1. The contradictions at the UN Conference on the Financial and Economic Crisis
While the UN document of the UN Conference on the Financial and Economic Crisis (draft agreed on 22 June) recognizes that “The current crisis has been compounded by an initial failure to appreciate the full scope of the risks accumulating in the financial markets” (Paragr. 40) and there is a “critical need for expanding the scope of regulation and supervision and making it more effective” (Paragr. 37), the conference also calls for the “conclusion to the Doha Round that increases market access” (Paragr. 26). However, no account is taken by the fact that the Doha Round includes further expansion of financial services without guarantees of better regulation and supervision. On the contrary, a new trade agreement that includes financial services will deregulate more financial services. For instance, free trade agreements require that no limit on the size of a financial foreign investor are being imposed by the host countries, nor that the value of financial transactions by a foreign financial company be restricted. This WTO rule under the GATS is a perfect formula to allow financial conglomerates to become too big to fail. GATS even does not allow an assessment to be made, before foreign financial operators enter a country, whether a foreign bank is economically needed. So far, developed countries have already submitted many demands for financial deregulation in developing countries.
Because GATS and FTA rules are so restrictive, some of the proposed reforms go against existing rules and commitments under these agreements. For instance, the G-20 has proposed to make derivative trading more transparent by standardizing derivatives and limiting the untransparent derivative trading called “over the counter” (OCT). However, different countries have legal obligations through GATS and FTAs to allow OCT derivative trading and any new financial service.
The UN Commission of Experts on the global economic and financial crisis chaired by Prof. Stiglitz Committee agreed that “Many bilateral and multilateral trade agreements contain commitments that circumscribe the ability of countries to respond to the current crisis with appropriate regulatory, structural, and macro-economic reforms and rescue packages, and may have exposed them unnecessarily to the contagion from the failures elsewhere in the global economic system." Many of the developed country UN members still refuse to see this reality.
The free trade agreements that liberalized and deregulated financial services were based on the assumption that the (financial) markets would correct themselves. Given that this assumption has now clearly proven to be wrong, financial services liberalization agreements should not continue but rather be reversed and completely reviewed. Therefore, the UN conference declaration is wrong to “recognize the right of countries to fully utilize their flexibilities consistent with their WTO commitments and obligations” since these WTO obligations unduly limit countries to undertake the necessary measures.
2. The links between ICSID and the financial crisis
The International Centre for Settlement of Investment Disputes (ICSID, part of the World Bank Group) has been set up to administer panels that make judgments and determine fines when foreign investors sue governments for alleged breaches of bilateral investment agreements (BITs). Based on BITs which were signed by Argentina and many other countries, ICSID has been judging on measures that were taken by Argentina when it was confronted with a financial crisis in 2001. The financial crisis measures had included (1) bank deposits and all credit, or obligations, denominated in foreign currency were converted into pesos, (2) fees for (privatized) public services were frozen and (3) devaluation of the currency against the dollar. As a consequence, many foreign investors –many of them who took over privatized public services- could not make the foreseen or guaranteed profits any more. More than 30 multinationals have since sued Argentina before ICSID to get compensation for the losses they claim these financial crisis measures have caused. A few of these companies have been insurance and other financial services companies. As a consequence, Argentina had so far to pay between $ 100 m and $ 200 m in the cases it lost, and some cases are still pending.1 ICSID can give no consideration whether the financial crisis measures were taken in the interest of the public and in extreme financial circumstances.
3. The links between ICSID and financial services: The dangerous mix of free trade agreements and BITs
Free trade agreements such as GATS (General Agreement on Trade in Services) under the WTO, and bilateral/regional free trade agreements, include liberalisation of financial services. However, this liberalisation includes allowing foreign financial investors to enter a country, such as banks opening new branches. These investors are not only guaranteed, through the particular free trade rules (see below), that the host country will not restrict their activities. If the host country also has bilateral investment agreements (BITs) with the home countries of the foreign financial investors, the financial investors are in addition protected against losses from nationalisation or from so-called unfair treatment. This could result in foreign financial investors suing the government before ICSID for instance for new regulations or measures that limit the profits foreign investors can make, even if these measures are in the public interest. For instance, foreign investors have already used a BIT to sue South Africa for its policies to increase black ownership in the mining sector aiming at reversing the legacy of apartheid, which could also happen in the financial sector for which there are also similar black empowerment measures.
