Who should be bailed out next?

March 29, 2023 09:03
Photo: Reuters

The shotgun wedding of UBS and Credit Suisse was hastily arranged in the spirit of ensuring our collective safety. As Swiss National Bank Chair Thomas Jordan noted, Credit Suisse’s size and global network makes it a “a global systemically important bank,” and having UBS take it over – thereby forestalling a bankruptcy – “ensures that the systemically important function remains secure.” Might we dare to hope that a similar sense of urgency and ambitious deployment of resources be brought to bear on the compounding crises confronting more than half of the world’s low-income countries?

The government-brokered UBS-Credit Suisse merger was uncharacteristic for the Swiss, and not only because it was concluded on a Sunday, normally Switzerland’s enforced day of rest. The government invoked emergency laws to override shareholders’ right to vote on mergers, and wrote down all of Credit Suisse’s additional tier-one (AT1) bonds – some $17 billion worth – running the risk of years of litigation.

Some fear that these actions will tarnish Switzerland’s reputation with investors. Maybe they will. But if the merger succeeds in stabilizing the financial system, it will be more than worthwhile for us all. The reality is that this outcome is not guaranteed, but not because of any flaw in the authorities’ decision-making or, indeed, any factor that the authorities can control. The bottom line is that complex systems are unpredictable, and even well-crafted interventions can fall short.

Such uncertainties did not deter the Swiss government from showing extraordinary leadership at a moment when it was needed. And comparable uncertainties did not stop major economies’ from mobilizing more than $15 trillion in short-term stimulus funding to protect themselves from systemic risks during the pandemic.

The same goes for protecting the economy from longer-term shortfalls. For example, the European Union deployed nearly $900 billion for post-pandemic economic development, and the United States and China mobilized trillions of dollars for investment in infrastructure and green technologies. Such interventions may not guarantee a secure future, but they are crucial nonetheless.

Similarly bold leadership is now needed to tackle the challenges facing increasingly vulnerable low-income countries, notably those facing the multifaceted crisis in sovereign debt, high and rising poverty, food insecurity, and social and political instability – all of which are being exacerbated by the Ukraine war – together with the mounting effects of climate change. But, so far, such leadership is nowhere to be found.

Instead, rich-country governments have offered an agonizingly slow, fragmented, and unambitious response to these mutually reinforcing crises, with other G20 countries that could make a difference – including China, India, Russia, and Saudi Arabia – also slow to act. Advanced-economy leaders offer well-rehearsed justifications for their inaction, pointing out, for starters, that they have their own problems, not least high inflation and tightening fiscal constraints, which are fueling popular frustration and political turmoil.

The same leaders voice concerns about “moral hazard.” They argue that the governments of countries in need have themselves to blame for their current mess. These governments have taken on too much debt, according to this view, and have failed to serve their populations properly, which suggests that they are likely to squander whatever relief they receive.

But it is the third reason for slow, incremental action in addressing the challenges facing low-income countries that is the most absurd. Behind closed doors, rich-country governments have in effect concluded that the debt distress faced by more than 60% of these countries (and more than 25% of emerging economies) does not pose a systemic threat. So, while they are willing to act quickly in bailing out domestic banks – even midsize institutions – they have concluded that offering significant debt relief to dozens of debt-distressed countries with hundreds of millions of vulnerable citizens is not worth the cost.

It is entirely possible that many actors do not fully understand the systemic implications of simmering crises – particularly debt distress – in low-income countries. The crises are happening “over there” – in places whose physical remoteness and apparent economic and financial unimportance makes them seem irrelevant.

“Over there-ism” will be our downfall. If short-term political and business interests trump longer-term imperatives like preventing continuous waves of debt crises, it will become harder to act collectively to mitigate climate change, ensure food security and political stability, and devise meaningful approaches for dealing with the rising number of refugees. Of course, poorer populations are already feeling the effects of these problems. But for those who could make a difference, they remain far away.

The UBS-Credit Suisse deal offers yet more evidence that, when the will is there, authorities can act quickly and ambitiously to mitigate systemic risks, even if the cost is considerable and the outcome is unpredictable. Rich-country governments might not recognize – or want to acknowledge – the systemic implications of the risks gathering at the nexus of sovereign debt, climate change, poverty, and political instability. But this will not stop those implications from materializing. Systemic is as systemic does.

Copyright: Project Syndicate
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