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February 28, 2013 12:04 am
Global cross-border capital flows have shrunk more than 60 per cent from their pre-crisis peak, with the UK seeing the biggest decline, highlighting the retrenchment in global finance and pressures on the world’s banks.
Loans and investment flows between countries were worth $4.6tn last year – down from $11.8tn in 2007, show calculations by McKinsey, the consultancy, in a study released today . Much of the decline was the result of Europe’s debt crisis. Capital flows were steadier in the world’s developing economies.
The sharp drop “has cast uncertainty over the future evolution of financial globalisation”, McKinsey said. While much of the increase pre-2007 was linked with growing economic imbalances, which contributed to debt bubbles, the report warns of “a more balkanized financial system with constrained access to credit and higher costs of borrowing in some countries”.
Although the global economy has seen growth returning, “we are not seeing a recovery at all in financial globalisation”, said Susan Lund, one of the report’s authors.
After the collapse of Lehman Brothers investment bank, global capital flows slumped to just $1.7tn in 2009 – the lowest since 1995 – but a recovery the following year has since gone into reverse as eurozone banks have retreated behind national borders.
Underscoring the pain the eurozone crisis has inflicted on banks in the region, the report said that while western Europe accounted for 56 per cent of growth between 1980 and 2007, it was responsible for 72 per cent of the collapse in global capital flows since then.
The UK is not part of Europe’s monetary union, but McKinsey calculated the country saw an 82 per cent fall in cross-border capital flows between 2007 and 2011, reflecting its role as a hub for financial transactions across the continent. Most of the UK decline was the result of a contraction in inflows and outflows of bank loans.
In the eurozone, banks’ domestic lending and buying of domestic bonds has increased since 2007, but Ms Lund said “the whole purpose of creating the single currency was to foster market integration – and it is going in the opposite direction”. With less interbank lending, funding constraints on traditional lenders have increased. Philipp Härle, another of the report’s authors, said: “This may be a good thing from a systemic risk point of view – but it comes as a cost.”
In contrast, capital inflows to developing economies have returned to near pre-crisis peaks, with foreign direct investment accounting for a larger share than for developed countries. Capital flows out of developing economies have grown even more rapidly than inflows – rising to $1.8tn last year from $295bn in 2000. China is now a larger source of loans to Latin America than the World Bank and the Inter-American Development Bank combined, according to McKinsey.
However, the report notes that the value of emerging markets’ financial assets as a proportion of the global total has increased only slightly in the past five years – and much less than emerging markets’ share of world economic output. This could reflect policy makers’ wariness about expanding local capital markets.
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