Crash Course on Monetary policy, central banks and ideology:

#3 Monetary policy: effects on the Global South — with Pablo Bortz

What effect did the previous round of QE have on the global south? How did it inflate debt levels? What can we expect from the current crisis-led monetary policy in developed economies?

  • What are the policy areas and instruments we need to look at to mitigate these effects? Is there a role for central banks and monetary policy in the global south?

  • How should we move from inward-looking central banks in the global north to a mandate that includes global monetary policy?

Unfortunately, Gyekye Tanoh, will not be able to present his view at Crash Course due to unforeseen circumstances. We hope to welcome Gyekye on another occasion and are delighted that Pablo G. Bortz has found the opportunity to take his place.

Pablo Bortz
Universidad de San Martín

Pablo G. Bortz obtained his Ph.D. at the Delft University of Technology. He is the author of Inequality, Growth, and ‘Hot’ Money (Edward Elgar). He is currently Professor of Macroeconomics at the University of San Martín, Argentina and he also teaches at the University of General Sarmiento. He worked at the Argentine Ministry of Finance, the Ministry of Foreign Affairs, and the Central Bank, and was Economic Affairs Associate at the United Nations Conference on Trade and Development (UNCTAD).



(Note that this is a summary, not a verbal transcript)

Rodrigo summarizes the two previous webinars, with Jensvan ‘t Klooster and Benjamin Braun. Last week, Benjamin Braun gave a presentation about the interdependence of Central Banks and financial markets . He explained their relationship by coining the term infrastructural entanglement. Today, with Pablo Bortz, we will focus on the periphery, and look at how monetary policy in the North affects the Global South.

Dollar hegemony

Rodrigo: What are the ‘hierachy of money’ and the hegemony of the dollar and why is that so important?

Pablo Bortz: Currency hierarchy is the command that your currency can have on goods, assets and credit. The dollar is at the top of this hierarchy., Most trade takes place in dollars, even if you are not trading with the US directly. The same goes for a lot of credit, even if not lent by US institutions. The dollar is the currency of denomination in a large part of global financial transactions. Other currencies also have substantial power, like the Euro and the Yen. But that is mainly on the regional level;globally it is the dollar that rules.

Rodrigo: What are the risks for a country to borrow in dollars, as opposed to borrowing in domestic currency?

Pablo Bortz: The main risk is that you run out of dollars when the time for paying comes. Because of capital flight, investors pulling out their money out of yourcountry, or trade deficits, you don’t lack the resources to pay, but you lack the dollars. You need dollars to pay the dollar-denominated debt. If it is denominated in your own currency you can always print your own currency, although there are side effects. But you can not print dollars (unless you are the US).

Global debt issues

Sara: Global debt has reached record heights, partly because of monetary policy (QE). How did this happen?

PB: The financial conditions and monetary policy in the North affect the conditions in which the Global South has access to dollar or euro funding, independent from the conditions in the recipient countries. Whenever there is excess liquidity (lots of money searching for higher return), the countries in the South get easier access to borrowing money. The other side of the coin is that tightening policies in the North mean money flows out of the economies of the Global South. They have no control over that. That reflects in exchange rates, commodity prices, etc. (this is further explained in the interview).

Sara: How did QE policies lead to growing debt levels in the South?

PB: First, the US had different phases of QE, to rescue the financial system and to remove toxic assets from the banks. The idea was to try to incentivise investors to go into riskier assets. Many of these are in the periphery. Between 2009-2014 there was a huge inflow of external liquidity from abroad. Firms more than governments took profit to borrow heavily. Then there was a period of eb and flow (the taper tantrum end of 2013) threatening to tightening the currency. This meant the withdrawal of liquidity, which produced a shock wave in emerging economies. Now we have the corona virus pandemic, At the beginning thereof, we saw an unprecedented massive outflow of money from emerging countries. It was worse than during the 2008 crisis. But then the FED stepped in again and started to provide liquidity , also to the emerging economies. So now the cycle is reversing.

The power of asset managers

Rodrigo: In the 1980’s there was also a debt crisis, but the banks were the most important players. Now it is mainly the (sovereign) bond market. How is a debt crisis different when it is situated in the bond market?

Pablo Bortz describes the situation in the 1980’s with the Volcker Shock, when the president of the FED decided to increase the interest rates to 20% and all Latin American countries went into default. This created the Latin American debt crisis of the 1980’s. If these countries would not have paid, the financial system of the US would have collapsed, because all the creditors were banks. In the 1990s/early 2000, the creditors were mainly financial investors, not banks. There were many different bonds investors, as opposed to a few large banks in the 1980s. This makes it much more difficult to reach an agreement with everyone on debt restructuring. Nowadays it is a mixture; relative importance of bond debt, but also the investors are more concentrated; a few big asset managers control 60% of the assets. But the asset managers are even more powerful than the banks were in the 1980s. The managers are companies like Black Rock, Pimco, Fidelity and some more.

Rodrigo: African nations are facing balance of payment problems because of outflow of dollars, and they cannot pay off debt or finance imports. There was a proposal for a Debt Standstill, discussed at the G20 and IMF. But private investors are not interested. You have to pay later, but you still have to pay.

The Argentinian case

Rodrigo: What can you tell us about the latest episode of the Argentinian debt crisis?

PB: It has similarities with earlier episodes, especially regarding financial regulation, the opening up of the financial system to foreign investors, and the large amounts of dollar debts. A new characteristic is a part of the peso denominated investments, where they borrowed in dollars which were then exchanged into pesos, causing an appreciation of the peso. But when the money flowed out of the country, this caused a crisis in April 2018. So it is a mix of traditional elements and new elements. The IMF did provide a lot of money, combined with the usual IMF stabilization program, but no control of capital outflow andno role for stabilization of the exchange rate., Instead, the money was used for paying debts and compensating for financing capital outflow. It worsened the crisis and did not provide any solution for the economy.

Carry trade and the role of the IMF

Rodrigo: At the heart of the problem was carry trade, making use of the difference in interest rates of the strong currencies and the local currency, producing an inflow (and later outflow) of money. When the outflow was happening, the IMF would provide money for the short run, but was also destroying the local economy, causing a big economic crisis, while not even stopping the money flowing out of the country.

PB: When the IMF steps in, instead of calming things down, it makes things worse. They did not solve any of the three problems.

Sara: This is not the first time that the IMF’s policy worsens an economic situations; why don’t they learn?

PB: The IMF always replicates and they will for sure come with an independent evaluation in two or three years, telling that they screwed up again. They admit the same mistakes every time and than do not change anything. What plays a role is geopolitics, creditors’ power, the thinking within the IMF, the economic framework they used that did not change in the past 40 years. These are barriers for reform on the inside and the outside. The main influence is from the US, the European countries, Japan, and now increasingly China. But for Latin America, the US is the ruler. They let private investors cash in, and after that they maybe allow a haircut.

Capital controls

Sara: To what extent are capital controls a solution?

PB: For inflows, you can for instance impose a tax on external borrowing (Chile). Or a tax on investments in derivative markets (Brazil). Other instruments are unremunerated reserve requirements, where you have to deposit double the money required for buying an asset. Other measures are to force a minimal period of time for an investment, for instance one year. For outflows, you can enforce a tax for acquiring dollars. There are different alternatives., They all have side effects, to be flexible with them is important.


Regulation of foreign investors: Considering this massive concentration of investors and the power these few players have, are there any initiatives to regulate this? Is it even possible to do his on a national level, or only on an international level?

PB: There is policy space for capital controls, or control on local banks to not accept dollar deposits. But individual countries can do very little against the power of the big asset managers (like Blackrock). There should be a coordinated response, but that is very unlikely now.

Rodrigo: Financial globalization, with the mobility of capital at its heart, makes it difficult for individual countries to take steps on their own. The problem lies with the architecture of global finance. Now there is this “wall of money” roaming the world, financialising any market. What monetary policy in the Global North could we think of that does not harm the Global South? Is there a version of QE that does not create these walls of money and the harm they cause in the South?


  • Better regulation on shadow banking

  • SDRs, as currency issued by the IMF (emerging markets use it and change that into dollars). Developed economies could lend their part (or give) to poorer countries. Or increase the amount of SDRs

  • Restructuring of the international financial monetary system, with China included, and better mechanisms to cope with balance of payment prices. China is taking some steps but is not (yet) challenging the role of the dollar.

What is the role of multinationals in the financial crisis?

PB: They have had two roles. First, they have been acting as asset mangers as well. With the corona crisis, they have been stripped of cash, often stopped operating and started to lay off people. Meanwhile, they took profit from the monetary policy of the federal reserve..

What do you think of lowering interest rates and reserve requirements to incentivize investments?

PB: Their effect depends on global conditions. If the US are also lowering interest rates, that can have an impact on the rates at which your firms access finance. I’m skeptical about the perspective for investment, as that is mainly driven by demand. It can alleviate some financial constraints on the short term. But the effect does not depend mainly on internal conditions, and the volatility is damaging. It creates uncertainty, reduces effectiveness and make risks even higher.

How would it be possible to build a debt market in Argentinean pesos to stop thinking in dollars? Is that possible?

PB: The Argentinian valuta perspective is that there are only a few instruments to invest your money in. So you need more instruments that pay return in pesos. One thing that is very difficult to solve is housing. You need dollars to buy houses in this country. You would need houses denominated in pesos, but that would require a structural change. You also need to change the saving practices and financial practices of companies. They have a lot of liquidity in dollars. You have to make them have more liquidity in peso denominated assets. The current government seems to be developing a peso market, but it is very small still.

The current crisis is also a domestic currency crisis. The IMF has been advocating free capital flows, but wants to combine that with countries developing their domestic debt markets. What has the current crisis taught us?

PB: The crisis has shown us that it is not enough to have a domestic market denominated in your own currency. It is better than to have it denominated in dollars, but not enough. The presence of foreign investors is also an important factor. Most of the outflows of currency left out of the domestic currency market. That also creates a lot of instability. It shows the need for capital control.

Rodrigo: The global liquidity or global wall of money that moves in and out of markets, and also moves in and out of domestic bonds, poses a big problem. We see now that the current solution that the IMF had proposed is not a solution for the crisis.

PB: It has flaws, I would say. It is better than it was before with dollardebt, but there are still vulnerabilities and it needs many improvements and modifications, regarding inflows and outflows.

Is monetary financing something to worry about when central banks in Latin America start to do QE operations and corporate asset purchases? What monetary policies can the Central Banks implement considering the balance of payments constraint?

PB: Central Banks should best have a differentiating monetary policy. They can target different sectors with different credit conditions and start favoring credit for investment instead of speculative borrowing. They could also start providing relatively stable returns to savers. At the same time, they could support green investments through other mechanisms and financial instruments, to favor public and private green finance. In that way, they can have an important role to play in the domestic economy. It requires a rethink.

About this series:
Crash Course on Monetary policy, central banks and ideology

Our new Crash Course on monetary policy, central banks and ideology is a platform designed to open up debate on how we can move out of the current crisis and make the necessary steps towards achieving social, economic and ecological justice. Crash Course is inviting global experts on monetary policy to break down complex issues in lay terms and make them accessible to all so that we can understand how to shape our global monetary policy for a fairer future.