As the years go by and new countries find themselves greatly affected by the crisis, a handful of them emerge as having resisted the extreme shock of global financial instability.
Here’s a list of economies whose financial system prevailed during the crisis
An early survivor was the Cedar Republic, defending its severe measures on liquidity against all temptations of more profit from speculation. Tight measures on financial institutions were implemented early on before 2007 and kept the country safe from both liquidity and credit risks. The plan of Riad Salameh, Lebanon’s Central Bank Governor, was put in place to respond to the post-civil war inflation that reached 100% per year back in the 1990s. Bringing back confidence became a major challenge for the financial institutions and called for stability above all.
Salameh was notably highly critical of the massive spike of risky assets in Western banks portfolios. Consequently, comparing Basel I’s obligation of a 4% base on risk-weighted assets convertible in cash, Lebanon required nearly 30% of a bank’s total assets. And what’s more, any borrower had to come up with a personal guarantee of 40% of equity already available on the total amount needed!
The medicine seemed hard to swallow, but Lebanon recorded a round 7% GDP growth for 2010, and a relatively stable inflation at 4.8%. Of course, Lebanon wasn’t closed from foreign incursion. The stock market suffered major blows in 2008 and 2009, and the country’s inflation is still very dependent on oil and food prices, but it is safe to assess that the tenacious financial system remarkably eroded the crisis’ worst consequences. The last challenge of Lebanon’s monetary policy has been the control of the public debt (reaching 135% in 2010), that has been stable there for about 5 years, and was largely allocated during the 1990s and early 2000s for reconstruction efforts.
Highly dependent on consumer indexes in Western countries, China feared a slowdown of its booming economy in 2008 and onwards. A few things happened that the government did not expect. First, the demand in Chinese products did not slow down as much as expected: it just became relatively unstable. Second, China needed a slowdown in order to curb its rampant inflation.
China’s financial system is among the most centralised in the world. Restrictions on capital outflows were implemented, responding appropriately to the domestic development challenge as Chinese citizens and firms were urged to invest within the country. Reports from the Bank of China also showed a careful, small investment in mortgage-backed securities while investing massively in safe Treasury bonds during 2007 to 2009.
There is a wide range of reasons why many think China could not make this list. Among them was the significant drop in the Shanghai Stock Exchange index in 2008 (by about 60% year-to-year), the real estate bubble that threatened coastal cities, and the strong decline of FDIs (foreign direct investments). However, 2010 and 2011 saw the effects of a process of reforms that started in 2008. As the bureaucracy saw its activity plummeting, the response was quick, and China built trusts for massive infrastructure projects in order to maintain its economy on the long-term, fostering local entrepreneurship. What is most relevant here is that China fundamentally changed its economic policies during the period 2008 and 2009, in order to better assess risk and gain more from their quasi-monopoly on a wide range of sectors in the foreign trade. And it’s working.
The financial system stayed relatively the same, but appeared more aggressive as we approached the years 2010 and 2011. The US government owed about one trillion dollars to China in 2011, and made considerable investments in sectors in crisis throughout the world.
Why include Australia? Australia, whose market essentially mimicked the moves of London and New-York; Australia, which constantly lacks capital flow, and shelters a very active and unregulated derivatives market. Yes, this Australia. But it is also the OECD member that absorbed the most the effects on its financial institutions.
The Labour government led by Kevin Rudd was at first timid. Trying to attribute the first shocks on inflation (at the time, these changes only represented an increased use of more complicated derivatives to short-sell and a shortage in the overnight market), the government became heavily criticised for its apparent inaction. The fact is: the Reserve Bank of Australia (RBA) did an amazing job. The surprise came along 2007 and 2008 when it was reported that Australia would have a relatively stable growth. Economists agreed on the fact that the RBA largely avoided liquidity risks by making exchange settlement funds attractive. Confidence was important, and Rudd proved cautious when he decided to insure all bank deposits and firms up to $1 million per individual and firm in the eventuality of collapse of any financial institutions.
The sub-prime issue was fortunately not exported to Australia. Banks generally refused to allocate them and rather preferred to contract longer term mortgage-backed securities. The housing bubble did not burst, and the real estate market was dubbed as one of the strongest in the world.
Australia, was also the least affected developed economy, relying on its mining industry and the growing demand from China, its relatively small population of 22 million virtually guaranteeing full-employment for all. In fact, critics who saw the upsurge in deficit were surprised to learn these were mostly loans to private sectors, especially mining. So even if the ‘lucky country’ considers himself being hit, it is no comparison with its OECD partners.
The one that probably came up in your head when you clicked on this page. Having experienced multiple crises across its recent history, the goal for Lula’s government was cautiousness. Starting to review different expansion plans abroad by Brazil’s major corporations, uncertainty was omnipresent, but leaders had confidence. The successes of these direct investments to both domestic and foreign-based Brazilian companies finally confirmed Brazil’s safe position in its business performance. The key was both to foster its partnership with developing countries (notably the other BRIC – Brazil, Russia, India, China – economies) and to improve the competitiveness of its companies based in the US and Europe while maintaining the image of a country that was all but China. Business is flourishing and the growing demand of nearly 200 million people is important when considering the potential that Brazil possesses in the short and long term.
It was again the change in capital requirements in mid-2007 that prevented the crisis from spreading to Brazil’s financial institutions. The Brazilian Tesouro reacted to the falling allowances of credit by reducing the reserve requirements this time, but coupled this action by easing the recourse to repurchase agreements for financial institutions. The fact is that commercial banks understood the risks of not having enough liquidity in a distrustful environment, and the liquidity index showed well above the ‘Estimated Liquidity Need in Stress Situations’ 2008 and 2009. For Brazil, as it was true for Lebanon, the key to financial stability was increased capital regulation, along with a heightened attention in credit requirements played by commercial banks. Furthermore, Brazil still enjoyed a relentless growth in its raw materials exports and its services, increasingly defining the country as one of the leaders of tomorrow. Ordem e Progresso.
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