Long-term finance drought fears loom large

Governments and central banks should change their monetary and fiscal policies to ensure that long-term finance for projects such as infrastructure or education is still available, experts told Emerging Markets on the sidelines of the annual Asian Development Bank meeting.

Some financial experts suggested that the problem is one of governments’ and central banks’ own making and is a result of record low interest rates discouraging investment and of government borrowing crowding out private lending.

“The [threatened] shortage of long-term finance is tied to the fact that the current system is punishing those who save, while rewarding irresponsible spenders,” former World Bank Group senior official and investment banker Ernest Kepper told Emerging Markets.

“Unrestrained money printing is undermining confidence in the purchasing power of the currency [investors] receive as repayment. I expect this situation to continue, which will undermine the supply of long-term funds for investment,” he added.

William Thomson, a former US Treasury official and one-time vice president and executive director of the ADB, meanwhile suggested to Emerging Markets that a “savings crisis” was at the heart of the concern over the long-term investment funding.

This is caused by “underfunded and over- promised entitlements for pensions and health care in rapidly aging societies and is compounded by the massive borrowings of governments and the zero interest rate monetary policies of central banks”, Thomson said.

The threat of a global drought of long-term finance for infrastructure and other projects is looming over this year’s annual meeting as the ADB’s new president Takehiko Nakao prepares to launch a drive for additional sources of funds to supplement the bank’s own resources.

Given the size of the resources gap to fund infrastructure and other needs facing Asia, the ADB “cannot be too ambitious about doing everything by itself,” and must maximize its efforts to “catalyze” private capital flows into such investments, Nakao told Emerging Markets in an interview before the meeting.

But as the ADB prepares to mobilize extra funds for Asia, other international financial organizations, led by the G20 group of advanced and emerging economies, are searching for global solutions to what they see as a much wider impending crisis of long-term funding.

In Moscow earlier this year, G20 finance ministers mandated a host of international institutions including the World Bank, IMF, OECD, Financial Stability Board and Unctad to study the problem and to report by the autumn.

“Long-term financing for investment, including infrastructure, is a key contributor to economic growth and job creation in all countries,” the G20 said in February.

Earlier, the Group of Thirty (G30) central bank governors, financiers and others had begun sounding the alarm, suggesting in a weighty special report that sweeping institutional and regulatory reforms were needed to stave off a long-term financing drought.

“Far-reaching reforms in the international financial system will be needed to ensure that rising demand for long-term capital can be met efficiently,” G30 chairman and former head of the European Central Bank Jean-Claude Trichet said.

“If such reforms are not undertaken, we will likely face significant shortfalls in finance in coming years,” Trichet said, citing multi-trillion dollar needs for financing investment in infrastructure, education, research and development and business expansion.

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