The crisis that began with banks and other financial institutions in the richest countries has spread through their economies and spilled into developing countries, undermining their sources of finance and extracting a direct human cost already. First, trade earnings have fallen sharply – with the World Bank estimating that low-income countries’ merchandise exports would have dropped by almost 15% in 2009, increasing their trade deficit from 6.3% to 9.2% of their GDP. Second, net private capital flows have fallen around 70% across all developing countries from around $1.2 trillion in 2007 to an estimated $363 billion in 2009 – a drop equivalent to around 5% of GDP. Third, remittances were estimated to have fallen in 2009 by 7.3%.

Of course the richest countries are also suffering economically. The difference is that shocks in many developing countries will have much harsher and potentially permanent impacts. An estimated 120 million extra people will be living on less than $2 a day by 2010. The ILO estimates that global unemployment will rise to 219-241 million people, the highest on record, with disproportionately damaging effects on women. The World Bank conservatively estimates that the crisis will cause an additional 30-50 thousand infant deaths in sub-Saharan Africa alone – to say nothing of the permanent effects on a generation that a peak in malnutrition is likely to have.
Don’t let these numbers make you angry, though - the real outrage is the underlying levels. More than a billion people going hungry every day, according to the FAO. It’s not the 11% growth that should shock us. A few more tens of thousands of unnecessary child deaths? It’s the eight or nine million a year that should shock us; should make us incandescent with rage.

This is why Christian Aid has long recognised that development efforts cannot only treat the symptoms of poverty, but must address the fundamental causes. You can learn more about this, and join our drive for Poverty Over at http://povertyover.christianaid.org.uk.

This is also why the crisis presents such a staggering opportunity for change that would benefit the world. The same lack of financial transparency that underpins the crisis also plays a major role in denying development, by facilitating the estimated one trillion dollars annually of illicit capital flows from developing countries due to corruption, money-laundering and above all tax evasion and avoidance. If international policymakers take the right measures, they can not only reduce the chances and likely severity of the next crisis, they can also kick away a major structural cause of poverty.

The crisis is the inevitable result of a classic financial liberalisation boom. As the experience of developing countries makes abundantly and painfully clear, every significant liberalisation of international financial flows has been followed by an economic boom, and then a subsequent bust. The boom periods involve rapid expansion of credit and are typically characterised by growth in consumption, bubbles in asset prices but little productive investment. The busts see a sharp contraction of credit, and – depending on the extent of countercyclical monetary and fiscal policy – often very sharp increases in unemployment and poverty.

The liberalisation that prompted the boom in this case is somewhat hidden from view, rather than being a clear policy decision. Effectively, financial integration among rich countries ran far ahead of the capacity of national regulators to maintain domestic credit restraint. By using structured investment vehicles in opaque and little-regulated jurisdictions, and other ways to exploit regulatory arbitrage, banks and other financial institutions were able to side step the key limits on their risk-taking.

Banks’ capital is regulated so that they cannot over-extend themselves and behave too riskily. The Basle Capital Accord mandates a safe level not exceeding $12.50 of (risk-adjusted) assets for each one dollar of equity or original capital. To take just one example, our partners the Tax Justice Network have shown that the Irish holding company of US investment bank Bear Stearns had almost $120 of assets for each dollar of underlying capital. Bear Stearns was subsequently bought out by JP Morgan, to avoid bankruptcy and at the behest of the Fed, for a price of around $10 a share – compared to a 52-week high of $133.20. Neither the US nor Irish regulators were apparently able to take a global view of the company’s risk, on-balance sheet or otherwise.

In this way competition among jurisdictions to provide ever-more attractive ‘light’ regulation, while other regulators failed to intervene, allowed banks and other financial institutions to avoid the key limits to their expanding credit. At the same time, financial market instruments of growing complexity were used to distribute the ultimate risks underpinning that credit expansion. Only when confidence eventually turned was it revealed that the ‘new paradigm’ had been a shell game, with systemic risks ramped up rather than miraculously dispersed.

‘Secrecy jurisdictions’, the preferred term to tax havens - as it is not the low tax that havens levy that is the problem, but the secrecy they offer which allows abuses and corruption to thrive, are not only the small islands of popular imagination. In fact, a great deal of the global total of opacity in financial flows can be attributed to larger centres – not least the US and the UK, which both feature in the top 5 of the new Financial Secrecy Index that Christian Aid and the Tax Justice Network have just published.

The index, which can be found at http://www.financialsecrecyindex.com/, measures the opacity of each jurisdiction, and weights this by their share of the market in providing financial services to non-residents. The top twenty includes eight European countries: Luxembourg (2), Switzerland (3), UK (5), Ireland (6), Belgium (9), Austria (12), Netherlands (15) and Portugal (Madeira) (17).

For developing countries, the same mechanism and the same jurisdictions that contributed to the boom have caused even greater damage than the crisis itself: international financial integration without coordinated regulation. For the crisis, the key area of flaunted regulation was that of capital reserves to constrain credit expansion and risk. For developing countries, the major impacts are around tax evasion, tax avoidance and other corrupt or illicit flows.

Global Financial Integrity, based in Washington DC and headed by Raymond Baker, have produced the most comprehensive and respected study of illicit flows. The findings are that one trillion dollars of illicit capital flow out of developing countries every year. Raymond Baker previously estimated the corporate tax evasion component to account for around two thirds of this, and consistent with that is Christian Aid’s own estimate that the mispricing of trade in commodities (by multinational companies and others) results in a tax loss to developing countries of around $160 billion each year – more than one and a half times the total received in aid. We estimate that these funds, if spent according to current patterns, would save the lives of almost 1,000 children under five every day.

Tax revenues are lost by the abuse of trade prices to shift profits out of developing countries and into secrecy jurisdictions. One resource-rich sub-Saharan African country, for example, sends more than half of its exports - on paper at least - to Switzerland. When uncovered, the illicit funds of corrupt politicians are also typically found in secrecy jurisdictions – whether London or Geneva. Tax administrations and anti-corruption authorities in developing countries typically have neither the capacity nor the legal agreements to be able to access the necessary information to see if individuals or companies are cheating the state of much needed funds.

But the damage goes well beyond the revenues lost. Academic research has shown that the share of tax in funding governments’ expenditures is a key determinant of their responsiveness to citizens – taxation drives political representation, strengthening governance and combating corruption. What this means is that a lack of transparency in financial markets and international trade are not only costing developing countries the funds that are rightfully theirs, they are also undermining the extent to which states use those resources for the benefit of their citizens.

Christian Aid has two key demands, which would go a long way to breaking down the international obstacles to effective taxation for development. One concerns the secrecy jurisdictions, and this is to replace the largely ineffective bilateral Tax Information Exchange Agreements (TIEAs) with a multilateral agreement including secrecy jurisdictions and developing countries. Like the EU Savings Tax Directive, but unlike TIEAs, this would need to include an element of automatic information exchange. At present, TIEAs allow exchange ‘on request’ and the burden of proof is so high that even powerful requesting jurisdictions like the USA are only able to meet it infrequently. Small, low-income countries would have little chance, even if they were able to negotiate TIEAs – which shows little sign of happening.

The second key proposal is for an international accounting standard to require multinational companies to report some basic data on their economic activity, including profits made and tax paid, on a country-by-country basis. Unlike the current system of global consolidated reporting only, country-by-country reporting would allow tax authorities a system to ‘red flag’ the highest risks of abuse – where, for example, a company carries out 20% of its business there but only declares 2% of its profits, while the reverse proportions apply in a secrecy jurisdiction.

The G20 is considering both proposals, not least because of the lead that the UK government has taken, but so far the grouping has not kept its promise to present proposals by the end of 2009 to ensure that developing countries benefit from the new cooperative environment for tax information exchange.

The interests of rich and poor countries and people alike are, for once, unified in the need for greater international financial transparency. European policymakers can provide the critical momentum to ensure that the new context takes account of developing countries and truly delivers a silver lining to the crisis. The alternative is a return to business as usual – and no-one can afford that.

Alex Cobham is Chief Policy Adviser at Christian Aid

This article was originally published in Europe’s World. Reproduced with permission

This morning’s UK gilt auction over subscribed.

Crisis, what crisis?

Larry Elliott on the carnage that’s been unleashed on Ireland and which the Tories would create here.

The Swiss have conceded the need for automatic information exchange.

Belize may suffer sanctions.

Mark Thomas is saying let’s invade Jersey.

The sadness of Guy Hands is revealed – a man who won’t see his own children so save tax.

And more. Go read, or you’re missing out.

Demand may improve if gilt yields approach 5 per cent. And traditional buyers – such as pension funds, banks and insurers – are expected to remain loyal to the market. “There will be gilt buyers at the right levels,” Gartside added. “To my mind, 5 per cent is a pretty good return. The current level of 3.9 per cent is low given that inflation is 2.9 per cent.”

Pension funds, in particular, are keen to see gilt yields rise as the QE programme has increased their liabilities. “We hope that the suspension of QE will raise yields, and so reduce scheme deficits,” said Joanne Segars, chief executive of the National Association of Pension Funds. “We want the government to play its part in supporting pension funds and help stem the tide of scheme closures by issuing more long-dated and index-linked gilts. This will help bring the stability that schemes need.”

Ignore all the nay-sayers, all the brokers, all the wide boys and all Conservative politicians: here’s the real opinion worth having on government debt. Relax the interest rate a little – or drop the AAA status (the effect is the same in broad terms as the increase in risk is reflected in an increased interest rate) and you’ll please the biggest market for UK government gilts (that’s debt in plain terms) - the UK pension fund market.

Put it another way: the demand for UK government debt is real, strong and will be continuing because UK government debt is the one savings product  the increasing number of baby-boomer pensioners can rely upon to pay them into old age.

Which proves just how wrong George Osborne and all his sycophants in the right wing media are. The reality is UK government borrowing is good news for our pension sector. The simple message is we can spend our way out of recession – as we need to, and benefit in the long run. Hoe about that for a double whammy (oh, and we can afford the extra interest too….)

I think someone’s been reading this blog.

If you’re not the side that Uncle Sam favours then it seems you’re just not allowed to win an election fairly and squarely.

I do expect there’s a lot of truth in this.

And it’s not to the credit of the USA or the media that it’s probably true.

In order to ensure direct communication between the banking industry, consumers and the European Commission, a Group of Experts in Banking Issues (GEBI) will be set up with the following mandate:

1. To give advice and opinions on the policies and possible legislative measures of the EC in the field of banking (including capital requirements, supervision, conglomerates, bank accounting, crisis management, and deposit guarantee schemes);

2. To provide information, forecasts and analysis concerning the background, and possible impact of banking policies and legislative proposals on various stakeholders.

The requirement for membership?:

- proven knowledge, competence and experience, including at European or international level, in the field of banking regulation.
-commitment to European issues and the internal market in financial services, ability to talk to relevant industry and public entities, willingness to commit time, neutrality and fair judgement;
- interest in formulating policies in banking regulation to respond to the challenges created by the financial crisis;

And the reward?:

Members will receive no remuneration for their duties in connection with the activities of the expert group, nor will they receive reimbursement of travel and subsistence expenses in connection with their attendance at meetings of the group.

So what will we get? Bankers talking to bankers and saying stakeholders want what bankers want.

I despair.

The EU / EC should:

a) Allocate seats to stakeholder groups

b) Fund them

c) Make clear they can issue minority reports if need be

d) Provide them with technical support.

Then we’d have meaningful debate. Right now there will be none.

Last week, the Institute for Fiscal Studies said that current public spending plans, which involve ring-fencing front-line services in education, health and police, as Osborne wants as well, imply the end of new road building, closing the court system and shutting two-thirds of prisons. But that would only address £80bn of the structural deficit by 2015. By wanting to do half as much again, Osborne and Cameron must end new school and hospital building programmes, radically reduce military spending, slash welfare benefits and make more than 500,000 public sector workers redundant.

500,000 public sector workers redundant would, as I have previously suggested, put 1,500,000 private sector employees out of work.

But Osborne is adamant, as the Guardian reports this morning:

David Cameron and George Osborne are drawing up plans to impose real-terms spending cuts that would see Britain’s public services slashed by billions of pounds during the next parliament.

A Tory spokeswoman confirmed that Osborne would cut the fiscal deficit faster than Labour: "Conservatives have set out a clear benchmark, against which we can be held to account, to safeguard Britain’s credit rating and eliminate a large part of the structural deficit over a parliament."

In 1992 the Conservatives brought the UK to its knees by absurd faith in the ERM. We had recession as a result, 15% interest rates, and the Tories consigned to the wilderness for well over a decade.

This time they’ve chosen another false totem – AAA rating – with the desire for low interest rates at all costs. We’ll get recession as a result, mass unemployment and (hopefully) the Tories consigned to the wilderness for well over a decade.

It’s not surprising the Guardian also notes:

The prospect of real-terms cuts in "total managed expenditure" – overall spending – is alarming some senior Tories. Kenneth Clarke, the shadow business secretary, recently warned against imposing "calamitous" cuts. One senior Tory said: "It is very difficult to achieve real-terms spending cuts. I hope this is just an aspiration because the economic picture is very bleak."

Quite so. This fixation is massively damaging. It’s also complete negation of the duty of a politician because it passes policy making to Fitch, Moody’s and Standards & Poor. First, we know their ability to rate credit is spectacularly poor. They more than most got sub-prime wrong. second, we know they’re in hock to bankers: this passes all policy making to the City. Third, we know the City is bent on destroying the social infrastructure of Britain so they can ring fence its wealth for their own personal benefit. Osborne would, of course, be handsomely rewarded for assisting their game.

But the fault line between the parties is now clear: jobs stabilised under Labour or two million more unemployed to come under the Tories. That’s the choice. I was horribly prescient last summer. Now I just hope Labour has the courage to fight on this basis.

The FT has an editorial under the above title today. As they say:

The ability to keep secrets is an essential part of private banking. But sadly for the bankers of Switzerland and other tax havens, it is an ability they are losing. Stung perhaps by pressure on public budgets, governments are using ever cruder methods to pierce the veil of customer confidentiality. In recent years, the British have leaned on the Channel Islands, while the US has forced open the ledgers of Switzerland’s UBS by threatening it with commercial retaliation. But the Germans have come up with the most direct approach: purchasing stolen bank recordsfrom employees.

As the n ote:

The Swiss are outraged, and have accused the Germans of fencing stolen goods.

It is easy to see why the Swiss are alarmed. Germany is in effect establishing a market in bank data. Berlin may not be commissioning acts of larceny, but the “Merkel put” is a standing inducement for bank staff to breach their contracts. This is a potent threat to the private banking model. Even the possibility of leaks is damaging. If you were a German tax evader, you would not want to wait around to test the loyalty of the staff at your offshore bank.

So what’s the FT’s opinion on this:

It is surely legitimate to offer inducements for informers to testify. And it is in the public interest for tax cheats to be identified and forced to pay their dues.

Merkel’s put is a highly effective mechanism for achieving this. The Germans have raked in about €200m so far from LGT’s clients for their €4.6m, some of which they recouped by onward sales of data to other states. The Swiss are right to be worried.

The FT has this completely right: Switzerland is, by offering bank secrecy knowing that it will be sued to facilitate tax evasion, promoting crime. There is no other explanation for its actions. It is the Swiss and the Swiss alone who are wrong in the German - Swiss dispute on this issue. Germany is tackling crime, Switzerland actively facilitating it to the point that its actions might reasonably be considered criminal. Of course it is legitimate in that case to buy data to stop crime.

In the broader context it’s also about stopping economic warfare by Switzerland, and we’ve always paid informers to do that.

There’s just one issue I’ll argue with the FT on. They says:

Tax evasion is seen as morally ambiguous partly because it does not cause a big harm to a single individual but a small harm to many. Non-compliance is sufficiently widespread that people feel “it is all right because everybody does it”

I disagree. Undermining the rule of law is a big harm to all - especially when tax evasion does in the process deny the essential resources society needs to ensure a decent standard of living for all, as will increasingly be the case over the combing years. This is an enormous issue, and we should treat it as such.