Writings and Speeches

Q&A: Eugene Rotberg
07 Oct 2021
IFR IMF/World Bank 2021

Eugene Rotberg was treasurer of the World Bank from 1968 to 1987, a period of immense change for the institution as it massively diversified its funding and created what was to become the largest swaps programme in the world. He talks to IFR about that period.

Robert McNamara asked you to become his treasurer shortly after taking over at the World Bank in 1968. What was your response?

Treasurer? Stunned. Hardly knew a debit from a credit. But, for me, it was the ultimate Robin Hood job – facilitating the distribution of wealth from rich to poor.

What was the treasury like in those days – and how was it viewed from outside?

Loyal, expert, traditional, a bit uptight, well respected in the investment banking community.

You quickly set about diversifying your sources of funding. Why was that so necessary?

All capital of the World Bank is owned by governments – but little capital is actually paid in. It cannot be lent, and can only be called in the dramatic event it is needed to meet World Bank obligations to its creditors. Therefore, if the bank wants to lend, it has to borrow. If it cannot borrow, it cannot lend. It had to diversify its borrowings, otherwise it would saturate any particular market. If no lending, no World Bank.

Did you meet any resistance?

The main push-back was against the lending programme, which emphasised projects for education, political reform and health, which had very uncertain positive cashflows. The bank staff was reluctant, as were its shareholders and bondholders, to lend to projects – unlike electric power, railroads et cetera – without cashflows.

How difficult was it to break into new markets?

The early bond placements were in the US and with central banks. Then the markets closed down in the 1970s. Institutional investors, particularly in the US, were reluctant to lend to the bank because it lent to countries that were dictatorships – on the left and right – because it lent to corrupt countries and to countries with low labour costs, which competed with US exports.

There was also a sense that LDCs (least developed countries) were too risky. They were defaulting on their loans from commercial banks. They also expropriated US property and formed cartels to fix prices. The bank was looked upon as staffed by wishy-washy liberals; institutions argued that scarce capital should be allocated for one’s own needs, not to a bunch of ex-colonies. I spent much of my time beating back these arguments. They did not disappear, only went into hibernation. There was also hostility because of McNamara’s identification with the war in Vietnam and the belief that he was embarked on a crusade to help the poor to expiate his sins in that war.

Was there anywhere that was strictly off limits?

The articles of the World Bank do not permit borrowing from the US or its instrumentalities like the Federal Reserve. It is the only country that cannot lend to the World Bank. Capital markets are okay but no borrowing from the US government or its central bank.

The German government was also reluctant to approve transactions that embodied short-dated or floating interest rates because they provided a vehicle to hedge against inflation, and the German government did not want to remove the pressure against inflation by permitting such investments.

What ideas were rejected?

It took six weeks to get approval from governments for the first swap because they were concerned about the counterparty risk and, more importantly, their loss of control over access to their markets, capital flows in and out of their country, and their currency. They were right.

The swaps transaction you did with IBM in the early 1980s was truly ground-breaking – did you ever think it would have the impact it did?

No way. It cascaded quickly from an alternative way to raise funds without going into the capital markets to a way to restructure and liquify the liability side of a balance sheet. Swaps also permitted banks to receive fixed-rate long-term cashflows that they could then offer to their clients – sovereign entities and industrial companies.

Swaps also facilitated the development of long-term derivative instruments that permitted companies to either speculate or hedge interest rates or currencies. All unexpected. There developed inexorably a gap between the knowledge base and expertise in the private sector versus the regulators – central banks and finance ministries. Moreover, finance ministries and central banks soon realized that derivatives and swaps were fundamental to the deficit financing of governments. Therefore, don’t mess with or regulate them. Bad news.

The World Bank was viewed with scepticism by many investors – especially in the US. When did that start to change?

When central banks began to hold World Bank bonds – a good housekeeping seal of approval. And, the bank constantly argued that poverty and despair would lead to more violence, refugees, civil war, massive migration, that globalisation and free and open trading and cross-border financing were beneficial to countries, both poor and rich alike, and that improvements to the standard of living – and hope for a better life – would create a base for democracy and civil discourse. These arguments won out by the 1980s. Or, at least, market reality won out. Currently, the bank can borrow in one day in capital markets what it took 20 years to borrow from 1947 to 1967.

What similarities and differences are there between the World Bank of today and that of the 1960s and 1970s?

Now, LDCs have the flexibility as to which currency they wish to borrow, whether the interest rate should be fixed or variable and how to hedge the risks. The staff is still highly professional, expert and open to every economic theory imaginable. They simply want to do good but are sometimes seen as bullying or arrogant. Do they make mistakes? Yes, but there is a complicated world out there.

The line between the IMF and the World Bank has become increasingly blurred; I’m not sure that is a positive development.

Women are finally holding positions of authority.

Quality most needed to be an effective president of the World Bank

Messianic – with an MBA

Career highlight

China

Most inaccurate headlines

World’s Smartest Banker, Stroke of Genius – those headlines belong instead to the likes of Gary Rose, Roberto Mendoza, Dennis Weatherstone and Patrick Stevenson

Most feel-good/proud headline

Frightening Do-Gooder

Most current concern

Refugees and refugee camps; political movements to the far right and isolationism; the gap between the expertise and knowledge base of the private sector for the swap and derivative market and the expertise of the regulators.

Greatest mistake

Supporting a system whereby LDCs had no say on which currencies they would be obligated to pay back to the bank, the interest rates, whether fixed or floating, et etcera. Fortunately, that changed.

Most memorable remark

Made to me by Abdul Aziz Al Quraishi, then-governor of the Saudi Arabian Monetary Authority, over dinner: “What is this nice Jewish boy like you doing having dinner with me on Yom Kippur?"