Now, it really is a party – and Adam
Feibelman joins the fun from Tulane law school. Not to be outdone by Anna,
Lee,
and Mitu,
his post comes complete with photos
of the Greek protest dog that has been seen at nearly every demonstration
in Athens over the last two years, including the recent
protests and riots against austerity measures. But Adam’s post also follows
a different tack from our prior posts on this crisis, which have largely
focused on the pros
and cons of the bailout, whether Greece should restructure
or pay up, and how the Greek
bond contract terms compare to those of other sovereigns who have
restructured. But Adam contends that
this discussion misses a crucial point: the looming sovereign debt and currency
crises highlight weak spots in the nascent international financial regulatory
apparatus.
First and foremost, the Greek
protest dog:
in on Greece. Having devoured the excellent
commentary by Kim (most recently here,
here
and here),
Anna
Gelpern, Lee Buchheit
and Mitu Gulati, the various reliable financial writers, and the very
spotty financial reporting in mainstream news, I find myself a bit surprised by
the scope of the discussion. In
earlier phases of the ongoing global financial crisis, a significant amount of commentary
was directed at the need for reform of the relevant regulatory landscape. In fact, the rush toward regulatory reform at that time
seemed disconcerting. Now, hardly anybody seems to be
interested in what the Greek debacle and the Euro crisis might reveal about
financial regulation, especially regulation of the international monetary
system.
In fact, whatever their causes and solutions, the looming
sovereign debt and currency crises highlight some festering weak spots in the
nascent international financial regulatory apparatus, and they suggest some
aspects in need of innovation and/or reform. The current phase of crisis underscores the potential
benefits of a more robust form of systemic, multilateral surveillance and
regulation of monetary affairs. But
it also underscores the challenges that policymakers will face in designing an
effective multilateral regulatory apparatus for the global monetary system.
It is becoming increasingly clear that a significant part of
what made the Greek situation so difficult to avert, and now makes it so
difficult to resolve, is Greece’s membership in the European Monetary Union and
resulting triangular relationship between Greece, the International Monetary
Fund, and the European Monetary Union.
While the Fund has long had formal authority to conduct surveillance of
Greece and to enforce Greece’s obligations with respect to exchange rate
policies and external stability, much of the relevant policymaking affecting
Greece is now done by regional institutions, over which the Fund has no formal
authority.
This scheme of overlapping regulatory domains poses many
hazards. It can dilute
accountability for individual institutions, which makes it dangerously easy for
well-recognized problems (like, say, atrocious data reporting) to go
unaddressed. Perhaps more
troubling, overlapping obligations and responsibility can pull in different
directions. As a number of
commentators have suggested, it appears that the EU is much more reluctant to
contemplate debt restructuring for Greece than is the IMF. If so, this may provide a rather stark
example of a significant tension between the economic and political interests
of the Euro zone and those of the rest of the world in promoting stability of
financial markets in general and the international monetary system in
particular. It at least
illustrates the potential for conflicting regulatory pulls.
Such tensions are not easily resolved, and they may prove
politically intractable. Yet
effective regulation of the international monetary system requires much clearer
articulation of priorities and authority.
One of the express purposes of the Fund is to “oversee the international
monetary system to ensure its effective operation.” Throughout most of its history, the Fund has primarily done
this through its bilateral surveillance of its individual members. In recent years, however, the Fund and
many of its members have realized that it needs to shift at least some of its
activity toward a more robust multilateral surveillance and to become more
effective in promoting systemic monetary stability. But what should this entail?
At the very least, membership in the Fund should entail some
obligation to avoid creating or exacerbating vulnerabilities in the global
monetary system (this means you, U.S. and China). But the current crisis in Greece and the Euro zone suggest
that there may be a need for a more aggressive form of multilateralism. It suggests, for example, that the Fund
should engage more directly with non-member institutions – like, say, the ECB –
that exert significant influence over Fund members and, thereby, upon the
international monetary system. Given
the political economy of the Fund and its ongoing challenges to its legitimacy,
it seems unlikely that there is much appetite for such far-reaching
reformulation of the Fund’s mandate. If the EU is increasingly perceived to be gambling with
global economic and financial security to preserve itself, however, and if the
Fund is correspondingly viewed as the more reasonable and realistic international
actor, this appetite may grow.
One final point: The current debate over bailout versus
restructuring should also reinvigorate consideration of a sovereign debt
restructuring mechanism (which presumably would fall within the Fund’s
domain). One of the potential benefits
of an SDRM that tends to be underappreciated (and controversial) is that it
could – depending on how it is designed – generate relatively objective criteria
as to when restructuring is warranted, perhaps relieving some of the political
obstacles that are so easily discernable at present.
— Adam Feibelman
Related
Posts:
Γκελπερν
v. Gelpern: Unformidable Opponent, Greek Edition
Should
Greece Restructure? The Debate Continues
Buchheit and Gulati on How To Restructure
Greek Debt
When Will Greece Restructure?
Greece Gets Bailout: Are We Done Now?
The Greek Bailout: War Versus Dishonor
What Do Those Greek Debt Contracts Say?
Greece: Argentina, Uruguay, or Twin Engine
Plane?
Blame It On Derivatives, Blame it On Goldman
Sachs, Blame It On the Nazis. But Don’t Blame the Greek Crisis on Greece
The Greek Crisis: Economic Meltdown or Mental
One?
The Modern Greek Drama: Comedy, Tragedy, or
Both?
The Modern Greek Drama, Part 2
Verge of the Unböring (The Modern Greek
Drama, Part 3)
Is 2010 The Year of Odious Sovereign
Defaults?