A Time to Dare

NEW YORK – The upcoming G-20 meeting is a make-or-break event. Unless it introduces practical measures to support the countries at the periphery of the global financial system, global markets will suffer another round of decline, just as they did after United States Treasury Secretary Timothy Geithner’s failure in February to produce practical measures to recapitalize America’s banking system.

The current financial crisis is different from all the others we have experienced since World War II. On previous occasions, whenever the financial system came to the brink of a breakdown, the authorities got their act together and pulled it back from the brink. This time the system actually broke down in the aftermath of Lehman Brothers’ collapse last September, and it had to be put on artificial life support. Among other measures, both Europe and the US have effectively guaranteed that no other important financial institution will be allowed to fail.

This step was necessary, but it produced unintended adverse consequences: many other countries, from Eastern Europe to Latin America, Africa, and Southeast Asia, could not offer similarly convincing guarantees. Abetted by the determination of national financial authorities at the center of the world economy to protect their own institutions, capital fled from the periphery. Currencies fell, interest rates rose, and credit default swaps soared. When the history of this crisis is written, it will be recorded that – in contrast to the Great Depression – protectionism first prevailed in finance rather than trade.

The International Financial Institutions (IFIs) are now faced with a novel task: to protect the periphery countries from a storm that emanated from the center. They are used to dealing with governments; now they must learn to deal with the collapse of the private sector. If they fail to do so, the periphery economies will suffer even more than those at the center.