Keeping a close watch

Interview with Mr Agustín Carstens, General Manager of the BIS, in LatinFinance, conducted by Mr Kevin Gray and published online and in print format on 2 August 2018.

The first Latin American at the helm of BIS, the former Mexico central banker discusses the outlook for the global economy, cryptocurrencies and financial regulation

When Agustín Carstens took over as the head of the Bank of International Settlements (BIS) in December, he became the first person from an emerging market country to lead the Basel-based institution often referred to as the central bank of central banks. At BIS, Carstens, who steered Mexico's monetary policy through a bout of economic turbulence after the election of US President Donald Trump, has focused on addressing the impact of financial technology and digital currencies on the global financial system. LatinFinance spoke to Carstens about the risks ahead for Latin America and other issues. The interview has been edited and condensed for clarity.

LatinFinance: What advice do you have for central banks working to end crisis-era monetary policy?

Agustín Carstens: For the major central banks in advanced economies that undertook very aggressive monetary policies during the last decade, it's nearly time to unwind. It's not a recommendation that should be adopted by everybody at the same time. But those central banks that have the conditions to do so, should. Unconventional monetary policies were very useful. They made a huge contribution towards getting over the most important problems of the global financial crisis with limited inflation impact. But at the same time, they generated substantial liquidity and that can distort financial markets. The Federal Reserve has started removing excessive accommodation, in a gradual way with forward guidance to markets, which we find appropriate. Some central banks are a bit behind the Fed because their recovery has not been as strong yet. But they are getting there. I'm referring to the European Central Bank and the Bank of Japan. Whenever they are ready, they should follow in establishing a more conventional monetary policy.

LF: Are you concerned that some of the central banks are moving too slowly or need to act more boldly?

AC: It is a balancing act. Obviously removing liquidity can generate volatility, therefore it has to be done in a very judicious way. Some volatility is unavoidable. But at the same time removing accommodation should not generate excessive turbulence that might threaten the recovery. There is no one-size-fits-all. The issue is for central banks to move as fast as the conditions allow them, so that financial vulnerabilities in the future are limited.

LF: Does the recovery depend too much on central banks?

AC: For many years it has. Now what we're seeing, especially since 2017, is a more synchronized recovery. We have witnessed some developments that we haven't seen in decades, for example, the very low rate of unemployment in the US. It's quite remarkable. There is a sense this can continue. The recovery has been well-supported by consumption and additional investment. At the same time, there are some threats to the recovery that need to be taken into account. In particular, something I am concerned about is if the recent protectionist mood persists and starts having an identifiable impact on investment in different countries.

LF: What other risks do you see, and do you think we're seeing the peak of the current growth cycle?

AC: I think, for example in the US, that growth can continue, especially now that there is fiscal and monetary stimulus. Nonetheless, the fiscal effect will probably wind down in the next few quarters, therefore it will not give continuous support to the recovery. There might be situations where growth is so fast that it also starts generating inflationary pressures requiring higher rates of interest. Right now we don't see a major risk of recession. But a moderate slowdown might be possible in the US. In Europe, Japan and most emerging markets, we still see potential for further growth. There are three main concerns: protectionism, a potential snap back in interest rates and a more risk-averse attitude by some institutional investors. That might generate decompression of different premiums in fixed-income markets and probably some correction in some stock markets that could generate turbulence and that might affect growth. There are some markets that are more vulnerable than others. The underlying situation in some countries might not be as strong and therefore this can have more impact in some emerging markets.

LF: Shifting to Latin America, do you see a heightened risk for the region?

AC: It is important for different countries in the region to consolidate a strong and prudent macroeconomic framework, particularly in countries that have or have had elections. Exposure to commodities is also a matter of concern. But in terms of protectionism, if, for example, the US and China move into a real trade war, some countries in Latin America might in fact benefit, in particular if that impacts commodity prices. I would say that there is no room for complacency in terms of having a strong macro framework, especially since we expect more restrictive financial conditions going forward. It will not be that easy to finance large current account or fiscal deficits in the future.

LF: I'd like to discuss cryptocurrencies. You call them cryptoassets. How do you think they should be regulated and how much of a risk do you think they pose to the financial system?

AC: The way they have been set up makes it very difficult to identify their roots. Bitcoin, for example, circulates all over the world. It can be mined by individuals in different parts of the world. That by itself represents an issue. Some parts of the infrastructure under which these cryptoassets are traded should be regulated and there are good reasons for that. One is that they have become a conduit for illegal transactions. The exchanges where these cyber assets are traded should be subject to anti-money laundering regulations. These assets have also attracted the attention of innocent bystanders. Many of these initial currency offers don't really provide adequate information, and many of them are even Ponzi schemes. I think consumer and investor protection legislation would be an option here. Finally, local authorities, as appropriate should also limit the involvement of the regulated financial system with these currencies, because they could facilitate illegal behaviour when they do not comply with the rules that apply to the formal financial system. There is quite a wide scope to regulate and also inform the general public about the limitations of these financial instruments.

LF: Looking at what this might mean for Latin America, do you think a regional approach is needed for regulation?

AC: That would be the best approach given the international nature of these assets, that they lend themselves to arbitrage and sidestep some regulations. To preserve the integrity of regulations in the formal financial system, it's appropriate to act in this fashion. In some countries there might be types of assets that require more specific regulation. Financial authorities should coordinate as much as possible.

LF: Is Latin America particularly exposed to some of your concerns over cryptocurrencies?

AC: One of the things we're trying to do is have a better understanding of where these cryptoassets are being traded and used the most. Latin America is not considered the most advanced in this area, which is good. At the same time, we have to be cautious since we don't have all the information. And why don't we have all the information? Simply because these are not regulated assets. However, Latin America has to be careful.

LF: Do you see a need to regulate blockchain?

AC: The technology, per se, is not what concerns us. It is the use of the technology to produce money privately that concerns us. I would say that the problem is that many of the creators of these cryptoassets have oversold the characteristics of such technology in the sense that technology alone would produce the trust that has been earned by sovereign currencies over many years. We have already seen that these technologies can fail and be subject to hacking. So it's applying the technology to the production of money that is questioned by us and others. We fully support other applications of blockchain and other technologies, for example, in the settlement of securities transactions. We don't have an anti-technology bias.