Charles in charge

14.05.08 22:05 Filed in: The Prague Post
Head of Institute of International Finance speaks in Prague

It’s been a traumatic and, for many, confusing year in the world of international finance. Perhaps seeking some illumination, Prague’s local banking community turned out in force May 7 for a discussion with Charles Dallara, the influential managing director of the Institute of International Finance (IIF), on the turmoil in the world’s financial markets and its repercussions for the banking system.
“We are beset with a serious crisis,” Dallara said. “It is not as grim as what you faced [in the 1990s], but it is quite serious.”
As managing director of the IIF, Dallara heads a lobbying group representing the world’s largest international financial institutions, such as Goldman Sachs and JPMorgan. He is a former executive director of the International Monetary Fund (IMF) and worked in the U.S. Treasury Department during the Reagan administration.
Dallara was introduced at his talk by  longtime friend, President Václav Klaus, who summed up the evening’s operating premise when he said to Dallara: “We trust you will not advocate anything organized by the government, just some free-market” solutions to alleviate the crisis.
“I will promise not to go against the grains of these principles,” Dallara replied.
Dallara, who has been a long-term friend of the Czech Republic — he proposed to his wife on Charles Bridge — compared the current market turmoil to the rapids the country had to navigate in the 1990s.
He recalled that the Czech Republic followed one of the most rigorous sets of market-oriented policies in Central Europe. The IMF had been skeptical of Klaus’ approach — he was then finance minister — but Klaus soon won the IMF over on the merits of a market-based transformation.
The Czech Republic managed to maintain inflation below 10 percent annually, run a strong privatization program and, most of all, keep political stability, Dallara said.
Dallara expressed confidence that the Czech Republic will continue to be an attractive place for investment in the future. The economy is growing at a remarkable rate and the country has a manufacturing base that can compete with any in the world.
However, “challenges remain,” he said, noting the need to tackle pension reform. “Inflationary pressures [are rising], which I’m sure will be dealt with by the central bank,” he added.
To help alleviate the credit crisis, Dallara advocated central banks to coordinate their actions. “This does not mean they should be on [exactly] the same page,” he said, but widely diverging interest rates have the potential to undermine market confidence.
Indeed, the world’s central banks have rarely acted in such seemingly contradictory ways.
The U.S. Federal Reserve has slashed its main interest rate seven times to 2 percent, since global financial turmoil erupted last August. The European Central Bank (ECB), meanwhile, has been more concerned about curbing inflation and so has kept its key interest rate steady at 4 percent. The Czech National Bank has followed a similar strategy as the ECB, most recently keeping its main rate unchanged at 3.75 percent May 7.
“We can no longer think exclusively in terms of geographic distribution of responsibility [for central banks],” Dallara said. “It’s no longer a neat job of controlling inflation in one location,” he added.
Klaus took exception to this.
“I must say that I have a national mentality,” he said. “You are allowed to have a harmonious world. It is right that we have different [monetary] systems.”
While the world is feeling the weight of the subprime mortgage crisis, the Czech Republic has been hurt less than others, analysts say.
In a report published March 6, the IIF noted that bank lending to emerging economies has been remarkably robust since the onset of the global credit turmoil.
Part of the explanation for this is that banks in the Czech Republic never lost sight of the basics and continued to apply fundamentally sound banking practices, Dallara said.
Analysts and decision-makers should be able to approach an asset’s market value by looking at the underlying cash flows, he said. The current problems revolved around flawed business decisions made by bank managers, who took excessive risks to increase profits. “[This was a] failure of management, not of risk management,” Dallara said.
This sound management was fortunate for the country’s businesses, as, due to a lack of venture capital, the emerging market economies of Central and Eastern Europe remain dependent on banks for their financing. In its 2008 report on capital flows to emerging market economies, the IIF expressed concerns about high current account deficits and possibly over-stretched local banking systems in some countries of the region.