Taking money off the table on a global scale

BRIEFING: "Globalisation under strain: Homeward bound; A great financial retrenchment is under way, the product of both market forces and political pressure on banks to lend at home rather than abroad," The Economist, 7 February 2009.

A retrenchment in cross-border credit is unfolding, says the mag. Banks are being encouraged by parent governments to focus first and foremost on helping out with the credit crunch at home--no surprise there.

We also get the Institute of International Finance estimate that net inflows of private capital to emerging markets will drop to $165B this year, down from a far larger $929B in 2007--obviously a very good year.

A chart on the second page helps disaggregate this a bit: The FDI (foreign direct investment) portion of those numbers stood at about $380B in 2006, then went up to more than half a trillion in 2007. The FDI dropped to 300 in 08 and looks to be just under 200B in 2009.

So that's not as bad as the aggregate numbers suggest.

What really happens here is commercial bank lending dries up a lot and emerging markets are paying off past loans, so a negative flow in 2009 after totaling about $400B in 2007.

As the Economist states:

This is economic nationalism, but of an insidious type. Western governments are not trying to keep foreign banks out of their markets: indeed, foreign credit would be welcome. But the purpose is to steer banks towards supporting businesses and jobs at home, not abroad. That has the whiff of protectionism about it.

The rest of the article speculates on the chance that the upcoming G-20 will meet the desire of the Euros to create some sort of global regulator from cross-border banks and inter-market flows in general.

Much ambition, but also plenty of suspicion, especially from emerging nations.