Financial Crisis, Cooperation and a Global New Deal?

A couple of days ago I asked if the current financial crisis was an opportunity for international law or at least international cooperation. See https://fletcherfila.wordpress.com/2008/10/06/financial-crisis-an-opportunity-for-international-law/.

The IMF has just backed a G-7 plan to stabilize markets. This plan apparently has the support of G-20 developing countries who are also feeling the effects of the market slump. Individual G-7 countries are preparing bailout packages similar to the same in US and UK.

 

See:-http://www.reuters.com/article/topNews/idUSTRE49A36O20081012?feedType=RSS&feedName=topNews&pageNumber=2&virtualBrandChannel=10338&sp=true; and http://www.reuters.com/article/topNews/idUSTRE49A43L20081012?feedType=RSS&feedName=topNews&sp=true.

 

It may be easier to be more cynical than optimistic of this nascent cooperation. As noted, “(t)he G7 rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no specifics on collective action.”

 

However, there may be a more fundamental obstacle than vagueness at hand. As we witnessed this week, bailout does not directly equate to market confidence. However, it appears to be the fundamental tool in cleaning this mess. There is a limited amount of money available in US, UK and German, etc, etc treasuries. If this round of bailouts fail, what next?

 

Do they start another round of bailouts? And with whose money? At present, we may be able to identify where pools of money are being stashed globally. China and Singapore and their foreign exchange reserves, petro-dollars in petrochemical countries, perhaps? 

 

God forbid, will we come to a point where international bailouts are necessary? If so, what are the prospects for cooperation then? I bet on bleak but who am I to say? More interestingly, if cooperation, to that extent, is possible, what terms will it be on? Will there be a new global financial deal of the magnitude of Bretton Woods (or bigger)?

 

Of course, this remains merely speculation; a flight of fantasy. But do we want to take it?

 

Financial Crisis: An Opportunity for International Law?

Apart from this year’s US elections, the looming financial crisis has dominated most of the recent headlines. Or have I been too bearish? Unlikely. Most commentators agree that the scale and manner in which these financial institutions have collapsed is unprecedented. Still, Wall Street continues to break records as share prices fell again today.

Integrated financial markets mean that America‘s bears will inevitably (or have already) cross(ed) the Atlantic and Pacific Oceans to do damage to other markets. Recently, the European Central Bank announced that it will not be able to fund a bail out in the same manner that its US counterpart plans to. Asia looks West and remembers its 1997-98 financial crisis and contemplates the effects of the forecasted slow down in China‘s economy.

The pertinent question for international lawyers:- Can international law provide a solution?

In my mind, international law in this field is caught between two competing policies. On one hand, there is a danger that looming financial crisis will prompt domestic jurisdictions into over-regulation. On the other hand, as demonstrated above, there is a real need for states to protect their capital markets from “knock-on” effects of another state’s financial crisis. The IMF and World Bank have been the traditional institutions in the business of balancing these objectives. However, the old debate between “conditionality” and “sovereignty” may prevent them from making substantial headway.

 

So, the first issue to resolve is perhaps, what kind of cooperation is appropriate to prevent or mitigate the “domino effects” of financial crisis? The second issue is, what kind of incentive structures should be used to achieve that cooperation?

 

Just to throw some talking points out there, international investment law may be a good place to start a discussion on this. Does international investment law, as it stands, provide an efficient way of deciding how far a state may regulate its securities markets and portfolio investments? How many BITs provide for protection of portfolio investments? Perhaps, we may even look at WTO law’s mechanisms for invocation of “safeguards” as a framework for when a state may impose more protectionist capital controls.

 

Your thoughts, criticisms, comments on this are appreciated.

 

P.S. Some interesting work has been done on financial crises in the wake of financial crises in Latin America and Asia. See e.g. Douglas Arner et al, “The Global Credit Crunch and Securitization in East Asia” (2008) 3(3) Capital Markets Law Journal 291.