Don't Let An International Crisis Go To Waste

 Now, it really is a party – and Adam Feibelman joins the fun from Tulane law school.  Not to be outdone by Anna, Lee, and Mitu, his post comes complete with photos of the Greek protest dog that has been seen at nearly every demonstration in Athens over the last two years, including the recent protests and riots against austerity measures. But Adam’s post also follows a different tack from our prior posts on this crisis, which have largely focused on the pros and cons of the bailout, whether Greece should restructure or pay up, and how the Greek bond contract terms compare to those of other sovereigns who have restructured.  But Adam contends that this discussion misses a crucial point: the looming sovereign debt and currency crises highlight weak spots in the nascent international financial regulatory apparatus.

First and foremost, the Greek protest dog: 
 

 Thanks to the folks at Faculty Lounge for letting me chime in on Greece.  Having devoured the excellent commentary by Kim (most recently here, here and here), Anna Gelpern, Lee Buchheit and Mitu Gulati, the various reliable financial writers, and the very spotty financial reporting in mainstream news, I find myself a bit surprised by the scope of the discussion.  In earlier phases of the ongoing global financial crisis, a significant amount of commentary was directed at the need for reform of the relevant regulatory landscape.   In fact, the rush toward regulatory reform at that time seemed disconcerting.  Now, hardly anybody seems to be interested in what the Greek debacle and the Euro crisis might reveal about financial regulation, especially regulation of the international monetary system.

In fact, whatever their causes and solutions, the looming sovereign debt and currency crises highlight some festering weak spots in the nascent international financial regulatory apparatus, and they suggest some aspects in need of innovation and/or reform.  The current phase of crisis underscores the potential benefits of a more robust form of systemic, multilateral surveillance and regulation of monetary affairs.  But it also underscores the challenges that policymakers will face in designing an effective multilateral regulatory apparatus for the global monetary system.  

It is becoming increasingly clear that a significant part of what made the Greek situation so difficult to avert, and now makes it so difficult to resolve, is Greece’s membership in the European Monetary Union and resulting triangular relationship between Greece, the International Monetary Fund, and the European Monetary Union.  While the Fund has long had formal authority to conduct surveillance of Greece and to enforce Greece’s obligations with respect to exchange rate policies and external stability, much of the relevant policymaking affecting Greece is now done by regional institutions, over which the Fund has no formal authority.  

This scheme of overlapping regulatory domains poses many hazards.  It can dilute accountability for individual institutions, which makes it dangerously easy for well-recognized problems (like, say, atrocious data reporting) to go unaddressed.  Perhaps more troubling, overlapping obligations and responsibility can pull in different directions.  As a number of commentators have suggested, it appears that the EU is much more reluctant to contemplate debt restructuring for Greece than is the IMF.  If so, this may provide a rather stark example of a significant tension between the economic and political interests of the Euro zone and those of the rest of the world in promoting stability of financial markets in general and the international monetary system in particular.  It at least illustrates the potential for conflicting regulatory pulls.

Such tensions are not easily resolved, and they may prove politically intractable.  Yet effective regulation of the international monetary system requires much clearer articulation of priorities and authority.  One of the express purposes of the Fund is to “oversee the international monetary system to ensure its effective operation.”   Throughout most of its history, the Fund has primarily done this through its bilateral surveillance of its individual members.  In recent years, however, the Fund and many of its members have realized that it needs to shift at least some of its activity toward a more robust multilateral surveillance and to become more effective in promoting systemic monetary stability.   But what should this entail?  

At the very least, membership in the Fund should entail some obligation to avoid creating or exacerbating vulnerabilities in the global monetary system (this means you, U.S. and China).  But the current crisis in Greece and the Euro zone suggest that there may be a need for a more aggressive form of multilateralism.  It suggests, for example, that the Fund should engage more directly with non-member institutions – like, say, the ECB – that exert significant influence over Fund members and, thereby, upon the international monetary system.  Given the political economy of the Fund and its ongoing challenges to its legitimacy, it seems unlikely that there is much appetite for such far-reaching reformulation of the Fund’s mandate.  If the EU is increasingly perceived to be gambling with global economic and financial security to preserve itself, however, and if the Fund is correspondingly viewed as the more reasonable and realistic international actor, this appetite may grow. 

One final point: The current debate over bailout versus restructuring should also reinvigorate consideration of a sovereign debt restructuring mechanism (which presumably would fall within the Fund’s domain).  One of the potential benefits of an SDRM that tends to be underappreciated (and controversial) is that it could – depending on how it is designed – generate relatively objective criteria as to when restructuring is warranted, perhaps relieving some of the political obstacles that are so easily discernable at present.  

-- Adam Feibelman

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