Inter-state solution in the stateless market: the international debt crisis and the global supervision of the Eurocurrency market, 1979 – 1984
Room 7 Session 2: Central banking – a science or an art? organized by Lars Fredrik Øksendal and Anders Ögren
Abstract
Apocalypse Now, the Bank of England circulated an internal report to member central banks of the Bank for International Settlements (BIS) in 1979. Prepared for ‘possible consequences of a debt service failure by a major borrowing country’, it warned of the growing indebtedness of less-developing-countries and lending practices of international banks. Some of the central bankers had called for the supervision of the Eurocurrency market, an offshore market for major currencies as well as a key channel for the recycling of petrodollars since the mid-1970s, against the threat of instabilities in the global financial market. However, the international financial organisation failed to prevent the much-prophesied crisis – the Latin American Debt Crisis of 1982. Two years later, the Eurocurrency Standing Committee, a specialist organisation of the BIS to tackle the growing debt burden of emerging markets, expressed a sense of frustration about the results of its work since 1980. This paper analyses the unsuccessful initiative by monetary authorities and international financial organisations to tackle the debt crisis and the governance of global finance before and after the Latin Debt Crisis of 1982. It contends that the economic sovereignty of nation-states and the offshore markets in the Global South was the key to understand the failure of synchronisation of national policies on the debt crisis. First, it examines key issues regarding the stateless market. The collection of consolidated statistics of Eurocurrency borrowings was the very first step towards the formulation of a regulatory framework. The BIS sought to set standard rules of prudential banking to prevent excessive lending operations and their macroeconomic ramification. And the assumption of lender of last resort by central banks compatible with the global expansion of the Eurocurrency market a contingent measure. However, national interests were prioritised than a global solution owing to diverged understandings of the market; hence, the lessons of the 1982 crisis was dismissed, which left the regulation of the global market at national levels. Second, this paper suggests that offshore markets around the world frustrated efforts by central banks of developed countries, including the United States, to formulate a comprehensive regulation of the global financial market. These global entities under the national jurisdiction were able to deliberately avoid the approach by the BIS to collect banking data. Instead, the competitive pressure in international banking business led to the establishment of the International Banking Facility in New York to further facilitate Eurocurrency lendings. This paper concludes that the incompatibility of the inter-state solution to the global Eurocurrency market and the cardinal element in the governance of global finance in the 1980s – the economic sovereignty of nation-states. It extensively uses original documents from the Federal Reserve Bank of New York, the Bank of England, and the UK government and contemporary periodicals such as Euromoney.
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