Annina Kaltenbrunner

Eurozone crisis: beggar thyself and thy neighbour

The sovereign debt crisis that broke out in Greece at the end of 2009 is fundamentally due to the precarious integration of peripheral countries in the eurozone. Its immediate causes, however, lie with the crisis of 2007–2009. Speculative mortgage lending by US financial institutions and trading of resultant derivative securities by international banks created a vast bubble in 2001–2007, leading to crisis and recession. State provision of liquidity and capital in 2008–2009 rescued the banks, while state expenditure prevented a worsening of the recession. The result in the eurozone was a sovereign debt crisis, exacerbated by the structural weaknesses of monetary union.

International Financialization and Depreciation: The Brazilian Real in the International Financial Crisis

Despite sound macroeconomic fundamentals, the Brazilian currency, the real, experienced one of the worlds largest exchange rate depreciations during the recent international financial crisis. This depreciation resulted from Brazils rising ‘international financialization’, i.e. the increased participation of foreign investors in short-term domestic Brazilian assets. One important manifestation of this process, in particular, was the increased internationalization of the Brazilian real, which has become one of the most widely traded emerging-market currencies. However, the rising influence of international investors on Brazils domestic currency weakened its exchange rate management during the international financial crisis as rapid international portfolio adjustment led to the reals sharp depreciation. Such exchange rate volatility has important implications for macroeconomic policy, especially exchange rate management, since, in the presence of increased international financialization, the standard prudent macroeconomic management that has been advocated by mainstream economics will prove inadequate — and might even undermine efforts — to maintain financial stability.

A post Keynesian framework of exchange rate determination: a Minskyan approach

Abstract This paper proposes a general framework to analyze exchange rate determination from a post Keynesian perspective based on chapter 17 of the General Theory. The paper shows that this framework accounts for both the importance of context and time-specific expectations put forward by existing post Keynesian exchange rate theory, and for the hierarchic and structured nature of the international monetary system that is crucial to understanding exchange rate movements in developing and emerging countries (DECs). To analyze these currency hierarchies, the paper presents a novel Minskyan approach that emphasizes the structural determinants of these hierarchies and currency positions in international debtor–creditor relations. This approach can better account for DECs’ continued monetary subordination and points to the endogenous and self-perpetuating nature of international monetary hierarchies.

Subordinated Financial Integration and Financialisation in Emerging Capitalist Economies: The Brazilian Experience

ABSTRACT This paper analyses the recent changes in financial practices and relations in emerging capitalist economies (ECEs) using the example of Brazil. It argues that in ECEs these financial transformations, akin to the financialisation phenomena observed in Core Capitalist Economies (CCEs), are fundamentally shaped by their subordinated integration into a financialised and structured world economy. To analyse this subordinated financialisation, the paper draws on the framework of international currency hierarchies. It shows by means of two specific processes how the existence of a hierarchic international monetary system has changed the financial behaviour of domestic economic agents, and with it the structure of the financial system. The first process highlights the phenomenon of reserve accumulation and the changing behaviour of domestic banks. The second points to ECEs’ sustained external vulnerability and its impact on the operations of Brazilian non-financial corporations. The paper also shows that not only were these financial transformations shaped by ECEs’ subordinated financial integration, but also that it was these financialisation tendencies themselves which contributed to cementing existing hierarchies and further deepened existing asymmetries between ECEs and CCEs.

Financial integration and exchange rate determination: a Brazilian case study

This paper investigates the impact on exchange rate determination of two recent changes in developing and emerging countries’ financial integration: first, the rising volume and heterogeneity of short-term portfolio flows; second, foreign investors’ increased exposure to domestic rather than foreign currency assets. In its analysis of Brazil, the paper shows that both changes have potentially destabilizing implications for the exchange rate and may create the risk of self-feeding bubble dynamics leading to large and sudden swings in exchange rates. The results have important implications for the regulation of international capital movements and choice of exchange rate regime.

Stemming the Tide: Capital Account Regulations in Developing and Emerging Countries

This chapter examines the evolution of capital controls in developing and emerging countries (DECs). It provides a summary of the definition of capital controls, their rationale in different economic paradigms, and historical evolution. It then analyses the most recent controls implemented in the wake and aftermath of the global financial crisis in 2008. It argues that rather than fundamentally questioning the benefits of open capital accounts, these measures were imposed as a last resort given the inherent contradictions of the conventional macroeconomic configuration. Controls have remained market-based, temporary and frequently disguised as macroprudential regulations to deal with the worst implications of free capital account convertibility. As such, they have sought to safeguard the general openness to cross-border capital. The chapter also argues that given the inherent instability of international financial markets and the structural subordination DECs assume in them, capital controls need to be permanent, comprehensive and institutionalised development instruments.

Financialization and liberalization: South Africa’s new forms of external vulnerability

Since the late 1990s, shifts in the nature of the global financial integration of developing and emerging countries have exposed them to new forms of external vulnerability. This article explores such in the South African case. The article shows a precipitous growth in the magnitude of South African assets held and traded by international investors – increasingly institutional investors and ‘other’ financial institutions, such as hedge funds and complex investment vehicles. The composition of these assets, and the motivation for trading, has also altered, shifting towards a complex set of rand-denominated, short-term assets in equity, bond and derivatives markets traded for capital gains. Given this, the article contends that it is the portfolio considerations of such investors, rather than economic ‘fundamentals’, that have come to determine key economic prices, including the exchange rate, causing volatility, large swings and sudden adjustments. This, it is argued, places monetary policy in a predicament. In the context of liberalized capital accounts, together with the prioritization of inflation targeting, open-market interventions are ineffective at managing exchange rate movements and volatility, and often reinforce both the patterns of trading and subsequent vulnerabilities while carrying their own costs. In these respects, the nature of South Africa’s global financial integrations has exposed it to new forms of external vulnerability, with both these developments, and associated monetary policies, deepening the financialization of the South African economy.