inflation (devaluations?)

11
1997 2008 Normalized neoliberalism

• 2 essential policy shifts (1997 IMF agreement)
• Market financing of budget deficits
• Exchange rate appreciation key to disinflation
  sterilized forex interventions (reserve
  targeting)
• structural excess of liquidity on the money
  market driven by capital inflows
• 1999 banking crisis IMF private sector
  initiative reduced appetite for emerging market
  asymetric distribution of liquidity on the
  money market gt reconfiguration of the banking
  sector.

12
Neoliberal regimes of monetary management

• (1)The transformation of the relationship between
  wholesale banking and the central bank, where
  management of liquidity tailors to speculative
  activity , working similarly under different
  policy regimes
• (2) An increasing reconfiguration of banking
  sector activity through neoliberal logics of
  financialized accumulation.
• (3) An increasing vulnerability to international
  sentiment, produced through practices of
  sterilized interventions, currency appreciations
  and expanding current account deficits in the
  context of a liberalized capital account, an
  outlook familiar to many Latin American countries
  (Massad, 1997).

13
(No Transcript)
14
(No Transcript)
15
(No Transcript)
16
The October 2008 speculative attack

• Standard and Poors downgrade
• EUR 2bn short positions opened, betting on
  depreciation settlement in domestic currency
  (overnight or swap)
• NBR drained domestic liquidity offshore players
  failed to close positions, swap rates gt 500,
  overnight ratesgt 50. Liquidity provision through
  discount window, collateral.
• Policy controversy adequate management of
  liquidity during crisis
• Stabilizing overnight interest rates vs. feeding
  speculative pressures

17
(No Transcript)
18
Narrating the crisis the IMF agreement

• Applauded NBR for attempts to contain imbalances,
  glossing over its strategy of real appreciations
  and strerilized interventions contributed to
  financial fragility
• 2 pillar approach
• A strong policy program fiscal contraction,
  improved bank supervision and regulation,
  continued exchange rate flexibility
• Large external financing assistance into NBR
  reserves to stimulate foreign currency lending
  (reducing reserve requirements on long term forex
  liabilities)
• New approach to Private Sector Involvement -
  convincing mother banks to roll over debt

19
(No Transcript)
20
(No Transcript)
21
Conclusions

• 1. Neoliberalism's strength - the discursive
  struggle over the definition of the crisis
• 2. new opportunities crisis as an opening for
  further marketization - pension law, public
  sector law
• 3. We are not all Keynesians now!