Speech transcript: Opening remarks by EBRD Chief Economist Erik Berglof on 19 May 2011

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Speech delivered by: Erik Berglof
Date: 19 May 2011

Your excellencies, ladies and gentlemen,

Please let me welcome you on behalf of the EBRD. We are very grateful to the Kazakh government for making this magnificent architectonic masterpiece available to us. It truly takes your breath away. It is, of course, somewhat disconcerting to contemplate the global financial system from the top of a pyramid… But in fact, I can think of no better place. Here at summit of the pyramid the air is thin and the light is bright. When we look down on creation, we may miss some of its nuances and imperfections, but we see the big picture - the complex interlinkages and the vastness of the system. And the exquisiteness of the architecture makes us think about what holds up the system, but also about its structural weaknesses.

Had we been spending more time up here at the summit perhaps we would have caught earlier some of the vulnerabilities that turned out to be so disastrous in the global financial crisis. We could have seen better the consequences of the ebbs and flows of international capital. We would have understood better the significance of the flows from Western to Eastern Europe and from parts of Asia to the United States – or the flows within the European Union from core to periphery. We would have seen more clearly the void at the core of the regulatory and supervisory structure that was supposed to support the complex web of cross-border banking in Central and Eastern Europe. We would perhaps have reacted earlier to the massive lending by Russian banks from international wholesale markets or to the rapid external expansion of the Kazakh banking system. We would probably also have been more attentive to the massive exposures in foreign, often exotic, currencies building up in the banking systems, and in households and corporations throughout the EBRD region.

The topic of this conference is about how to build local currency markets – and how we can reduce some of the vulnerabilities of the global financial system. At the EBRD we came to this, not from our vantage point up here at the summit, but from our presence on the ground. We saw the thinness of these markets in our daily struggle to convince lenders and borrowers to use local currency – and when we try to issue local currency bonds to be able to provide local currency finance to our clients. It is through these often frustrating experiences that we have come to realise that we must also address the underlying causes.

In our work to foster these markets we have come to understand that we must combine the view from the summit and the down-to-earth experience from transacting in these markets. We must understand the magnitude and structure of capital flows, how they shape vulnerabilities, and what specific policies, if any, we may use to control them. We must unveil the underlying reasons for global and regional imbalances, and understand how the macroeconomic frameworks shape financing patterns, but we must also identify the specific structural weaknesses in regulation and supervision that prevents these markets from growing. We must also look at what is missing in the plumbing – what specific legal changes are needed, how basic reference rates can be established and how the human capital can be attracted to make these markets function efficiently.

We have also come to realise that we cannot have the same impact on our own. Instead, we have joined forces with the IMF and World Bank in a joint initiative to develop local currency and capital markets. But most of all, of course, we need the collaboration from the local authorities. The first concrete output from this effort - three joint country assessments of local currency and local capital markets - will be presented at a panel of the Annual Meeting later this week. Ultimately, these country assessments will have commitments from the three international financial institutions and from the authorities for what each party can do to foster the development of local currency and capital markets. We are also working together with central banks and ministries of finance, and with the private sector in our countries of operation, including here in Kazakhstan, on new experiments to kick-start these markets in new and interesting ways. We hope to discuss these experiments during the conference and compare our experiences so far with those of other parts of the world and with those from different episodes in the evolution of the global financial system. We are very grateful to the excellent collaboration we have had with our co-organisers the Reinventing Bretton Woods Committee and the secretariat of the French G20 Presidency. Together we have been able to attract this interesting group of academic experts and policymakers. Let me also take this opportunity to thank all those in the Annual Meetings team and our Kazakh hosts who have made the preparations for this meeting. I am sure we will have an unforgettable experience here at the top of the pyramid and I am convinced that its architecture will inspire new insights and new solutions.

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