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credit rating

1024 681 Dominique de Villepin

World needs G3 for better co-op among top three economies

 – In an interview for China Daily, Dominique de Villepin proposes to enhance cooperation between the world’s major economic actors – 

 

Could you share your view on the infrastructure credit rating methodology to be launched this time?

I think that it’s a very innovative approach that Dagong has initiated with this new methodology. For the first time, we’re going to have new tools allowing us to appreciate the quality of the different investment in infrastructures, the quality of financial project and the quality of companies. It will allow to guide capital flows towards the best projects. This is something very new and adapted to the challenges. Many infrastructure projects will be implemented all along the One Belt One Road in Asia, South East Asia, Central Asia and Caucasus in the coming years. For the first time, the new rating methodology promoted by Dagong in a more comprehensive way with the help of new technologies will give access to relevant and multidimensional criteria to evaluate precisely all different risks.

Among all the issues to be discussed in this year’s G20 Summit in Hangzhou, which topic do you care most about?

The most important issue is to build new tools in order to ensure the financial stability. This requires to innovate and to create new instruments. That’s why I really believe we need a new financial system.

First, a better cooperation has become necessary between the three main world currencies: the dollar, the euro and the yuan. I do believe that we need a G3 as a new institutional way to improve cooperation among the three main economic regimes. This G3 will be a strong cooperative architecture organized at governments and Central Banks levels to respond to major crisis situation and to coordinate monetary policies.

Second we need a new tool to assess risk, and that’s why I think we need a more balanced credit rating system. As a matter of fact, the existing system dominated by the US Big Three is not only unfair, but inefficient as we witnessed during the 2008 crisis. Because of its development, Asia needs its own credit rating system to support a more stable financial order.The question is: how can we create new capacities and express innovative ideas that help us to address the challenges of the global economy. The world economy is in a new situation, the growth is slowing down all around Eurasia, in Europe, in China, in Russia. That’s why we have to search for new engines for growth. Of course One Belt and One Road is giving us a very strong perspective, opening towards stability and prosperity. But for that, it is crucial to make it a shared project. The AIIB is an emblematic example of this approach, with 57 members and its concrete work to foster infrastructure development in Asia. We have to be innovative, creative, if we want to address the current situation of world economy.

What suggestions would you offer to foster co-financing among relative parties for the global infrastructure connectivity alliance initiative?

I think the most important challenge is to use all the different institutions to create synergy and share expertise, the former ones like the World Bank, the IMF as well as the new ones like Asian Infrastructure Investment Bank, like the New Development Bank, in order to achieve a fairer and more multilateral cooperation. There should be a very coherent strategy between the different institutions to push forward the capacity of financial economic community to build up new projects. The growth of the world is lacking of some new innovative project. We need to have initiative of this kind, which is going to be, of course, strong impulse for better growth. There is a need to increase cooperation between private and public financial actors from different countries to develop platforms of co-financing.

How can they attract more private capital and social capital for the initiative? And also, if it’s appropriate, could you introduce the experience and operation situation of PPP (Public-Private-Partnership) in European countries that China could learn from?

The key of PPP is to achieve the best cooperation between private and public capital as well as between public and private expertise. We have seen it growing recently, especially in France, and we should now take the lessons from the promising experiences of this tool. Public capital is needed in order to give the first input and private capital is needed as well. We are in a time of huge liquidities but without being able to direct them towards the real economy, towards the best projects and towards the best possible services for the population. It is all about creating a secure environment for investors and to build up confidence for all the actors.

The project of Dagong today, which is a new methodology for infrastructure, will create more trust through a better assessment of the risk. Because there’s more guarantee that money we have would have good return. So now we have to change the situation in creating trust, by the stronger involvement of countries, and by supporting big projects like One Belt and One Road which are going to show that when we choose carefully about the project, we may have a high return on investment, and of course with support of financial institutions.

How do policymakers in France value the AIIB’s prospect and future?

France is highly committed to the success of the One Belt One Road initiative. Indeed, France has been one of the first countries to join the AIIB and has always been involved in multilateral institutions promoting dialogue and stability.

I believe that AIIB has a very important position and responsibility. AIIB, has attracted a high number of members: more than 50 countries have decided to take part in the Bank. Chairman Jin Liqun has done really a great job in giving credibility to this bank. AIIB is setting very high standards promoting a project management that is lean, clean and green as Chairman Ji Liqun puts it.

So I really think that this bank, which is in the process of selecting some projects, as we see in right now, in India, Pakistan and some other countries, will be able to build up its credibility through ambitious projects and sustainable methods.

Structural reform has been a heated issue in this year’s G20 Summit. Currently western countries are also facing with a series of structural problems. Could you introduce the latest situation and progress that has been achieved by European countries?

Structural reforms are key to tackle the challenges of the changes in globalization that have appeared since the crisis of 2008. We need to find a sustainable path for public debts and deficits and to define new motors for growth. We need to help the economy invest, innovate, create jobs. For this, it is necessary to modernize and adapt institutions. In Europe, we have still a lot of work to do to find a right balance between, on the one hand, the necessity of controlling debts and deficits and, on the other hand, the need to stimulate the economy in a time of rising risks where we face the threat of a deflationist spiral.

As you pointed out in a previous speech at this year’s Boao Forum, China and Europe both need pay attention to some bottlenecks when changing the mode of growth. What factors would you pay special attention to through China’s structural reform? How should China achieve balance between economic growth and the process of reform?

China is going through a major historical transition, from an export-driven manufacturing model to a model based on domestic-consumption and services economy. It’s a change European countries have had to go through in the 1970’s and 1980’s. And of course it creates difficulties and unbalances that we are witnessing today. But I think we see also positive signs showing that China is on the right track. Services are growing fast and urban equipments are growing. Innovation is booming in airspace, supercalculators, superconductors, genomics. China has a huge asset compared to other economies, in this transition, it has the biggest domestic market in the world. Of course, managing this change will need taking the lessons of what countries in Europe for example have gone through, by accompanying the social impact of the industrial overcapacities in the heavy industry, for example the steel industry, and creating a social safety net. It will mean modernizing the credit system and the capital markets for more efficiency It will mean adapting the SOEs to the world competition. This will also mean gradual and progressive reforms, as has been explained by Prime Minister Li Keqiang in Boao. The new five year plan is a positive sign of the sustainable development path of China.

13 avril 2016, China Daily 

1024 738 Dominique de Villepin

Controlling Risk in a World of Risks

The ratings business is at a crossroads. The recent report of the European Securities and Markets Authority (ESMA) has once again pointed to the major defects of the pre-crisis rating organization. The ratings of the Big Three rating agencies, Moody’s, Fitch and Standard& Poor’s are criticized for their potential conflicts of interest, for their lack of confidentiality and for their poor quality. At the same moment, many institutions, in China and the ASEAN region, in India as well as in Africa, raise the question of the necessity to create a new model that could give a better picture of the world economy. These questions are sound reminders of the necessity to reform this sector, because in fact world growth is at stake.

There are two reasons to this. One is the past, the other is the future.

The first reason is the lesson of the past, because the 2007-2008 crisis has taught us the massive impact wrong ratings could have. The rating agencies are not the cause of the crisis, but they have undoubtedly catalyzed it. They have slowed down the awareness of the dangers before the crisis, through underevaluation of the risks on the financial market and the derivate products.

They have accelerated the defaults of companies and states after the breakout of the crisis through rapid downgrading that led in fact to an overevaluation of risk. In a nutshell, they have done exactly the contrary of what they are designed to do. And if we want more stability in finance, we need a reform of credit rating. The solutions are at hand, they are pluralism, objectivity where today we have ideology and monopoly.

The second reason is the future of the world economy. We are entering a more complex, a more diverse, a more global economy in which information and risk assessment will be even more the key of growth and stability as they are today. The existing credit rating system was adapted to an economy of the West or at least dominated by the West. The rise of the emerging countries has changed the game. With the massive unbalance of credit in the world, with all the liquidities in the emerging world, in China with the trade balance surplus, in Russia, Latin America or the Middle East with the mineral resources and all the debts – private, corporate and sovereign- in the Western countries, the monopoly of the West in risk assessment is not only unfair, it’s terribly perilous.

What will be the future of globalization? Let’s face it, it will be a struggle for long term capital on the world scale, because the emerging markets are no more only export-oriented factories but are becoming fast growing domestic markets. They will need more and more infrastructures for urban development, housing, communications and this means massive investments. At the same time, new emerging economies will appear, with their own needs. In the coming decades, Africa will need around a trillion dollars in infrastructure investments for example. But African companies are barely rated now. Africa is still considered in the West as a black hole of risk, when there are methods, there are criteria, there are precedents that can be used to evaluate sovereign and corporate risks on the continent. But for this strong local credit rating agencies, in Western Africa for example, would be needed.

In this struggle, risk assessment will become strategic and to guarantee stability, we have only one choice, diversity. We need a choice in risk assessment. It’s not about replacing the monopoly of the Big Three by a new monopoly. It’s about new voices. And there are several promising projects today in this exciting sector.

In this new world of risk, risk assessment will be even more than they already are a major public good, as important as the freedom of communications, as the security of the seas, as the stability of climate. That’s why we need public and private actions to reform the system.

We need public reforms and this means a new regulatory environment. An exemplary work has been done on this matter by the European Union since 2008, with three different laws, probably because the States of the Union have been major victims of erratic ratings in the past. Since last June, the new regulation is enforced and creates the conditions of a more precise, more objective and more ethical rating. It has promotes confidentiality. It avoids many situations of conflicts of interests, by regulating the simultaneous shareholding of rating and rated companies. It develops legal responsibility in rating, which is crucial and it creates the conditions of diversity by promoting a double rating, one of the two originating from a small agency.

This leads the way but isn’t enough we need worldwide reform, and the G20 hasn’t been at the level of expectations on this issue. In fact, this raises the question of worldwide economic governance as a whole. We need global regulations and global criteria to evaluate the work of Credit Rating Agencies, but also to regulate the banking system. For this we need an economic Security Council of the United Nations, that would directly control the Bretton Woods Institutions. We also need the World Bank to give the impetus to changes in risk assessment by promoting a cultural diversity of ratings.

We also need private changes, because innovation is best bourne by new private entities that put all their energy in a new competition. What should a useful, innovative and solid rating agency be? I think some aspects of a new methodology can be pinpointed.

First, it should provide a “glocal” view on an economy that is becoming at the same time increasingly global and increasingly local.

Secondly, it should provide a contracyclical measure of risk, being more conservative in times of rising tides and more flexible in times of falling tides. In my view, this is a key responsibility for risk assessment, because it’s not the role of rating agencies to promote speculation or to provoke the burst of these bubbles.

Thirdly, it should lead the way and give a good picture of the future. This means giving the public information about sovereign debts, but also about key sectors of the future and working hard on adapting its rating methods to sectors with a bright future, IT sector, energy sector, infrastructure projects.

Now is the time for a new globalization, that can be either multipolar, based on fair development, stability and innovation or confrontational, based on privileges, speculation and inequities. This means making choices and changes in many sectors: let’s begin with credit rating.

12th December 2013, Huffington Post