2011

Financial Risk and its Governance in the Global Political Economy
A Critical Appraisal

Bethelhem Ketsela Moulat

Introduction

Critically analysing the mainstream conceptualization of financial risk, the changing nature of its governance and deliberating on how legitimacy for both is reproduced has become even more of an imperative following the 2008-09 global financial meltdown and the subsequent economic recession.

Although the conventional tendency has been and continues to be to think of global finance as being too complex and technical, it is argued here that in particular, the notion of risk in the realm of finance, has been socially constructed to be divorced from the concept of uncertainty, becoming a mathematically calculable enterprise to which high stakes of material rewards are attached. Consequently, this form of mathematical abstraction has and continues to limit the extent to which risk practices are politicized, bestowing them a seemingly 'apolitical' status, even though the social and economic outcomes of such practices, epitomized most notably by the recurring financial crises, are unevenly tilted in favour of the material interests of the financial sector. Indeed the recent global recession has once again shed light onto this asymmetric risk-reward distribution inherent in the global financial architecture and its disruptive repercussions on the social fabric upon which it is embedded.

It is also argued that the ideational structure underpinning risk management practices, has been providing legitimacy for a specific type of financial risk governance, in which private sector and technocratic elites have gained substantial significance vis-à-vis publicly accountable ones. Nonetheless, even though these actors have assumed de facto authority, their operations feature a democratic deficit, leading their authoritative status, much like the ideas underpinning risk practices, to remain politically contestable.

This article is divided into three main sections: the first outlines the theoretical point of view on which the argument based, namely constructivism, which will be followed by a close look at the social construction of financial risk. The second section features a critical analysis of the changing nature of financial risk governance, in which the transition from the Bretton Woods to the current financial risk governance regime will be discussed. Moreover, a couple of mini-case studies featuring two critical agencies at work within such a regime will be presented: the Basel Committee on Banking and Supervision and Credit Rating Agencies. This is done in order to illustrate the decisively private- sector and technocratic orientation of financial risk governance, a status-quo which seems to persist even after the recent financial crisis. Finally, before the presentation of the conclusive remarks, a brief analysis of the issue of legitimacy pertaining to the normative context underlying risk practices and their corresponding governance will be made.

Constructivism and Financial Ideas

Global finance has been more often than not depicted as a 'black box': its underpinning practices and assumptions have been and continue to largely be off limits from general public debate, whilst open only to a privileged set of transnational 'experts'. However, as stated by Mackenzie "not to examine the contents of black boxes is to miss a critical point of how societies are constructed" (2005, 557). Accordingly, here the main focus will be on exploring the construction of risk as a specific mechanism constitutive of the modern financial order (Green 2000, 77-78) and on examining the corresponding prevalent mode of financial risk governance.

Problem solving theories broadly speaking, do not attempt to question the role of underlying assumptions and ideas, nor the material consequences that these produce (Cox 1981, 208). It is then rather on the basis of a critical/constructivist standpoint, that questions concerning how and why particular constitutive notions of risk and their associated governance practices have come about and are made to persist, will be elaborated.

To expand, constructivism as one of the newest theoretical additions to the fields of IR and IPE has proven to be quite useful for critically analyzing various aspects of the global political economy. Despite the fact that its central tenets have remained debated even by those who define themselves as its core advocates, at the heart of this recent scholarship, lies an unequivocal "reformulation of the relationship between the 'material' and the 'ideational', an emphasis on the rules-governed nature of the social world, a focus on the constitutive nature of rules and ideas, and a belief in the stabilizing value of norms and ideas" (Best 2005, 6).

As a result, it is commonplace to encounter the notion that constructivism provides the "middle ground" between rationalist and reflexivist approaches (Adler 1997, 330). This claim is derived from constructivism's reassertion and juxtaposition of the ideational realm to the material one, in political-economic analysis: this is in stark contrast to traditional IPE theories, most notably neorealism and neoliberalism, which have long discounted the role of ideas and instead focused on material structures, whilst post-positivist theories, such as deconstructive theories of J. Deridda, have tended to neglect the material realm and operate on a purely meta-theoretical level of analysis of text (Reus-Smit 2001, 215).

The ontological premise upon which constructivist literature is based first of all, rejects the conventional interpretation of humans as rational, atomistic and asocial units. Instead it embraces the view, also shared by critical theory, which presents humans as "non-atomistic, socially embedded, communicatively constituted and naturally empowered" (Reus-Smit 2001, 215).

The ideational realm displays structural characteristics if conceived as shared or collective knowledge and institutionalized practice, which then provides the necessary means for the social construction of the identities and interests of political agents, and shape their subsequent actions (Adler 1997, 324). Shared knowledge, also known as intersubjective knowledge is the collection of ideas, meanings and interpretations about the surrounding reality and other than being structurally constraining (or enabling), acts most crucially as the basis for the existence and reproduction of that certain type of 'social reality' (in this case a specific form of financial risk governance). The latter is in turn constituted of 'social facts' and draws its objectivity from the prevailing consensus among actors themselves (Adler 1997, 323; Wendt 1995, 74).

From a normative standpoint, constructivism concerns itself with the prospects and endorsement of social change; and constitutive, intersubjective rules institutionalized in social practice offer agents the possibility for change (Onuf 1997, 9). This makes constructivism critical in the sense that "it does not take institutions and social and power relations for granted but calls them into question by concerning itself with their origins and how and whether they might be in the process of changing" (Cox 1981, 209). It does so by unravelling the contingent nature of ostensibly naturalized social structures, which are in effect, as mentioned earlier, dependent upon the continued practice of agents (Wendt 1995, 74).

Moreover, social change is closely related to the notion of power because in rivalling a dominant social reality, the naturalized and institutionalized instersubjective ideas and social practices which underpin such reality and define the identities and interests of actors, must be successfully 'de-constructed'. Hence, the construction of an alternative social reality requires the "authority to determine the shared meanings that constitute the identities, interests and practices of states .... [and] the ability to create the underlying rules of the game, to define what constitutes acceptable play..." (Adler 997, 336). This point further highlights the need to take into account how and why a specific set of intersubjective mental frameworks dominate and result in one, particular social reality at a specific point in time. It is especially useful to uncover how ideational and discursive factors alongside material ones help such form of dominance to persist (Hay 2002, 214).

Constructivism then is useful in highlighting the role of ideas in shaping and determining specific socio-economic and political outcomes. Once applied in the realm of finance, provides the basis for critically analyzing the role of core financial economics theories and general underlying assumptions, including those pertaining to risk management practices.

Therefore, the need to first discuss the specific set of ideas that fortify the mainstream conceptualization of risk is related to the process of uncovering how such a conceptualization informs and legitimates particular forms of powerful risk practices with material consequences. The ensuing financial risk governance procedures are in fact "made up of institutional facts.....that cannot be understood without reference to their social and discursive context" (Best 2004, 385). Accordingly, the next section will critically analyse the 'social construction' of financial risk, as opposed to the mainstream economistic view which presents it as a natural and neutral concept.

The Social Construction of Financial Risk

At the rudimentary level of conventional understanding, financial risk is portrayed as the flip side of credit: in financial economics jargon there is the so called, 'risk-return trade off', which highlights how investors' choice for highly risky undertakings will yield them high returns. It is useful however to dig beneath this common perception of risk, because after all, financial risks whilst being engaged in by mainly speculative investors for their potentially lucrative yields lead to adverse consequences, which are increasingly borne by those who are not direct, active players in the financial markets. This has been demonstrated by the recurrent financial, economic, debt, corporate crises of recent times at the global, regional and country levels.

In contrast to this, a number of scholars have presented a case for the historical 'social construction' of risk, according to which a decidedly naturalistic view of risk has been adopted, which has permitted it to be interpreted purely as a technical matter (Dannreuther and Lekhi 2000; Deuchars 2004; de Goede 2004; Green 2000; Porter 2005). Historically, the unavailability of a conceptual framework which permitted a marked distinction between the notion of uncertainty on the one hand, and that of risk on the other, had proved to be a major impediment to the legitimacy of financial risk practices: in fact, speculation in financial markets was not viewed to be any different from gambling, which made it essentially an immoral act (de Goede 2004, 202). It was only with the eventual construction of such a conceptual distinction, that risk practices as known today have become rationalized and widely incorporated into the finance industry. Indeed, in the past, as opposed to the concept of uncertainty, which, according to the finance community features an element of incalculability, risk has been extrapolated and "identified as natural on the one hand, and humanly calculable on the other" (de Goede 2004, 200).

Although this crucial conceptual transition came about only during the nineteenth century, it is nonetheless reasonable to link it to the well established lineage of rational and modernist mode of thought, which stretches back to Machiavellian times (Dannreuther and Lekhi 2000, 577; Deuchars 2004, 30; de Goede 2000, 66; 2004, 204). Indeed, the tendency to rationalize and commoditise uncertainty in the form of modern risk practices implies an interplay of the logic of capitalism on the one hand and that of modernity on the other (Green 2000, 82).

More specifically, the inherent relationship between credit and risk aforementioned, can be considered to have resulted in the application of the distinctive "Machiavellian virtues of foresight, knowledge and strength....as a means through which credit can be mastered" (de Goede 2000, 66), with the ultimate aim of creating and reproducing wealth for a particular segment of society, namely the risk-taking and capital owning financial community (de Goede 2004, 212; Green 2000, 87). Moreover, the re-articulation of uncertain future as a calculable risk has had a dual function: "it accorded moral responsibility to financial speculation, because it cares for and hedges against uncertain future ... (and) provided the financial speculator with a legitimate professional practice" (de Goede 2004, 204).

It is evident that the current global financial order has been characterized by an escalating development and commercialization of risk management systems; yet, by historicizing the concept of risk and by uncovering how it has been socially constructed over time, one is able to question the "financial logics of transcendental rationality" (de Goede 2000, 60), which seemingly underpins modern use of risk in a range of financial instruments, including derivatives and other speculative contracts.

Indeed, the simultaneous emphasis on the application of pure statistical knowledge and mathematical modelling in modern financial risk management, is indicative of the perceived need to create and institutionalize a sense of rationality, regularity and predictability in the face of the constantly unexpected and contingent nature of future outcomes (Dannreuther and Lekhi 2000, 575; Deuchars 2004, 55; Porter 2005, 174).

This has significant implications in so far as the widely accepted transcendentalist version legitimizes the possibility of transforming uncertainty into a profitable enterprise, allowing many such speculative products to become normalized sources of financial practices, in spite of their asymmetric material distributional consequences (de Goede 2004, 212; Tickell 2000, 88).

These financial products, whose values are derived from those of underlying assets (Mauer 2002, 15; Valdez and Wood 2003, 379) enable market actors not only to hedge against risk of fluctuation in prices, but to also undertake speculative activities for even greater returns (Mauer 2002, 16). The fundamental mathematical theory known as the 'Black-Scholes-Merton Option Pricing Theory', has helped controversial derivative products such as options, futures and swaps, in breaking away from their historical connection with disreputability (Mackenzie 2005, 562; Mauer 2002, 21).

Arguably, one of the salient controversies associated with the ideational framework justifying mathematical abstraction of such kind, supported by this rationalistic approach to risk, consists in its ultimately limiting effect of the extent to which real risk practices, inherent in derivatives trading for instance, are actually politicized, bestowing them a seemingly 'apolitical' status, even though the adverse outcomes of such practices, epitomized by recurring financial crises, are unevenly distributed. In fact, as argued by Porter, highly technical and economistic versions of risk management tend to neglect the existing "dialectic tension between more intense and sophisticated systems of control, on the one hand, and more unmanageable and frightening disruptions on the other" (2005, 180).

This is a characteristic also known as risk's indeterminacy (Porter 2005, 184) which forms one of the basic points for critiquing complex risk management techniques, since it is premised upon the idea that, contrary to mainstream modes of thought, such techniques create room for more risk, instead of eliminating the inherent incalculability of future outcomes they are supposed to eradicate in the first place (Green 2000, 84). This view is also shared by Gill, who argues that, not only are societies confronted with the increasing pervasiveness of 'manufactured risks' as opposed to natural ones, but they are also witnessing an ever deepening privatization of risk, whereby, risk is being shifted down to the personal level (1997, 61).

Derivatives' trading is again illustrative of this point in that, their innate tendency to rationalize and socialize risk beyond their immediate domain (Mauer 2002, 17) has been accompanied by a simultaneous aggregate impact of possible system level risks bearing negative repercussions for inactive agents within the financial system as a whole. In the case of the infamous Enron corporate scandal for example, the unprecedented proliferation of complex risk models incorporated within derivative products had encouraged the financiers into assuming more and more risk, guided by the implicit assumption that any amount of risk once calculable can be hedged against. However, while their objective was to accrue financial gain for themselves and their shareholders, their actions had inevitably jeopardized the homes, incomes and savings of ordinary people (Tickell 2000, 89), which mirrors the concept of privatization of risk raised by Gill (1997, 61).

Therefore, interlinked with risk's indeterminacy, is another political aspect of its practices disguised by its construction as a highly mathematical enterprise: its material or real effect of exacerbating existing structures of socio-economic inequality. In fact, the poorer segments of societies generally risk more whilst those with specialist knowledge and resources, who are actively engaged in the global financial sphere, are able to not only offset the damage caused, but also to reap the material gains from the various risk practices (Porter 2005, 184; Tickell 2000, 89).

Bailouts undertaken by public authorities acting as lenders of last resort during financial and corporate crises, "collateralize the exposure of private investors", while perpetuating the reality that "risk premium is effectively socialized by domestic taxpayers' future ability to pay" (Blyth 2003, 253). There have been numerous cases of such bailouts, of which the one provided to AIG, the 'too big to fail' insurance giant, by Obama's administration, in the immediate aftermath of the global recession of 2008-09 is a notable example.

Similarly, financial rectitude in post-crises situations, calling for cuts in public spending, signal another way in which reckless financial risk undertakings leads to asymmetric distributional consequences that ultimately engenders deeper socio-economic inequalities. Indeed, as argued by Mendoza, even in the context of the recent post-crises period, "there have been preliminary signs since early 2010 that the recovery has begun and has benefited the banking and financial sectors where the financial crisis started" while further marginalizing "the poor, who are likely at their weakest and most vulnerable point, having undertaken a variety of coping strategies that are difficult to reverse quickly" (2011, 5)

So far, the foregoing discussion has highlighted how the social construction of risk as being different from uncertainty, due to the conscious imposition of elements of calculability and rationality solely to the former, has enabled the legitimization of various highly risky financial instruments in everyday business conduct. The exceedingly mathematical nature of risk practices and their management has also obscured and de-politicized them, while perpetuating the adverse impact associated with such practices, such as the fact that various financial instruments, while intended to offset risks tend to actually generate even more complex sets of risk, while also exacerbating the overall asymmetric risk-reward distribution in favour of the finance community.

Thus, as a result of this particular normative context underlying the notion and management of risk, "financial politics is reduced to a technical rationality which makes possible a particular mode of governance, which precludes real challenges to financial authority" (de Goede 2000, 72). Since the space for political contestation is reduced by the de-politicizing effect of the opaque and highly technical nature of financial risk management, probing the validity of derivatives and other financial instruments is thus rendered limited (though not impossible). Concurrently, a particularly specialist knowledge intensive financial risk governance scheme has been put in place as being the most viable, with its key characteristics being one of promoting self-regulation by private authority, whilst emphasising the provision transparency by applying more of the same sort of quantitative and highly technical skills. It is to these crucial developments that the discussion will now turn.

The Changing Nature of Financial Risk Governance

Assessing the role of private and public actors in sustaining particular forms of global financial risk governance in the pre-2008 global financial crisis period and examining how legitimacy for them has been produced requires at least a brief overview of the previous governance regime also known as the Bretton Woods financial order.

From the Bretton Woods System to the New Financial Order

The Bretton Woods financial system was "specifically designed to allow states to attain domestic policy autonomy through capital controls without having to keep an eye on the exchange rate" (Blyth 2003, 240). It institutionalized public control of the financial and monetary order, by empowering the state to use its legitimate powers to impose basic regulatory requirements, in correspondence with comprehensive domestic needs (Dannreuther and Lekhi 2000, 587; Helleiner, 1994; Underhill 2001, 282).

However, many changes have taken place since the Bretton Woods agreement of 1949: the steady rise of the Eurocurrency markets since the 1960s, coupled with a deepening of technological and financial innovation, which coupled with state led decisions, such as the repeal of capital controls contributed to the collapse of the fixed exchange rate system in the 1970s (Blyth 2003, 240; Helleiner, 1994). Moreover, the proliferation of complex derivatives trading has undermined further the basis of the international financial regulatory environment, whilst also enabling private financial interests to engage in arbitraging and speculative activities. These material changes were accompanied by an ideological shift which favoured free capital mobility and a continued privatization of risk (Gill 1997, 61) leading to the emergence and consolidation of a specific type of transnational financial structure and governance mechanism of global financial risk (Tsingou, 2005).

In general terms, as argued by Scholte, one important direct consequence of globalization, which he considers to primarily entail "a reconfiguration of geography" is the transition from a statist mode of governance to a 'post-statist' or 'post-sovereign' one, which features a dispersion of authority on all levels: upwards/supra-state level; downwards/sub-state level and laterally/from public to private quarters (2002, 14). This implies that in fact "governance is not simply the expression of sovereignty.... (but rather) extends well beyond the state and the formal model of state sovereignty" (Deuchars 2004, 57).

Similarly, as far as governance of global finance (including financial risk) is concerned, a distinction between government on the one hand and governance on the other signifies the dispersion of authority among various actors, including non-state ones (Rosenau 1992 quoted in Tsingou 2005). In other words, the realm of financial risk governance currently features state and inter-governmental institutions, alongside increasingly prominent hybrid governing systems mainly consisting of market actors, in turn intent on promoting self-regulatory practices, closely aligned to the interests of the private financial sector (Cerny 2002, 194). In the current volatile financial system, private sector rules and norms have emerged as being substantially influential at the expense of public sector based ones.

Whilst the Bretton Woods system, aimed at promoting financial stability by putting private financial markets at the service of national economic development (Underhill 2001, 284), the post-Bretton Woods system has been permeated with the use of derivatives and similar complex financial trading instruments simultaneously supporting the "socialization of costs due to financial crises and the privatization of the benefits of unfettered capital mobility" (Germain 2002, 25). Hence, the language of financial ideas such as the calculability of risk supported by the use of abstract mathematical formulae, and the notion of rationality of markets, combined with the continued call for quantitative transparency as a 'cure all medicine', have been overriding other public policy priorities like procuring social justice and a more equitable material distribution of resources. It is through this same language of financial ideas that legitimacy has been secured for this form of governance, elevating technocrats and embedded knowledge networks, such as credit rating agencies, above other authoritative entities including states (Blyth 2003, 242; Sinclair 2001; 2005).

Indeed, the contemporary 'buzzword' permeating regulation of financial risk is transparency: recurrent financial crises are, according to the mainstream view, attributed to informational discrepancies, (Blyth 2003, 239) or to low quality of information upon which investment decisions are made (Baily et al 2000, 108) or to dysfunctions and market distortions resulting essentially from home grown policy errors (Soederberg 2002, 614). While this ideological predisposition is indicative of the undisputed status accorded to the theory of the efficiency of markets, it also suggests that correspondingly, regulation is best accomplished "by those who carry the risk, namely financial interests themselves" (Blyth 2003, 254), since they are (at least in theory) assumed to have more information of their riskexposure and of other necessary financial detail.

It is no coincidence that this scheme of self-regulation in financial risk management has fit well within the broader framework of a particular ideology, namely the neoliberal doctrine of self-responsibility, self-control and rational calculation (Deuchars 2004, 81; Klein, 2008). Hence, further application of mathematical technique is made justifiable, much like the inclusion of private sector risk profiling agencies, as key performers of financial governance (Dannreuther and Lekhi 2000, 87; Green 2000, 86; Sinclair 2001, 2005). The interconnection of the trends just outlined is nowhere better illustrated than through a close examination of the politics behind (a) the acceptance on behalf of the Basel Committee on Banking and Supervision, of the so called, VaR internal risk assessment model, as part of the Basel Capital Adequacy Accord II and (b) the role of credit rating agencies in the debate regarding the post-Asian financial crisis reform of the international financial architecture.

The Basel Committee on Banking and Supervision, the VaR and the Basel Capital Adequacy Accord

The Basel Committee, which was formed in 1975, has been the pivotal international entity in charge of formulating standards for international banking regulation (Porter 2005, 57). It has members comprising of representatives of central banks from the G-10. Most importantly it exemplifies a closed nature of conducting transnational banking supervision and regulation, which are also subjected to a "growing dependence of regulators and supervisors on private market interests (whereby).... regulatory standards are increasingly aligned to the preferences of the largest global market players" (Underhill 1997, 43).

Basel II for instance, the Committee as part of its commitment to the current Capital Adequacy Accord, has fully embraced the idea of enhancing transparency via self-regulation, as the most effective and thus appropriate, or best- practice solution for attaining greater financial stability (de Goede 2004, 211; Tsingou, 2005); this is indicative of the pursuit of a decidedly, pro-market type of regulation, which "marginalizes radical reforms where public authority is more assertive" (Tickell 2000, 92). Basel III is currently being discussed but no move away from this approach to transparency can be discerned.

Since the beginning of the 2000s, the so called, VaR, or Value at Risk internal risk assessment model, has been accommodated as the standard requirement for large financial institutions' control of their own risk exposure at any point in time. By producing a single figure that assesses the risk exposure arising out of each transaction performed and through a final summation of all individual VaR amounts, a firm can estimate its total risk exposure at any given time (Blyth 2003, 249; Nocera, 2009).

Yet, the Committee's on-going support to such a highly abstract yet convenient model is controversial, especially when one takes into consideration that conventional risk technologies such as VaR, do not take into factor neither the possibility of unprecedented events occurring (de Goede 2004, 210), or in other words, the notion of risk's indeterminacy aforementioned, nor do they take into account the social character of the market (Green 2000, 87). In fact, as shown during the Asian crisis and the collapse of the Long Term Capital Management hedge fund, the application of VaR has allowed "financial institutions to maintain smaller capital reserves and engage in riskier trading" (de Goede 2004, 211) while simultaneously making "trading much more dangerous by tying unrelated markets together in the search of liquidity" (Blyth 2003, 251).

Moreover, it is important to note that the choice for sanctioning the use of VaR analysis by the Committee (and the Securities Exchange Commission in the USA in particular) is an ideological one, which in line with the core argument of the paper underscores the weight of the constitutive role of the underpinning ideas and normative assumptions pertaining to risk's presumed calculability, perceived market efficiency and transparency improvement through numbers as the main vehicle for attaining financial stability, all of which ultimately continue to shape how risk is actually managed and socially distributed (Blyth 2003, 251).

The Committee's unquestioned acceptance of the financial industry's mathematical risk modelling and self-politicking through additional transparency techniques, in the end legitimizes the contestability of such a de- politicized regulatory system (Soederberg 2002, 614), while affording narrow security only to those who construct, sell and operate the core risk instruments, though their function underpins day to day financial practices and hence affects ordinary lives as well (de Goede 2004, 213).

Embedded Knowledge Networks-Rating Agencies and the Privatization of the International Financial Governance Architecture

The financial sphere has had a strong tradition of self-regulation, for instance in the case of the Gold Standard period. Once conditions became more permissive, unlike during the Bretton Woods era, it was not at all unforeseen for a self-regulatory governance scheme to be fashionable again (Tsingou, 2005). In fact, as mentioned earlier, this is exactly what has actually taken place as far as financial risk governance is concerned, especially as the current global era is saturated by "the commonsense notion that the state is in any case less an authoritative actor and more a facilitator and enforcer" (Cerny 2002, 209).

More specifically, the role of what Sinclair calls embedded knowledge networks is relevant here, which are "private institutions that possess a specific form of social authority and help to privatize policy making, narrowing the sphere of government intervention" (2001a, 441). Credit rating agencies, of which the most prominent ones are Standard and Poor's and Moody's, fall under such a category, because they are private, they derive their authority from their expert status in financial markets and their involvement in financial risk governance propagates the privatization of the international financial architecture, while ostracizing state-led public policy interventions.

The rhetoric that global finance and in particular its inherent risk practices are too complex, has led the public sector itself to accept "more and more highly technical approaches, which seem attractive because they appear to offer pragmatic effective evolutions" (Porter 2005, 196). Simplistic credit ratings conform to these types of solutions, while on a more general level, the aforementioned ideas relating to the calculability of risk has permitted rating agencies to maintain and build upon their expert status (Green 2000, 86), where as the process of financial disintermediation combined with the fact that promotion of technical transparency is the number one priority within the debate of the reformation of the international financial architecture, has escalated the importance of their functionality as market disciplining entities (Randall 2002, 20; King and Sinclair 2003, 346 ;Sinclair 2001a; 2001b; 2005; Soederberg 2002, 615).

However, from a democratic point of view, the current move towards a privatized and self-regulatory international financial architecture is very problematic since it will most likely lead to the exclusion of other legitimate stakeholders in matters of global finance governance (Sinclair 2001, 449). Among these stakeholders are ordinary citizens, who as shown by recent financial and corporate crises continue to be burdened with the most disruptive forms of risk, although they are not directly implicated in the latter's introduction. Sen recently made a case in this regard, in relation to how "Europe's democratic governance could be undermined by the hugely heightened role of financial institutions and rating agencies, which now lord it freely over parts of Europe's political terrain" (2011), of which Greece's ongoing social unrest is a critical example. This leads right into the discussion regarding the legitimacy of such type of governance scheme and its underlying normative assumptions, which will now be briefly examined.

Legitimacy within Financial Risk Governance

Pauly rightly argues that "language, not money or force provides legitimacy" (1995, 369): accordingly, this article has explored the stabilizing and legitimizing power of the language of financial ideas and has showed how the orthodoxy of financial risk governance currently upheld as legitimate, is underpinned by assumptions of (a) risk's calculability, aided by highly technical and specialist knowledge based models, and (b) efficiency and rationality of markets, more generally. In particular, these normative assumptions have legitimized the development of a governing transnational polity, which is increasingly private sector oriented, based on the principle of self-regulation and devoid of democratic accountability (Gill 1997, 71; Porter 2005, 193; Tickell 2000, 95; Tsingou 2005; Underhill 2001, 282).

This particular arrangement however is highly problematic because, governance of financial risk, affects everyone, and as such it should be permitted to fit in exactly, within the purview of the public domain (Underhill 2001, 285). The current financial order features an asymmetric risk-reward distribution in favour of the financial sector and correspondingly, the current regime continues to be largely dominated by the preferences of the very same financial sector interests who profit from it most, and who are likely to be the most risk tolerant as a result of their insider knowledge and favourable agenda-setting authority (Tickell 2000, 96; Underhill 2001, 288).

Where as the safety and stability of the financial system should be a matter of public policy, "private sector governance causes concern in so far as the state appears to increasingly identify with private interest" (Tsingou, 2005) and thus a democratic deficit is formed as those interests that do not coincide with transnational capital, though legitimate on their own right, will be under-represented. Since representation via inclusion "is thought to be important for reasons of fairness, effectiveness and legitimacy" (Porter and Wood 2002, 236), the fact that there is lack of it in the governance of financial risk, creates a problem for the continued legitimacy of the authority that technocratic elites have been able to acquire (Green 2000, 86).

Conclusion

The article has endeavoured to provide a critical analysis of the changing nature and legitimacy of global financial risk and its associated governance. Careful attention has been afforded to the social construction of risk as a contingent and historical concept, which contradicts the mainstream view presenting risk and global finance in general as a natural and coherent system. Instead the argument has been that risk has been constructed as a calculable enterprise, which can be hedged against via the application of ever increasingly complex mathematical models. This peculiar language has so far legitimized a self-regulatory and technocratic governance framework, which aims at including financial sector interests while excluding those of the public more generally. By this token, this same language has also obscured and de-politicized global financial risk practice and management: other than excluding those actors without the required expertise and resources, it has also the crucial impact on the agenda setting process, since only a narrow range of issues, favourable to the preferences of the financial sector are being and continue to be considered even after the recent global recession. However, pressing questions about the existing asymmetric risk/reward distribution supersede technical matters such as the provision of transparency done by resorting to refined mathematics: these questions, can however be solved only through political contestation and deliberation on both the constitutive normative assumptions pertinent to the practice of risk and on the legitimacy of the corresponding financial sector driven governance structure currently at work.

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