This excellent book by Jana Grittersová, formerly an economist with the Slovakian Central Bank and the European Commission, makes an important contribution to the political economy literature on monetary stabilization in emerging markets. Existing accounts focusing on the respective roles of domestic institutional reform and international organizations, she suggests, are inadequate. An impressive range of empirical evidence is deployed to support the different claim that countries with large reputational deficits can borrow more credibility from global banks by allowing them extensive control over domestic banking activities. Those emerging countries that have done this, including a number in the former Soviet bloc and some in Latin America, have gained substantial monetary, currency, and financial stability benefits. The book offers important insights, including the inseparability of monetary and financial reform and the importance of disaggregating financial globalization and its effects: Foreign bank presence is far more stabilizing than foreign borrowing, and variations in the degree of global bank internal centralization affect how financial-stability shocks travel between home and host countries.

Borrowing Credibility is well conceived in its structure and approach. After a clear introduction to the argument and empirical findings, a theoretical chapter outlines why accepting foreign subsidiaries or branches of global banks can enhance domestic policy credibility by increasing financial transparency, improving the quality of local financial regulation and supervision, and acting in crises as private lenders of last resort (LLRs) to their local affiliates. The signal that global bank presence in the domestic economy sends to international investors is useful because of information asymmetries and is credible when this presence is sufficiently high (meaning, effectively, dominant), so that these banks can inflict real costs on the host government for policy defection.

The rest of the book is devoted to exploring the importance of these mechanisms for currency stability and the cost of sovereign borrowing. Chapter 3 provides extensive statistical tests of their impact on borrowing costs using a data set of 80 emerging countries from 1995 to 2009, finding that banking globalization more consistently reduces these costs than formal central bank independence or international commitments. The chapter also provides evidence that this is not an artifact of selection bias or because global banks are too big to fail in their home countries. In Chapters 4–6, the three causal mechanisms are explored in illuminating comparative case studies of the establishment of currency boards (Estonia and Bulgaria), inflation targeting regimes (Czech Republic and Poland), and financial crisis management (Argentina in 2001–2 and Eastern Europe after 2007). Credible monetary reform was contingent on the introduction of a dominant global bank presence that weakened collusive ties between governments and domestic banks—a political breakthrough often only possible after serious (and sometimes serial) crises.

There are inevitably areas where I differ from the author’s judgments. One is that Grittersová’s credibility mechanism rests in part on the claim that global banks have strong incentives to retain their reputation and to avoid “opportunistic behaviour” (pp. 43–44). Yet we have an abundance of examples of major global banks engaging in highly opportunistic behavior that threatens their viability, and serial money laundering and tax scandals that cast further doubt on this claim. Perhaps global banks are systematically more prudent in challenging emerging market environments, but if so, why? Has the erosion of the reputation of many global banks in recent years reduced the average credibility benefits that the author estimates for the 1995–2009 period? Grittersová also argues that the financial stability benefits of global banks rest on “private” lender of last resort provisions, but I would emphasize more these banks’ reliance on implicit home government guarantees; after all, the largest Austrian, Belgian, Italian, and Swedish banks operating in Eastern Europe are now all designated as Other Systemically Important Institutions by home and European authorities. The book touches on this additional form of “credibility borrowing” in its discussion of LLR support from Austrian and Swedish governments in 2008–9, but not in the theoretical framework.

The book has very clear policy implications, but how generalizable and politically palatable are they? Stamps of approval from international organizations, as many have long suspected, are often of little help when domestic politics and institutions fail to reassure financial markets, and building credibility via deep domestic institutional reform may be, for practical purposes, beyond many governments. Grittersová offers a possible quicker fix, but skeptics might ask whether rapid opening to global banks is viable for countries dogged by poor economic prospects. There also seem to be important cases where monetary credibility was restored in exceptionally difficult circumstances without dramatic opening to global banks. Brazil’s hybrid Real Plan under Fernando Cardoso surprised many, including the International Monetary Fund, in eliminating its chaotic hyperinflation in short order after 1994; only toward the end of the reform process (from late 1997) was a greater role for foreign banks allowed, and most of the reduction in Brazil’s sovereign borrowing spread over U.S. Treasuries occurred before this time.

There may also be costs to giving up control over national finance that should be weighed against the potential benefits. Many emerging Asian countries have been more cautious in opening their financial sectors to foreign participation than has most of postcommunist Europe without obviously suffering large net costs. This includes high-growth economies like China and Vietnam, as well as successful “emerged” economies like South Korea. In the latter case, Elizabeth Thurbon (Developmental Mindset, 2016) argues that an activist state continues to use its financial sector to promote successful innovation and industrial upgrading—offering a quite different lesson to Grittersová, though perhaps one even more difficult to replicate.

To be sure, there are many who would prefer to retain a system of national finance on populist grounds, which might itself hide cronyistic motivations. Strikingly, this seems to include a number of contemporary political leaders in the Central and Eastern European countries that are the main focus of the book. Illiberal populist leaders like Hungary’s Viktor Orbán and Poland’s Jaroslaw Kaczynski figure surprisingly little in it, though they now loom as serious threats to the globalization and European integration projects that have underpinned banking globalization. Grittersová argues that banking globalization has been resilient, but how long can the major Scandinavian and Western European banks with large stakes in this region remain insulated from the growing political strains in their host countries and between their home and host governments?

The book says relatively little about how much this elite project of credibility borrowing was supported by citizens. More research is needed on how much these citizens, including those attracted by populist policies, understand and fear the loss of the benefits that Grittersová shows were provided by financial globalization. In the current environment, one can imagine how attempts by global bank affiliates to sanction the government for policy defection could play into the hands of populist leaders; if so, this could undermine the credibility mechanism on which the book’s argument rests.