CONCEPTO DE LA NULIDAD DEL NEGOCIO JURÍDICO

CRISES?

Some similarities of today's crisis with earlier financial crises are notable. Among economists a consensus seems to emerge on the many parallels including the root causes of the crisis. (133_{) These}

include the build-up of a bubble in asset prices (housing and equity) fuelled by an insufficiently managed financial liberalisation. While financial liberalisation took a different form in today's crisis than in the past, the impacts were very similar. In contrast to capital account liberalisation or loosening of banking regulations, in the run-up to today's crisis financial innovation occurred through the complex bundling and spreading of debt. But

(133_{) See, for example, Reinhart and Rogoff (2008 a,b,c), Bordo}

Part III The Fiscal Costs of Financial Crises: Past Evidence and Implications for Today's Crisis

both types of financial liberalisation resulted in a build-up of excessive risk.

But past crises experience does not necessarily link globalisation with more costly financial crises. On the one hand, closer financial and real integration appears to be associated with a greater prevalence of financial crises (Box III.6.1). There is an increasing literature on the potential spillover effects of banking and equity market turmoil, in a world of more closely integrated good, services and capital markets (e.g., Kaminsky and Reinhart, 2000; van Rijckeghem and Weder, 2001). In fact, with tighter global economic and financial integration, financial crises have become more frequent (e.g., Reinhart and Rogoff, 2008a). This has also implied higher fiscal losses for the world as a whole. On the other hand, however, the fiscal costs for individual countries to rehabilitate their banking systems do not seem to have significantly increased with greater globalisation (Box III.6.1). However, the global nature and severity of today's

crisis is unprecedented. Never have financial markets been so closely integrated at the outbreak of a crisis and, except for the Great Depression, the shockwave has never emanated from the largest world economy. By end-2008, more than two thirds of the world's largest economies (measured in per cent of world GDP) were experiencing a systemic banking crisis, as reflected in the issuance of blanket guarantees, the injection of public capital into their banking systems and IMF- supported programs (see Section III.6.1 for more details on the rehabilitation measures taken in the EU Member States). At the same time, the economic outlook for the advanced economies has been the bleakest since World War II (Graph III.6.2). (134₎

(134_{) While some parallels to the Great Depression can be}

drawn, the current crisis distinguishes itself from that period particularly as regards the monetary and fiscal policy stimulus and the better macroeconomic starting positions (IMF, 2009b).

Box III.6.1:Financial crises in the global economy

One major striking aspect of the current financial crisis is its global and fast-spreading nature. Contagion has already been experienced in the past (often coupled with currency crises) and was found to be linked to more closely integrated goods, services and capital markets (e.g. Kaminsky and Reinhart, 2000 and van Rijckeghem and Weder, 2001). However, the diffusion of the current financial crisis to countries that initially looked relatively immune from the US subprime mortgage market failures has taken place at an unprecedented pace (e.g. Frank et al., 2008). This may partly be explained by the large degree of financial integration. In fact, with tighter global economic and financial integration, the spreading of financial crises has become more prevalent. Reinhart and Rogoff (2008a) provide descriptive evidence on this, by plotting a

measure of the frequency of financial crises against a measure of international capital flows since the 19th

century and observe that the two variables are highly correlated. However, part of the apparent correlation is driven by the two world wars during which capital flows collapsed and financial crises were not accounted for. In order to check whether the relationship between globalisation and financial crises holds independently of major shocks through wars, it may be more appropriate to consider a shorter time span. This is done in Graph 1 below, which suggests that the pace of economic and financial integration and the share of countries in crisis have been correlated over the period 1973-2004. The measure of global financial integration makes use of the data provided by Milesi-Ferretti and Lane (2007a) and combines information on capital, FDI and trade flows across countries.

Graph 1: Number of countries in financial crisis and pace of global financial integration (1973-2004)

0 0.05 0.1 0.15 0.2 0.25 0.3 1973 19 75 197 7 197 9 1981 1983 1985 1987 19 89 19 91 19 93 199 5 199 7 1999 2001 2003 -0 .05 0 0.05 0.1 0.15 0.2 0.25

Proportion of countries in financial crisis (% of total; LHS) 1/ Pace of f inancial integration (% change; 3-year moving average; RHS)

Notes :1/ Bas ed on the sample of countries us ed for the analy sis in this paper. GDP-weighted averages .

2/ Financ ial integration is m easured as the ratio of total external financ ial as sets and liabilities to GDP (data are from M iles i-Ferretti and Lane (2007) until 2004 and compris e foreign direc t inves tment, portfolio equity investment, offic ial reserves and ex ternal debt). The pace of global financial integration is meas ured as the three-y ear moving average of the annual percent change of this indic ator.

Sourc es : Calculations bas ed on Milesi-Ferretti and Lane (2007) and Laeven and Valencia (2008).

Has globalisation also been associated with more costly banking crises in terms of the fiscal outlays for

rehabilitating the banking sector? (1_{) This question can be considered from two angles. On the one hand, a}

greater share of countries in financial crisis could raise the fiscal cost for the world economy. On the other hand, the question arises as to whether global spillovers have led to higher fiscal costs for countries considered individually. A simple bi-variate analysis indicates while the overall costs for the global economy have increased as crises have become more frequent (not shown here), the average net direct fiscal

(1_{) Indeed, some authors have argued that the growing integration of the world economy may lead governments to}

increase their size in order to hedge against global systemic shocks to protect their citizens against the adverse consequences of these shocks (see in particular Rodrik, 1998 and Alesina and Spolaore, 2003).

Part III The Fiscal Costs of Financial Crises: Past Evidence and Implications for Today's Crisis

The global nature of the crisis is limiting today's response options compared to those available in other crises episodes. The limitations relate to the real and the financial sector. An export-led recovery is compromised, at least in the short run, as the world economy is in a slump, unlike in previous local and regional crises episodes (Graph III.6.2). Related to that, the exchange rate is generally not available as an adjustment tool (and is excluded by definition within the euro area). This could, on the one hand, complicate the recovery process which in previous crises has frequently been helped by a boost of external competitiveness through a real depreciation or a strong world economy (Graph III.6.3 and Table III.6.4). On the other hand, the denomination of public debt in national currency for euro-area countries acts as a stabilising factor compared to countries indebted to a large extent in foreign currency which entails the risk of debt explosion in case of sharp depreciation of national currencies.

The international dimension of the crisis also reduces the potential involvement of private foreign investors in contributing to the rehabilitation of the banking system. In the past, in more than half of financial crises impaired assets were sold to foreigners (see Annex Table III.2). During the current crisis, initially sovereign wealth funds had taken on this role with a first round of capital injections but foreign investment has petered out as the crisis has spread around the world. Both of these limitations in policy responses flag that today's financial crisis could imply a bigger burden on public finances, directly through the bank restructuring efforts and indirectly through the economic slump and its impact on the budget.

Box (continued)

costs for each individual country have not been closely linked to the pace of financial integration and the number of crises (Graph 2). The same relation holds broadly for output costs.

The evidence provided here suggest that: (i) increased globalisation has gone hand in hand with a greater prevalence of systemic financial crises, but (ii) this was not associated with significantly higher output cost or fiscal losses experienced on average by a country in crisis.

Graph 2: Number of countries in financial crisis and net direct fiscal costs and output losses (1973-2004) 0 0.05 0.1 0.15 0.2 0.25 0.3 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 0 0.001 0.002 0.003 0.004 0.005 0.006

Proportion of countries in financial crisis (% of total; LHS) 2/ Net direct fiscal costs (RHS) 3/

Output loss (RHS) 4/

Notes: 1/ Based on the sample of countries used for the analysis in this paper. GDP-weighted averages. 2/ Based on data are from Milesi-Ferretti and Lane (2007). See footnote 2/ in Graph 1 in this box.

3/ Average GDP-weighted net direct fiscal costs in percent of GDP. Net direct fiscal costs are from Laeven and Valencia. See Appendix Table 1 for definition and data.

4/ Average GDP-weighted output loss. Output loss data are from Laeven and Valencia. See Appendix Table 1 for definition and data.

Graph III.6.2: World real GDP growth during major banking crises -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 Nordic crisis (1991- 94) Asian crisis (1997- 2002) Today's crisis (2008- 10) 1/ 1974-75 1980-82 1991-93 2001-02 (% c hange) World Advanced economies

Banking crises Recessions in

advanced economies

Notes: 1/ Projections IMF WEO Update, March 2009.

Source: IMF International Financial Statistics.

Graph III.6.3: Real effective exchange rate during banking crises

(% change) -35 -30 -25 -20 -15 -10 -5 0 5 10 15 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 EU-27 2/ EU-15 3/

Big 5 industrial country-crises 4/ Big 8 emerging market-crises 5/ TOTAL 6/

Notes: 1/ Based on 49 crises episodes as shown in Annex Table III.1. Unweighted country averages. t = start of the crisis.

2/ Includes crisis episodes in Bulgaria, Czech Republic, Finland, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, and Sweden. For new Member States data from 1991. 3/ Includes crises episodes in Finland and Sweden.

4/ Includes crisis episodes in Finland, Sweden, Norway and Japan. No data for Spain available.

5/ Includes Argentina (2001), Indonesia, Korea, Malaysia, Mexico (1994), Philippines, Thailand and Turkey (2000).

Source: Calculations based on IMF International Financial Statistics.

6.3. HOW MUCH CAN PAST CRISES REALLY