FXstreet.com (Barcelona) - Marc Chandler, Global Head of
Currency Research at Brown Brothers Harriman notes that news that a
large Swiss bank will begin charging business clients a negative
interest rate for holding Swiss Franc deposits has gotten some
observers suggesting that this is a form of capital control.
Usually Capital Controls refer to Sovereign action. In the late
1970s, both Germany and Switzerland did in fact impose negative
rates on foreign deposits to discourage speculation in their
currencies. However, despite the headlines, Chandler refers away
from Switzerland and highlights what he perceives as a REAL capital
control story. He writes, "The IMF, the bastion of neo-liberalism
is continuing to modify its stance. Recall that in the recent past
it has come out in favour of macro prudential policies and has
diluted its support for austerity by recognizing the fiscal
multiplier is significantly greater than it previously projected,
partly as a function of the near-zero interest rate environment."
Today, a staff paper, though written in a personal rather than
official capacity, accept the use of direct controls to reduce the
volatility of capital flows. It did however, advocate that such
controls can be "transparent, targeted and generally temporary."
Chandler notes that of course, the IMF has not abandoned its
ideology completely and recognises that capital mobility is
generally beneficial. However, it acknowledges that hot money flows
could destabilise economies in which the capital markets are
Chandler picks up on an FT articles which notes that some people
are arguing that the IMF should be more critical of the
"super-loose monetary policy in rich countries for encouraging
volatile flows into emerging markets", without acknowledging that
capital flows into emerging markets have actually fallen over the
past couple of years, despite the monetary stance of the "rich"
(high indebted) countries.
Additionally, Chandler notes that there are a number of factors
that drive flows into developing countries and the money policy of
the high income countries is one factor, but he doesn´t understand
why some like to pretend that it´s mono-causal.
He writes, "Strong growth profiles, high interest rates, strong
returns on capital and, of course, under-valued currencies also
attract capital flows to some developing countries. Lastly, when
Brazilian companies, for example, issue bonds abroad in foreign
currencies and/or sell shares abroad and repatriate the funds, the
resulting bid for the local currency does not fit into the
"currency war" narrative that many seem so enamoured with."
Chandler finishes by stating that in any event, the IMF continues
to evolve away from the Washington Consensus and push for capital
account liberalisation in all places and at all times. He feels
that is a more nuanced stance.