"Irresponsible" governments, regulators and banks are mainly responsible for the global recession, not Offshore Financial Centers, said Tim Ridley, former Chairman of the Cayman Islands Monetary Authority.
"It is a myth that OFCs are primarily responsible for the recent financial meltdowns," he told OffshoreAlert. "The harsh reality is that the US meltdown resulted from an alliance between the politicians, the regulators and the banks to provide cheap housing loans to those who could never pay the loans back; and, in Europe the meltdown resulted from the irresponsible policies of governments who believed that a cradle to grave welfare system could be provided for ever on borrowed money."
Although "the pendulum is still swinging against OFCs for the moment", he said that "for the most, part, OFCs have dodged the misdirected bullet that 'offshore' was responsible for the meltdown".
"In Cayman, the hedge fund industry is re-energized and is growing again, Asian IPOs are doing well, and captive insurance is hanging in," he said. "But the debt side (securitization) is still quiet, albeit with some green shoots, the banking and trust sector is essentially flat and, overall, the recovery in OFCs has been patchy."
Ridley defined OFCs as "typically places that facilitate international financial transactions rather than create them" and said there were three likely scenarios for them: Doomsday, Nirvana or the Curate's Egg.
- "Doomsday" would be the "cataclysmic decline of these centers" caused by "major economic powers implementing domestic policies and programs that eliminate the need to use OFCs", "the reintroduction of exchange/capital controls by all major economic powers", or, less likely, "the effective implementation of international agreements between the major economic powers not to compete on regulatory and tax matters".
- "Nirvana" would be "the continued and unchecked growth of OFCs driven by increased globalization of financial markets, continued regulatory and tax arbitrage and competition between sovereign states and the welcoming of the useful role played by OFCs".
- "The Curate's Egg", which Ridley said was "the most likely" outcome, would be "a mix" of the Doomsday and Nirvana scenarios, whereby "some OFCs would flourish and others die" against a backdrop of "continued attempts by major economic powers and blocks to reduce the advantages they can offer".
Ridley said OFCS "cannot afford to become complacent again" and assume it is only a matter of time before "happy days are here again".
"I believe success will come to those jurisdictions that can genuinely add value to international transactions and are recognized as so doing," he said. "This in turn requires the right mix of a stable and transparent political, legal, judicial and economic environment, no or limited direct taxation or a good network of double tax treaties, a good risk based regulatory and supervisory approach, a flexible and adaptive approach to legislation and regulation to provide the structures, products and supervision expected by the market, a willingness to engage with international standard setters, foreign governments, regulators and law enforcement and tax agencies to agree mutually satisfactory standards of regulation and cross border assistance and law enforcement, modern infrastructure, a welcoming immigration policy to attract the expertise needed and an educated and motivated local work force."
He concluded: "Many (but not all) OFCs meet the foregoing tests for being survivors and need not suffer death by a thousand cuts. But, to really thrive as financial services centers, OFCs must learn better from their own mistakes and those of others, and work more effectively to be fully accepted as legitimate participants in the global financial world."
Ridley will be speaking about the role that OFCs play in the global economy at The 10th Annual OffshoreAlert Conference, which will take place at The Ritz-Carlton, south Beach in Miami Beach, Florida on April 29 to May 1, 2012.