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To paraphrase Woody Allen, if the IMF didn’t exist, perhaps it would be necessary to invent it. Few doubt that we need it, or something like it. This report looks at the IMF’s evolving role five years on from the financial crisis alongside that of the development finance bodies such as the World Bank Group and regional development banks, and considers whether these institutions are adapting to the world’s new financial architecture – or simply trying to adapt that architecture to suit their outlook.
Considerable disenchantment exists among emerging economies over the perceived favourable treatment of Europe by an institution dominated by European and US executives. This has been compounded by a series of bungled bailouts – Latvia, Greece, Cyprus – that even provoked a grudging apology from the Fund itself.
Despite the muttered discontent, emerging markets enter the autumn down but not out. As our report shows, “they’ve had a serious wobble, but as an asset class, emerging market debt won’t fall off the face of the earth”.
Global investors spent the immediate post-financial crisis years falling in love with sovereign and corporate debt in the riskiest emerging markets. Sovereigns and investment-grade corporates, from Brazil to Russia and Malaysia, issued debt by the truckload; risky African and Latin American frontier markets jumped on the bandwagon – and emerging market debt quadrupled in just four years by end-June 2013.
With yields and interest rates set to rise in the US and Europe as the West’s recovery continues and tapering becomes reality, has the trouble for emerging markets only just begun? And if so, who will be hit the hardest?
The report looks at how well Russia’s banking system is equipped to deal with a round of volatility, and whether the turbulence in Turkey’s capital markets has raised the spectre of a return to the country’s past form as a hotbed of instability.
If development bodies were ever to need lessons on survival, they might do well to look at how the ratings agencies have maintained their relevance. Much-maligned for being among the intellectual authors of the crisis five year ago, as this report shows they remain a significant presence in the capital markets with an impressive record rating sovereigns.
One thing these global institutions have common is that they are all protagonists in an era of reinvention. Not so long ago, the likes of the European Bank for Reconstruction and Development appeared destined for extinction. Now development banks seem to bestride the earth.
Reinvention of this kind does not just provoke questions about how well prepared these organisations are for future crises – it also shines the spotlight on how they are striving to remain relevant in the new order.