Hopes rise for financial services deal

Date: 23/10/1997

By Chris Johnstone

FIRST time round, the groom did not turn up for the wedding because the presents were not attractive enough.

Two years later, the wrapping has been improved, a few small extras have been added but the doubts remain and some guests are threatening to stay away.

That more or less sums up the situation as the US ponders whether to sign up to a World Trade Organisation (WTO) deal to open up global financial services by the 12 December deadline.

Washington refused to say 'I do' to an agreement last time round in 1995, with the EU and a group of other countries patching up a scaled-down interim deal regardless. This time, as then, the world's biggest player on global financial services markets still has the capacity to make or spoil the party.

The lack of satisfactory offers from developing countries was the main reason the US stayed outside the last agreement. This summer's financial crisis in South East Asia, and the more modest tremors in eastern Europe, have raised fresh questions over whether a new deal is timely and still possible.

At stake in the latest round of negotiations are attempts to give banks, insurers and securities companies the same treatment and market access as local firms across the globe.

Hope was injected into the process last week when the WTO's financial services committee received promises of 14 new market-opening offers from a string of countries including the crisis-hit Philippines, Indonesia and Malaysia. Latin American trend-setter Brazil, which has in the past cited constitutional problems as blocking a market-opening commitment, was also on the list.

These added to five offers from Iceland, Slovenia, Nigeria, Kenya and Egypt which came in a few days earlier. There were, however, some noticeable absentees from the latest list of offers and promises, including Argentina, India and Thailand.

The offers from Malaysia and other South East Asian tigers are seen as significant, especially after the wave of rhetoric against western speculators which came out of Kuala Lumpur over the summer, when the ringitt fell by more than 30&percent; against the dollar and the local stock exchange experienced a mini-crash.

Yet that rhetoric was followed by relatively few concrete measures to close up the markets.

The argument that opening them up might leave less room for speculation by increasing the flow of money and broadening the number of financial actors seems, for the moment, to be countering the temptation to retreat behind national barriers.

The developed world points to Mexico, where liberalisation was speeded up after the peso crisis, as the example for other developing countries to follow. (Thailand, the latter-day Mexico, will probably be forced to meet the liberalisation demands of the Japanese and western creditors bankrolling its International Monetary Fund recovery programme whether it likes it or not).

The West is dangling a carrot and stick in front of the developing countries. The developed world's need for around 700 billion ecu to fund infrastructure projects alone over the next five years can only be met by foreign investors - and, the argument goes, they will only act if they are offered a friendly, stable environment.

The wave of new offers appears to have swung the US stance from ambivalence to cautious optimism, although officials warn that the details of those offers have still to be examined and that time is running seriously short.

“Sentiment seems positive right now,” said one US official, although he refused to specify where Washington would be demanding improved offers.

The US has set quality and quantity criteria which must be met for it to be satisfied. The quality criteria include a list of demands covering the automatic right of banks and insurance companies to set up on foreign soil without having to establish joint ventures with local companies, allowing full majority ownership (51&percent;) of financial services companies, and holding on to extra rights that have already been won.

Quantity is covered by the nebulous notion of a sufficient critical mass of offers on the table.

Europe's financial services industry is upbeat about the chances of a deal involving the US. “We will have something,” said a spokesman for the European Banking Federation, although he admitted that there was not much new to persuade the US to sign up. “It is a small plus that is being offered on the 1995 package,” he said.

The Brussels-based federation is closely shadowing developments alongside leading US, Australian, Japanese and Hong Kong banking organisations which make up the Financial Leaders Group.

The group has, however, cautioned that key delegations will have to put new and, in some cases, improved offers on the table before the next round of negotiations begins on 10 November, if there is to be a basis for agreement.

European optimism is partly based on a belief that there is too much at stake for the US to walk away again and the fact that new offers from key developing countries are slowly coming in or being promised.

The EU-inspired 1995 deal salvaged most of the market-opening offers on the table then and provided a foundation for the present round of talks. Failure to strike a new deal now would wipe out all the gains made so far and mean starting from scratch again in the year 2000.

“That would be a global round with more opportunities for banks traded off against more opportunities for rice and cars. Financial services should think twice about what sort of agreement they would get from that sort of deal,” warned a banking federation spokesman.

However, industry experts say the US still might reason that it should stand aside from an agreement on the grounds that it could use its formidable bargaining weight to get better bilateral deals than those possible through the WTO framework.

That approach has already given the US firms preferential access to some markets and Washington fears that those advantages could disappear with a global agreement which does not include established, so-called 'grandfather rights'.

The Union is playing a supportive role in the process, but says it has nothing to add to its existing market-opening proposal.

Financial Services Commissioner Mario Monti will, however, embark on his own five-nation tour of Singapore, Indonesia, Malaysia, Taipei and Thailand at the start of November to cajole and beef up market opening offers which are felt to be too feeble. Monti's tour comes ahead of a key meeting of top trade diplomats, the high-level group, on 12 November.

That meeting will probably discuss what has, until now, been unmentionable: whether there should be any postponement of the 12 December deadline.