Activities carried on by rating agencies have a negative impact on the process of overcoming the crisis in various countries.
The slowdown in the anti-crisis management is especially evident on the European market. The analysis shows high frequency of ratings change which triggers panic on the markets and impairs capital raise and revival of markets.
Thus, if we analyse the situation in Greece, within the period between June 2011 and March 2012 long-term sovereign rating downgrade occurred thrice bringing it from B1 to C. Meanwhile, the budget deficit fell from 8.5% to 6.8%, the pace of sovereign debt growth slowed down, and agreements were made regarding the partial write-off of debts to creditors – which undoubtedly was a sign of economic recovery. The anti-crisis decisions made today are supposed to change the macro indices in future because the results of most of such measures can be seen only a while after the implementation thereof. That is why the decision on rating downgrading which was made in July of the previous year – a month after the previous revision – could not possibly be based only on the economic data, nor could it be a result of the government policy assessment.
It was a result of the fact that the restructured Greek bonds had been construed as distressed debt exchange which gave grounds to consider the mandatory part of the transaction as a form of sovereign default. Such approach of rating agencies proves that they have turned out to be incapable to adapt the methods of market risks assessment under crisis conditions, and thus, go on with their activities as if the situation concerned only one particular company under the conditions of general stability. Such systemic error – which especially has respect to sovereign ratings – impairs the recovery of national economies and reduces the efficiency of governmental decisions aimed at the reduction of the public debt.
As of today, Greece has got state immunity against the policy of rating agencies since the Bank of Greece and the European Financial Stability Fund (EFSF) took measures against the possibility of any impact on this country’s liquidity. However, the situation looks quite different if we analyse the impact of this policy on other countries and the corporate sector. Thus, the sovereign rating downgrading results in the revision of commercial companies and financial institutions ratings. And this – in its turn – poses a threat of affecting their capacity to recover the labour market, competitiveness and budgetary payments.
The agencies have revised their approach towards risk assessment recently. While they were only recording the deterioration of the economic situation – which gave grounds for rating downgrading – now the decisions are made in view of the long-term prospects based on prognostic assessment. Therefore, agencies’ decision have had a significant impact on the market and gave way to this negative scenario of the situation development.
In this context, a demonstrative example is the situation in Ukraine which – though not a Eurozone member – is also experiencing a negative pressure on the part of the Big Tree. The sovereign rating downgrading in the end of 2011 was caused – among other factors – by freezing crediting support of Ukraine by the IMF. This decision resulted in the rise of credit cost for the country and its companies on foreign markets, as well as decline of the foreign loan market which has only enhanced the impact of termination of crediting support from this international donor.
Another example could be “incorrect” publications of statements about the economic deterioration of Europe’s “locomotive” countries such as Finland which has had a negative impact on the European market and obvious political effect.
According to our estimations, activities carried on by rating agencies in Europe today only facilitate crisis aggravation in the Eurozone and the collapse of the latter, as well as downfall of the European trade system. Because the collapse of the Eurozone will result in the enhancement of the protectionism on the European market and disturbance of the existing trade relations. Under the condition of the European sovereign debt crisis the downgrading of sovereign ratings leads to the increase of sovereign bonds profitability and reduction of volumes of the raised capital which impairs the recovery of the national economy and enhances the imbalance within the Eurozone. The fact that the rating of Greece and several other countries having issues with the public debt is approaching the default indicator is another factor posing the risk of undermining the Eurozone.
Global monopolization of the market by three agencies has resulted in politicizing the whole risk evaluation process and today is one of the threats for the stability of the European financial sector. Activities of the European rating agencies during the last year show the change of their functions from expert assessment to political influence. This opinion was supported by the European Central Bank Board member Christian Noyer. According to The New York Times earlier publications, there were two famous superpowers in the post-Cold War world: the United States and Moody’s. While the U.S. can destroy almost any enemy by military means, Moody’s is able to destroy any country through financial means, just setting the lowest rating.
We believe that the future of the European financial and economic system depends directly on the European Union’s ability to take measures on the creation of the European Rating Agency. This will have a positive influence on the development of the regional market and loosen the tensions and process politicizing. Therefore, the EU will get an objective risk evaluation instrument meeting the European standards and taking into consideration the geoeconomic interests of Europe. Moreover, market stabilization will enhance the efficiency of the anti-crisis steps of the Eurozone governments, including by means of recovery of the economic corporate sector. We believe that such institution could as well increase the assessment objectiveness in those European countries that are not members of the European Union and the Eurozone.
On the Role of Sovereign Wealth Funds (SWFs) in Supporting a Green Recovery
Perhaps one of the few areas where a consensus is crystallizing across the major powers of the global economy is on the urgency of advancing the green environmental agendas and reducing the carbon emissions. Global institutions such as the IMF are emphasizing the need for a green recovery to take hold in the world economy as the global community emerges from one of the starkest crises in the past century. The world’s sovereign wealth funds as a powerful force in international financial markets could play a vital role in advancing green projects as well as green finance. This is particularly relevant for Russia, where the National Wellbeing Fund could be partly invested into green financial instruments.
At this stage there is a number of global networks and initiatives that bring together the world’s largest institutional investors, including sovereign wealth funds, to drive the green investment agenda. These include European Long Term Investors, the Institutional Group on Climate Change and the Network on Climate Risk. Some of the wealth funds from the Middle East, including the Abu Dhabi Investment Authority, the Kuwait Investment Authority, the Qatar Investment Authority and the Public Investment Fund of Saudi Arabia, are signatories to the One Planet SWF Framework. The meeting held by the International Forum of Sovereign Wealth Funds in 2016 “participants highlighted that SWFs are particularly well-positioned to become trailblazers in green investment”.
Recent data and surveys reveal a growing integration of the green agenda into the decision-making and strategies of the world’s sovereign wealth funds. These were the findings of an inaugural survey of 34 sovereign wealth funds, representing 43% of the world’s sovereign funds, conducted in September by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Funds .
The survey reveals that climate-related strategies represent more than 10% of portfolios for 30% of responding wealth funds. The survey also found that these funds made 18 investments in agriculture technology, forestry and renewables opportunities in 2020 at a total value of $2 billion, up from eight investments valued at $324 million in 2015. Overall, according to the survey “sovereign wealth funds have invested more than $5 billion in agritech, forestry and renewables opportunities over the past five years as part of an increased push toward climate change-aware investing”.
Just over a third of responding funds (36%) have a formal climate-change strategy in place, with 55% of these funds adopting the policies since 2015 and 30% since 2018.
The survey came up with the following recommendations to wealth funds based on the survey findings:
· to adopt and implement climate-related strategies;
· to seek appropriate talent and expertise;
· to explore board member and executive education;
· to use metrics to show not only climate impact but also comparable returns and risk reduction;
· to communicate to all stakeholders the strategic importance of climate change;
· to partner with peers and international initiatives to share experience and generate greater leadership from within the wealth fund network.
The latter recommendation dovetails the recent Valdai Club initiative to enhance cooperation among the largest sovereign wealth funds against the backdrop of the Covid pandemic. In particular, in 2020 the Valdai Club together with Shafi Aldamer and Curran Flynn from King Fahd University of Oil and Minerals advanced the proposal to create a platform for the sovereign wealth funds (SWFs) of G20 countries to boost long-term cooperation, direct investments, and the formation of bilateral/trilateral/multilateral investment accords. The findings of this policy brief were included in the T20 communiqué, which encourages the G20 to promote “the creation of a platform that would bring together the sovereign wealth funds of its members, possibly in coordination with the International Forum of Sovereign Wealth Funds.”
Such a platform would encourage the G20 states to strengthen their economic cooperation, bolster mutual interests, improve multilateralism, and develop opportunities for their SWFs. Additionally, it would act as an emergency tool in easing the impact of a global crisis, such as the current COVID-19 pandemic, as it can be employed as an anti-crisis measure via the investments of the G20 states’ SWFs. One important venue of cooperation for such a platform for sovereign wealth funds could be the elaboration of green investing principles and benchmarks for the major sovereign wealth funds, which in turn would support the advancement of a green recovery in the global economy in the aftermath of the Covid pandemic.
As regards Russia’s sovereign wealth funds, most notably the National Wellbeing Fund (NWF), which by Q1 2021 has accumulated more than USD 180 bn in overall resources there may be a case for investing part of the liquid reserve into green instruments, including sovereign green bonds. In particular, the investment guidelines for the NWF may involve a formal target on the share of green assets in the Fund’s portfolio. These in turn may include corporate and sovereign green bonds from advanced economies as well as an allocation reserved for Russia’s corporate and sovereign green bonds. The latter would potentially deliver a significant boost to the development of Russia’s green bond market. Currently green bonds account for just 1.5% of total corporate bonds outstanding in Russia and the emergence of sizeable demand from Russia’s sovereign wealth fund would raise the potential growth for this very important market segment.
From our partner RIAC
5 things you should know about the state of the global economy
Is this the year we overcome the global economic crisis caused by the pandemic? Are our jobs in danger? Who has lost the most in the crisis and what can be done to recover? As the UN Department of Social and Economic Affairs (DESA) prepares to launch the mid-year update of the 2021 World Economic Situation and Prospects (WESP) report, here are five things you need to know about the state of the global economy.
1) US and China bounce back, but a slow recovery for developing countries
While economic output in the United States and China is expected to grow robustly and lift global growth, many developing economies are not expected to return to pre-pandemic output levels anytime soon. The pandemic is far from over for most developing countries where vaccination is advancing slowly, and fiscal pressures have intensified.
2) The situation of the most vulnerable has become even more precarious
Lockdowns and social distancing measures resulted in large job losses in contact-intensive and labour-intensive service sectors, which predominantly employ women. The pandemic has also exposed the vulnerability of informal employment, which is the main source of jobs in many countries and which offers less job security, social protection and access to healthcare.
3) Global trade recovery is strong, particularly in Asia
Merchandise trade has already surpassed pre-pandemic levels, buoyed by strong demand for electrical and electronic equipment, personal protective equipment (PPE) and other manufactured goods. Trade in services remains constrained by restrictions on international travel. While exports from Asian economies have soared, exports from Africa, Western Asia, and the Commonwealth of Independent States has stalled.
4) The COVID-19 crisis has inflicted more harm on women and girls
This crisis disproportionately affected women, who suffered significant job and income losses, contributing to the worsening of gender poverty gaps. Burdened by increased home care duties, many girls and women gave up on schools, and the workforce altogether. Returning to school and work might take longer or may not happen at all for many of them, further widening gender gaps in education, income and wealth.
5) Countries need to do more to address the uneven impact of the COVID-19 crisis
There is an urgent need for countries to formulate better targeted and gender-sensitive policies to drive a more resilient and inclusive recovery from the crisis. Though on the frontlines of the pandemic, women have been under-represented in pandemic related decision-making and economic policy responses. The severe and disproportionate impact of the pandemic on women and girls call for more targeted policy and support measures for women and girls, not only to accelerate the recovery but also to ensure that the recovery is inclusive and resilient.
Biden’s shift from neo-liberal economic model
Mercantilism; which was the ‘Hall of Fame’ from 15th-18th Century had emerged from the decaying of feudal economic system in Europe. It was initially started from the Mediterranean trade in bullion on the cities like Venice, Genoa and Pisa. In the course of history, this idea was challenged by the writings of John Lock’s Second Treatise of Government and A Letter Concerning Toleration with larger than life of Adam Smith’s, The Wealth of Nations of 1776—gave rise to Classical Liberalism. This idea also even started shaking during the 1930s followed by the Great Depression. The Keynesian economic model came to escape the consequences of this Great economic shortfall till 1970s. Afterwards, Neo-liberalism was the ‘lifeline of the global economy’. Soon, this also diminished from the rapid financialization and globalization process of 1990s. The financialization, which was the ‘Heart of the Town’ till 2008; devastated by the 2008 financial crisis. The US government rescued this crisis via Dodd-Frank Act and greater stimulus package to economy. And, lastly current COVID-19 pandemic crisis is much more powerful than that of 1930’s Great Depression or any other crisis in observable history. To cope of with this crisis, Biden administration is rescuing the economy with comprehensive stimulus package by challenging the internationally accepted fundamental economic model.
Today, Keynesian economic model is taking shape in the US. The central theme of Keynesian theory —measured as the sum of the spending by households, business, and the government; which Biden is doing so by $640 billion housing plans over 10 years to provide affordable, safe housing for all individuals, by increasing tax for corporations and high-income filers by $3.3 trillion. In addition to this, he is creating massive government spending ($2trillion) on infrastructure for job creation, spending on public goods( health care, education, job, security, child care), and less interested in fiscal deficits and his more critical view on an unregulated market controlled by big corporations. These steps of Biden correlated with that of the Keynesian economic model (the model which remained ‘talk of the town’ from WWII to the 1970s). Following this, new Washington Consensus is born against the low levels of government spending, minimizing fiscal deficits, nonintervention, and deregulation in the market, and liberations of trade and foreign investment. All these ‘values’ are undermined by the current Biden administration.
The world economy is in the same historical place as that of WWII followed by the great depression comparing today of the COVID-19 pandemic. So, whenever there is an unprecedented shock on capitalism; it has always transformed itself within. From the Mercantilism(16th-18th Century), Classical liberalism, Keynesian/ neoliberalism, and financialization–capitalism has survived astonishingly. This new ‘Bidenomics’ will behave as an influential replica in the other parts of the world as the land, labor, capital, and productivity is impacted immensely by the COVID-19 pandemic. This succeeding market intervention by the US government could replicate in other international liberalism followers nations of the world. The era of government-led intervention in the market started.
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