Category Archives: Debt

The Restructuring of Sovereign Debt

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The economic repercussions of Russia’s invasion of Ukraine will be devastating for many countries that have yet to recover from the pandemic. Higher prices for commodities, particularly energy and food, will increase inflation rates and widen trade deficits for those nations that import those items. Increases in interest rates will raise the cost of debt financing and hamper the ability of borrowers to meet their obligations or refinance existing debt.

Carmen Reinhart, Chief Economist of the World Bank, warned that the pandemic had exacerbated existing financial weaknesses in her Mundell-Fleming Lecture, “From Health Crisis to Financial Distress,” which has been published in the IMF Economic Review. She points out that economic and financial crises, including banking, currency, debt, etc., often occur together. The resulting “conglomerate crisis” can lead to a severe economic downturn. She warns that initial attempts to arrange a “shallow” restructuring of sovereign debt that does not reduce the intertemporal value of the debt may be followed by one or more subsequent restructurings, exacerbating the impact of the crisis.

Governments that need to restructure debt may be able to lessen the resulting impact if they act early. Tamon Asonuma, Marcos Chamon, Aitor Erce and Akira Sasahara have examined the consequences of debt restructurings in an IMF Working Paper, “Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel.” The authors looked at 179 restructurings of the sovereign debt held by private holders over the period of 1978-2010. They divided the sample into three categories: “strictly preemptive,” where no payments were missed; “weakly preemptive,” where some payments were missed but only temporarily and only after the start of negotiations with creditors; and “post-default,” which occurred when payments were missed and without agreement with the creditors.

They reported that banking crises and severe declines of credit and net capital inflow occurred more frequently following post-default restructurings. They also found that contractions of GDP and investment spending were substantial in post-default restructurings, less severe in weakly preemptive restructurings and did not occur in the case of strictly preemptive cases. Private credit and capital inflows remained below the pre-crisis levels and interest rates rose after post-default restructurings. Their results indicate that governments that can restructure without missing payments will avoid some of the costs associated with restructurings. The authors acknowledge that large shocks can force a halt in payments, but even in those cases collaboration with creditors is more advantageous than unilateral actions.

The IMF reviewed the institutional mechanisms that address sovereign debt restructurings in 2020 policy paper, The International Architecture for Resolving Sovereign Debt Involving Private-Sector Creditors—Recent Developments, Challenges, And Reform Options. The review found that recent restructurings of sovereign debt had been much smoother than those in previous periods. It attributed this change to several factors, including the increased use of collective action clauses which allow a majority of the creditors to override a minority that oppose a restructuring. The paper’s authors called for more contractual reforms as well as an increase in debt transparency, and also recommended that the international financial institutions support debt restructurings financially when appropriate. But the report  warned that the pandemic could engender a widespread crisis that could overwhelm existing procedures:

“Should a COVID-related systemic sovereign debt crisis requiring multiple deep restructurings materialize, the current resolution toolkit may not be adequate in addressing the crisis effectively and additional instruments may need to be activated at short notice.”

The IMF sought to establish new instruments in 2020 when it joined the Group of 20 nations to create an institutional mechanism for low-income countries with unsustainable debt loads called the “Common Framework” (see here). The initiative sought to bring together official creditors, including the traditional lenders such as the U.S. and France, with more recent lenders, such as China and India, to coordinate debt relief efforts. Private creditors were to use comparable terms in their negotiations.

But the Framework has not been widely adopted because of reluctance by some lenders and borrowers. Chinese lending has been funneled through several institutions, and they are not always willing to join other creditors. The governments of the nations with the debt loads have been reluctant to signal that they may need relief, in part because of a negative signaling effect. The IMF has called for reorganizing and expanding the Common Framework.

A wave of restructuring may be triggered by a Russian default on its dollar-denominated bonds. The credit rating agencies have downgraded the Russian bonds to junk bond status (“C” in the case of Fitch’s rating). President Putin has stated that the bond payments will be paid in rubles, but the Russian currency has lost its international value. A default would hasten the collapse of the Russian economy. It would also lead to a reassessment of the solvency of other governments and their ability to fulfill their debt obligations. Foreign bondholders could decide to cut their losses by selling the bonds of the emerging markets and developing economies. A wave of such selling that occurs at the same time as the Federal Reserve raises interest rates will almost certainly lead to a new debt crisis for many countries. The IMF and World Bank will be hard-pressed to coordinate relief efforts across so many borrowers and lenders.

The Coming Wave of Debt Restructurings

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The news that the Federal Reserve will raise interest rates in 2022 sooner than anticipated was not surprising in view of the continued high rates of U.S. inflation. While U.S. asset prices are falling in response to the prospect of higher rates as well as a smaller Fed balance sheet, foreign markets are straining to decipher the spillover effects on their economies. But it is only a matter of time until emerging markets and developing economies face higher financing costs and the need for debt restructurings.

The World Bank pointS out in its most recent Global Economic Prospects that global debt levels in 2020 rose to their highest levels relative to GDP in decades. The publication also shows that economic projections for the emerging markets and developing economies excluding China are for lower growth rates than those of the advanced economies. Consequently, servicing and repaying the debt represents a challenge for those countries. World Bank President David Malpass warned that 60% of the poorest countries need to restructure their debt or will need to.

Ayhan Kose, Franziska L. Ohnsorge and Carmen Reinhart of the World Bank and Kenneth Rogoff of Harvard University examine the options that countries with elevated debt levels face in their NBER working paper, ”The Aftermath of Debt Surges.” They divide the possible responses into orthodox and heterodox solutions. The former includes strong economic growth that reduces relative debt levels as well as fiscal consolidation that can generate surpluses to pay off debt. Other measures are the privatization of public assets and higher wealth taxation, both of which can yield needed revenues. All come with associated downsides hazards, such as higher interest rates if growth comes with more inflation, or a lack of the conditions needed for successful privatization.

Heterodox approaches include unexpected inflation to erode real debt levels, financial repression to maintain low interest rate and debt default or restructuring. The authors point out that external defaults and restructuring impose long-term costs in the form of higher bond yields. Nonetheless, they warn that debt default, both external and domestic, may become more common in the wake of the increase in debt in response to the pandemic.

Similarly, Stephan Danninger, Kenneth Kang and Hélène Poirson of the IMF have a post on the IMF’s Blog, “Emerging Economies Must Prepare for Fed Policy Tightening,” that presents measures that the governments of these countries should undertake to limit the fallout from higher foreign rates. These include allowing their currencies to depreciate while raising their own interest rates. Of course, such measures make supporting a weak domestic economy more difficult. They warn that countries with significant nonperforming debt levels will face solvency concerns.

The IMF, the World Bank and the Group of 20 have joined together to implement a “Common Framework” to help low-income countries deal with their unsustainable debt. Creditor Committees will be created on a case-by-case basis to coordinate debt restructuring by private and official creditors. Private lenders, however, have not shown an interest in joining the program and to date, only three countries—Chad, Zambia and Ethiopia—have applied for assistance.

Another challenge facing the Common Framework is the role of China, which has become the largest bilateral lender to the low-income countries. China has not joined the Paris Club, the organization of creditor nations that deals with bilateral debt between advanced economies and low-income countries. However, it has to date followed the policies of the Paris Club members in deferring debt. One possible complication consists of whether loans from Chinese policy banks, such as the China Development Bank and the Export-Import Bank of China, and state-owned commercial banks, such as the Industrial and Commercial Bank of China, should be treated as private or official creditors.

Anne Krueger of Johns Hopkins University has warned that debt restructuring and further lending should be accompanied by appropriate economic policies. Some countries were engaging in unsustainable spending before the pandemic, and any new lending should be used for spending related to the pandemic. She cites Bolivia, Ghana, Madagascar, Pakistan, Sri Lanka, and Zambia as countries that had excessive expenditures before the pandemic.

The possibility of a debt crisis among the emerging markets and developing nations has long been foreseen (see here and here). The wave of new lending to these countries in the period preceding the pandemic was similar to previous surges that had led to financial crises, and the pandemic further raised debt levels. The combination of higher interest rates in the advanced economies, sluggish economic growth and the possibility of further disruptions due to the pandemic pose a challenge to governments with limited abilities to respond.

The Next “Lost Decade”?

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The 1980s were a “lost decade” of economic growth for those developing countries in Latin America that were enveloped in a debt crisis. Many now fear that we are on the verge of another debt crisis in the wake of borrowing by governments to support their economies during the pandemic. A concerted response will be needed to avoid it.

Countries such as Mexico and Brazil had borrowed during the 1970s to finance oil bills that had skyrocketed after OPEC had raised petroleum prices. International banks were happy to recycle the dollars that the oil-exporters had placed on deposit with them. The crisis came when the Federal Reserve under Paul Volcker raised interest rates, and the U.S. experienced back-to-back recessions that lowered the demand for these countries’ exports. It took a decade of negotiations and failed initiatives before the bank debt was refinanced as bonds or written off.

The IMF’s latest Global Financial Stability Report provides data on the recent rise in government debt: “Government debt in emerging markets (excluding China) is expected to reach 61 percent of GDP in 2021, and gross financing needs are anticipated to remain elevated at 13 percent of GDP in 2021, coming off record levels in 2020.” This escalation follows the pre-pandemic period when public debt/GDP levels had already risen in emerging market economies and advanced economies outside Europe.

The governments issuing debt were able to finance their expenditures at very low interest rates that reflected the 2020 collapse in economic activity and the rapid response by central banks. The “sudden stop” of capital flows to emerging markets last spring was reversed as investors returned seeking the higher yields that emerging market debt could provide. Moody’s reports record sales of Eurobonds in 2020 by emerging markets of $639 billion. Foreign investors also purchased sizable amounts of local currency debt in many of these countries.

But the favorable conditions of the past year are changing. Economic recovery will be much slower for countries such as Brazil and India, where the numbers of people infected by the coronavirus continue to soar. In April’s World Economic Outlook, the IMF reported improved prospects for growth in the advanced economies but less a less favorable outlook for the emerging and developing economies with the exception of China. Second, interest rates have risen from their very low levels In the U.S., reflecting expectations of increased growth and inflation. Third, a strong U.S. dollar makes servicing dollar-denominated debt more expensive.

Many of those issuing bonds relied on the analysis of Olivier Blanchard, until recently chief economist of the IMF, to justify their borrowing. Blanchard had pointed out that an increase in public debt may be sustainable if the rate of economic growth exceeds the interest on the public debt. The governments of some emerging markets used this line of reasoning to justify their borrowing as they responded to the worldwide lockdown and the need for medical equipment and supplies.

But emerging markets face different circumstances than those of advanced economies. They pay a risk premium that can escalate when conditions deteriorate.  IMF economists Marcos Chamon and Jonathan D. Ostry warn that borrowing costs for emerging markets and developing economies may become significantly higher relatively quickly. The Economist cites a bank study that lists Brazil, Indonesia, Mexico and South Africa as among the countries most vulnerable to any jump in interest rates.

If (or when) conditions do deteriorate, what responses will be available? The IMF, the World Bank and the Group of 20 have suspended the debt servicing of their loans to low-income countries via a Debt Service Suspension Initiative (DSSI). The response has been limited, perhaps due to fears of what acceptance would imply about domestic economic management. Moreover, DSSI does not apply to private bondholders, and the commercial share of the holdings of public debt rose over the last decade.

During the 1980s the IMF worked with the governments in distress and the international banks that were their lenders. This time, however, there is a more disparate group of lenders, and it will be more difficult to formulate a common response. China has become a major lender, and China has joined the DSSI. But some of their loans were made state-owned banks and agencies, which may be classified as private lenders. Some foreign bondholders claim they are concerned that any debt relief they extend will be used to pay the Chinese lenders.

The IMF intends a more direct response through an issuance of Special Drawing Rights (SDRs), the official currency of the Fund. These can be sold or used as foreign exchange reserves, thus freeing up other reserve assets. Their allocation are based on the quotas which reflect a country’s size and international economic activity, so favors the advanced economies. But there are mechanisms that allow countries that do not need the new allocation to lend or donate them to countries that do. The U.S. had withheld its approval of the increase, but Treasury Secretary Yellen reversed that decision and the allocation is expected to take place next summer.

Kris James Mitchener of Santa Clara University and Christoph Trebesch of the Kiel Institute for the World Economy review the literature on sovereign debt in their paper, “Sovereign Debt in the 21st Century: Looking Backward, Looking Forward.” While their survey emphasizes debt problems in advanced economies, they point out implications for the emerging market economies. For example, they find that the enforcement of debt contracts via legal challenges has become more common. Distressed debt funds purchase debt that has been discounted in value because of concerns over default, and then demand full repayment from the issuing government in court in London or New York. They show that such tactics were used in the cases of Argentina, Greece and the Ukraine. Similar challenges may emerge if emerging markets attempt to restructure their obligations.

The record of the last debt crisis makes clear the adverse implications for allowing debt problems to fester. The pandemic has already undone much of the progress in reducing poverty, pushing tens of millions many back below the poverty line.   A new debt crisis would exacerbate the divergent impacts of the pandemic on the developing economies and the advanced. Just as it is in the self-interest of all countries to contain the virus itself, all have a stake in dealing with its financial fallout.

Portfolio Capital Flows to Emerging Markets amid the Pandemic

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Among the most notable economic responses to the COVID-19 pandemic has been the turnaround in capital flows to emerging markets. A sudden reversal in portfolio flows of over $100 billion to these countries in March has been offset by a surge of capital this fall. But many of these countries have accumulated debt burdens that will affect their ability to recover from the pandemic.

The IMF examined portfolio flows to these economies in last April’s issue of the Global Financial Stability Report (see also here). The report showed that prior to the pandemic, bond portfolio inflows had been larger than equity portfolio flows, with cumulative flows since 2005 of approximately $2.5 trillion for bonds vs. about $1 trillion for equity. The bonds included both bonds denominated in foreign currency as well as local currency debt. These flows had constituted significant amounts of finance in the emerging and frontier markets’ debt and equity markets.

The authors of the report analyzed the determinants of the different types of portfolio flows. They reported that changes in global conditions (or “push factors”) are largely responsible for debt inflows. Among these factors are the VIX index, a measure of global risk appetite, the U.S. Treasury bond yield, and the foreign exchange value of the dollar. Equity flows are also influenced by foreign conditions, but domestic economic growth (a “pull” factor) is a larger factor in raising the likelihood of capital inflows. This reflects the dependency of the returns on portfolio equity on profitable business operations.

These results explain a large part of the retreat from portfolio securities last March. When the extent of the pandemic became clear, the VIX measure rose while the dollar initially appreciated as investors sought a “safe harbor.” These developments contributed to the reversal of foreign holdings of debt securities. The rapid deterioration in the prospects for economic growth in the emerging markets influenced the turnaround of portfolio equity flows.

But capital inflows were flowing back to the emerging markets by the summer and continued to rise this fall. The Institute for International Finance (IIF) reported inflows of $76.5 billion in November alone, with $39.8 billion for emerging market equities and $37.7 billion for bonds and other debt. For the fourth quarter the IIF expected the strongest level of inflows since the first quarter of 2013.

The turnaround reflects several factors. First, the Federal Reserve’s strong response to stabilize financial markets has been successful, and market volatility has dropped. At the same time, the Fed’s lowering of the Federal Funds rate caused investors to look elsewhere for yields. Finally, the announcements of successful vaccines offers the prospect of an economic recovery in 2021.

However, there are concerns that the desire for the higher yield on riskier debt is fostering the issuance of bonds by borrowers who may not be able to fulfill their obligations. The ability of many of the governments and firms in the emerging market economies to meet their debt obligations is very much open to question. In December, S&P Global Ratings noted that “short-term risks still loom large” in the emerging markets.  Moreover, the agency stated that  “Debt overhang among governments and pressure on corporate earnings would constrain an economic recovery.” Five of the 16 key emerging market sovereign bonds that S&P rates carry negative outlooks: Chile, Colombia, Mexico, Indonesia and Malaysia.

The dangers of government spending in emerging markets financed by debt have been noted by Michael Spence of Stanford and Danny Leipziger in “The Pandemic Public-Debt Dilemma.” While the current cost of debt financing is relatively cheap, Spence and Leipziger pointed out that “a country’s citizens are not well-served when their government becomes more indebted in order to spend imprudently.” They warn that “borrowing in hard currencies when exports are depressed and their own exchange rates are under duress simply makes future debt re-scheduling more likely…”

Similarly, Raghuram G. Rajan of the University of Chicago and former governor of the Reserve Bank of India also questions how much debt a government can issue in “How Much Debt Is Too Much?” While some governments can roll over existing debt, Rajan claims that ”… investors will buy that new debt only if they are confident that the government can repay all its debt from its prospective revenues.” He warns that “Many an emerging market has faced a debt “sudden stop” well before it reached full employment, triggered by evaporating market confidence in its ability to roll over debt.”

Jeremy Bulow of Stanford, Carmen M. Reinhart, currently chief economist of the World Bank Group, Kenneth Rogoff of Harvard and Christoph Trebesch of the Kiel Institute for the World economy foresee a need to plan measures to deal with debt problems in “The Debt Pandemic.” They warn of debt restructurings on a scale not seen since the debt crisis of the 1980s. They view the pandemic as “…a once-in-a-century shock that merits a generous response from official and private creditors toward emerging market and developing economies.” Among the measures they suggest is new legislation to support orderly restructurings.

The need for policy measures to deal with debt restructuring is also expressed by Kristalina Georgieva, Managing Director of the IMF, Ceyla Pazarbasioglu,  Director of the IMF’s Strategy, Policy, and Review Department, and Rhoda Weeks-Brown,  General Counsel and Director of the IMF’s Legal Department. They specifically call for strengthening provisions that minimize economic disruption when debtors are in distress. These could include lower debt payments or the automatic suspension of  debt service. They also ask for increased debt transparency and agreement by creditor governments that are part of the Paris Club on a common approach to restructuring.  The latter two steps are aimed in part at China, which has become the largest bilateral creditor for many developing countries. There is considerable uncertainty over the size and conditions of debt owed to China, and how China will respond to the inability of debtor governments to make payments on the debt.

The IMF itself has pledged to provide debt service relief to its poorest members, while working with the Group of 20 on its Debt Service Suspension Initiative. Under this program, the governments of the G20 have offered to suspend the payments of government-to-government debt for 73 developing economies. The G20 also called on private lenders to offer similar relief, but there has been little response.

The onset of a debt crisis among the emerging market countries has been foreseen.  The widespread borrowing to deal with pandemic, however, has exacerbated the debt overhang. The pandemic will continue to affect financial stability and economic performance even as medical measures are implemented to deal with the virus .

The Coming Debt Crisis

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After the 2008-09 global financial crisis, economists were criticized for not predicting its coming. This charge was not totally justified, as there were some who were concerned about the run-up in asset prices. Robert Schiller of Yale, for example, had warned that housing prices had escalated to unsustainable levels. But the looming debt crisis in the emerging market economies has been foreseen by many, although the particular trigger—a pandemic—was not.

Last year the World Bank released Global Waves of Debt: Causes and Consequences, written by M. Ayhan Kose, Peter Nagle, Franziska Ohnsorge and Naotaka Sugawara. The authors examined a wave of debt buildup that began in 2010. By 2018 total debt in the emerging markets and developing economies (EMDE) had risen by 54 percentage points to 168% of GDP. Much of this increase reflected a rise in corporate debt in China, but even excluding China debt reached a near-record level of 107% of GDP in the remaining countries.

The book’s authors compare the recent rise in the EMDE’s debt to other waves of debt accumulation during the last fifty years. These include the debt issued by governments in the 1970s and 1980s, particularly in Latin America; a second wave from 1990 until the early 2000s that reflected borrowing by banks and firms in East Asia and governments in Europe and Central Asia; and a third run-up in private borrowing via bank loans in Europe and Central Asia in the early 2000s. All these previous waves ended in some form of crisis that adversely affected economic growth.

While the most recent increase in debt shares some features with the previous waves such as low global interest rates, the report’s authors state that it has been “…larger, faster, and more broad-based than in the three previous waves…” The sources of credit shifted away from global banks to the capital markets and regional banks. The buildup included a rise in government debt, particularly among commodity-exporting countries, as well as private debt. China’s private debt rise accounted for about four-fifths of the increase in private EMDE debt during this period. External debt rose, particularly in the EMDEs excluding China, and much of these liabilities were denominated in foreign currency.

The World Bank’s economists report that about half of all episodes of rapid debt accumulation in the EMDEs have been associated with financial crises. They (with Wee Chian Koh) further explore this subject in a recent World Bank Policy Research Paper, “Debt and Financial Crises.” They identify 256 episodes of rapid government debt accumulation and 263 episodes of rapid private debt accumulation in 100 EMDEs over the period of 1970-2018. They test their effect upon the occurrence of bank, sovereign debt and currency crises in an econometric model, and find that such accumulations do increase the likelihood of such crises. An increase of government debt of 30 percentage points of GDP raised the probability of a debt crisis to 2% from 1.4% in the absence of such a build-up, and of a currency crisis to 6.6% from 4.1%. Similarly, a 15% of GDP rise in private debt doubled the probability of a bank crisis to 4.8% if there were no accumulation, and of a currency crisis to 7.5% from 3.9%. (For earlier analyses of the impact of external debt on the occurrence of bank crises see here and here.)

Kristin J. Forbes of MIT and Francis E. Warnock of the University of Virginia’s Darden Business School looked at episodes of extreme capital flows in the period since the global financial crisis (GFC) in a recent NBER Working Paper, “Capital Flows Waves—or Ripples? Extreme Capital Flow Movements Since the Crisis.”  They update the results reported in their 2012 Journal of International Economics paper, in which they distinguished between surges, stops, flights and retrenchments. They reported that before the GFC global risk, global growth and regional contagion were associated with extreme capital flow episodes, while domestic factors were less important.

Forbes and Warnock update their data base in the new paper. They report that has been a lower incidence of extreme capital flow episodes since 2009 in their sample of 58 advanced and emerging market economies, and such episodes occur more as “ripples” than “waves.” They also find that as in the past the majority of episodes of extreme capital flows were debt-led. When they distinguish between bank versus portfolio debt, their results suggest a substantially larger role for bank flows in driving extreme capital flows.

Forbes and Warnock also repeat their earlier analysis of the determinants of extreme capital flows using data from the post-crisis period. They find less evidence of significant relationships of the global variables with the extreme capital flows. Global risk is significant only in the stop and retrenchment episodes, and contagion is significantly associated only with surges. They suggest that these results may reflect changes in the post-crisis global financial system, such as greater use of unconventional tools of monetary policy, as well as increased volatility in commodity prices.

Corporations can respond to crises by changing how and where they raise funds. Juan J. Cortina, Tatiana Didier and Sergio L. Schmukler of the World Bank analyze these responses in another World Bank Policy Research Working paper, “Global Corporate Debt During Crises: Implications of Switching Borrowing across Markets.” They point out that firms can obtain funds either via bank syndicated lending or bonds, and they can borrow in international or domestic markets. They use data on 56,826 firms in advanced and emerging market economies with 183,732 issuances during the period 1991-2014, and focus on borrowing during the GFC and domestic banking crises. They point out that the total amounts of bonds and syndicated loans issued during this period increased almost 27-fold in the emerging market economies versus more than 7 times in the advanced economies.

Cortina, Didier and Schmukler found that the issuance of bonds relative to syndicated loans increased during the GFC by 9 percentage points from a baseline of 52% in the emerging markets, and by 6 percentage points in the advanced economies from a baseline probability of 28%. There was also an increase in the use of domestic debt markets relative to international ones during the GFC, particularly by emerging economy firms. During domestic banking crises, on the other hand, firms turned to the use of bonds in the international markets. When the authors used firm-level data, they found that this switching was done by larger firms.

The authors also report that the debt instruments have different characteristics. For example, the emerging market firms obtained smaller amounts of funds with bonds as compared to bank syndicated loans. Moreover, the debt of firms in emerging markets in international markets was more likely to be denominated in foreign currency, as opposed to the use of domestic currency in domestic markets.

Cortina, Didier and Schmukler also investigated how these characteristics changed during the GFC and domestic bank crises. While the volume of bond financing increased during the GFC relative to the pre-crisis years, syndicated bank loan financing fell, and these amounts in the emerging market economies fully compensated each other. In the advanced economies, on the other hand, total debt financing fell.

The global pandemic is disrupting all financial markets and institutions. The situation of banks in the advanced economies is stronger than it was during the GFC (but this could change), and the Federal Reserve is supporting the flow of credit. But the emerging markets corporations and governments that face falling exports, currency depreciations and enormous health expenditures will find it difficult to service their debt. Kristalina Georgieva, managing director of the IMF, has announced that the Fund will come to the assistance of these economies, and next week’s meeting of the IMF will address their needs. The fact that alarm bells about debt in emerging markets had been sounding will be of little comfort to those who have to deal with the collapse in financial flows.