Bonds from emerging market and developing countries are becoming more ‘popular’ with global investors as interest rates and profitability prospects are falling in developed countries. The major reason for the rising demand for these bonds is the way they are integrated in investment funds without much consideration of the consequences.
In the discussion paper ‘The risky interconnectedness between investment funds and developing country debt’, SOMO-researcher Myriam Vander Stichele takes Ghana as a clear example of how the global investment fund industry transfers risks and volatility, or even crisis, throughout global financial markets.
Key is the easy way in which capital can be moved, which ultimately backfires on Ghana’s currency, debt burden and bond issuance prospects. An important driver is the many ways the investment fund industry can make profits by packaging and repackaging the bond.
Taking the example of one specific indexed fund that includes Ghanaian bonds, the paper exposes how speculators are allowed to borrow bonds from the fund and bet on its share price. This increases the interconnectedness between the globalised, already volatile, financial markets and the debt burden of developing countries, making economies more vulnerable and less sustainable.
Connecting the dots
This week, the World Bank and the IMF have their annual meetings in Washington DC. This paper is presented there as an example of how lack of regulation of the fund industry and the free movement of capital have to be reconsidered. The recommendations for reforms to prevent irresponsible lending and excessive indebtedness will be presented and discussed at the Civil Society Policy Forum on 16 and 18 October.
The paper argues such changes should be part of the ‘sustainable finance’ agenda that improves financial stability, at a time that the IMF calls for ‘connecting the dots’ between sustainable finance and financial stability.