What World Needs, Brazil Says, Is Joint Effort of Liquidity Management

Henrique Meirelles Gathered in São Paulo, in southeastern Brazil, governors of central banks from several countries discussed, November 9 and 10, coordinated actions for fighting the effects of the international financial crisis.

The information was disclosed by Henrique Meirelles, the president of  the Central Bank of Brazil (CBB), in a press conference held during the bimonthly meeting of the Bank for International Settlements (BIS), a multilateral organization also known as the central bank of central banks.

"Coordinated actions must address liquidity management, because what is taking place is as follows: in markets that are dysfunctional due to serious or even not-so-serious lack to liquidity, central banks must implement liquidity management policies. And liquidity management is sometimes carried out in a joint effort," said Meirelles.

As an example, he mentioned the dollar swap agreements recently established between the United States' Fed and the CBB, as well as between the Fed and other CBs. "This contract has been discussed at length as an exemplary measure of joint work," said the president at the CBB. "In order for us to face global liquidity issues, the problem must be jointly addressed," he stated.

Meirelles underscored, however, that this is not a monetary policy measure. Even though the final statement of the G-20 – a group consisting of the world's 20 leading economies that met last weekend, in São Paulo – advises governments to adopt anti-cyclical measures in order to fight the crisis, such a decision is up to local authorities and depends on the economic reality in each country.

Meirelles also stated that the crisis is affecting countries in four different ways. In the first place, there are nations that depend on exports to the United States and other developed economies. As these economies slow down, exporter countries are forced to implement measures aimed at expanding the domestic market, as is the case with China, which announced last Sunday a domestic investment package of nearly US$ 600 billion.

The CB governors reached the conclusion that there is going to be a substantial slowdown of global growth in 2009, as the Gross Domestic Product (GDP) of developed countries should decrease and emerging countries should post lower growth rates.

Another category is that of countries whose banks are incurring losses due to sub-prime bonds, and which are being forced to inject money into the banking system in order to keep those institutions from going bankrupt. Other governments are purchasing useless bonds in order to remove them from the markets.

Meirelles asserted that Brazil does not fit into any of those categories, because it has already adopted measures turned to expanding the domestic market in recent years, its banks have not been incurring losses, and it has no toxic assets in circulation.

The last category consists of countries in which liquidity is lacking, thus leading to a retraction in the credit market. This, according to Meirelles, is the case with Brazil. He said that the government, the CBB and other public banks have already implemented a series of measures for restoring order in the financing sector.

"A gradual resumption of credit is taking place due to the measures that were adopted, such as the reduction of mandatory deposits by banks, the injection of dollars into the exchange market, and action taken by official banks," he said.

"We are not back at the level we were on before Lehman Brothers went bankrupt, but there has been a certain degree of recovery," he claimed. According to him, the Brazilian domestic market is doing well, and right now there is no need for anti-cyclical action, such as the loosening of fiscal and monetary policies.

The collapse of the United States bank marked the worsening of the crisis. It was from that moment on that international sources of financing began to dry out, and investors started pulling money out of emerging markets in order to cover up holes or flee the risk.

According to Meirelles, at the BIS meeting, a conclusion was reached that there has been an improvement in the international credit situation since early October.

Another modality of joint action discussed during the BIS meeting was the creation of a system for supervising international financial operations within the scope of the Financial Stability Forum (FSF) in order to identify high-risk transactions, in addition to the integration of the FSF with the International Monetary Fund (IMF), so that coordinated problem-solving work may take place.

The FSF provides consultancy to central banks, but it has no emerging countries among its members, which restricts the scope of adoption of its recommendations. In the proposal that Brazil is going to submit to the G-20 summit, next Saturday in Washington, the country calls for increased participation from developing nations in the Forum, otherwise its decisions will not be accepted.

Meirelles also stated that the central banks are aware of a need for adopting "prudential" measures, including greater regulation and inspection of financial markets by authorities. He asserted that there are countries in which investment banks, for example, are not supervised by the central bank, such as the United States. In Brazil, in turn, these institutions are regulated. "Now we all must head in the same direction, and the CBB is an example," he said.

Also in the area of prudential actions, Meirelles stated that there is a consensus regarding the need for limiting excess leverage of banks, i.e., cases in which the volume of loans granted by a given institution is too high compared to its capital. Consensus has also been reached regarding the importance of unifying the agencies that regulate the financial system. "This is part of the recommendations, and we are going to discuss this matter further," stated the president at the CBB.

The BIS' bimonthly meetings are usually held in Basel, Switzerland, where the institution has its headquarters. Once a year, however, it is held in another country. This was the first time that the meeting took place in Brazil, taking advantage of the presence of central bank governors who were already going to come to the country in order to attend the G-20 meeting.

Anba – www.anba.com.br


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