A step closer to a stronger global financial safety net
Manuela Goretti and Bikas Joshi
* IMF responds to G-20 call for
strengthening global financial safety net
*New crisis-prevention credit line
joins enhanced Flexible Credit Line
*Discussions to continue on framework
to address systemic events
The IMF has agreed two important changes as a further enhancement to
its crisis-prevention toolkit. A new precautionary credit line for
members with sound economic policies will now operate alongside a
beefed-up Flexible Credit Line - the insurance option for the IMF’s
strongest performing members.
These improvements are a step toward the vision of the Group of
Twenty (G-20) industrialized and emerging market economies for a
strengthened ‘global financial safety net,’ a network of insurance and
loan instruments - from multilateral institutions like the IMF, regional
financing arrangements, and individual countries - that countries could
draw on if confronted with a crisis, to cope with volatility and
contagion (see Chart 1).
IMF
Managing Director Dominique Strauss-Kahn said these decisions “mark an
important step in our ongoing work with our membership to strengthen the
global financial safety net.” He added that “the availability of these
credit lines to a broader spectrum of countries will contribute to a
more stable international monetary system.”
Expanding the fund’s safety net
Improvements in the IMF’s lending toolkit in March 2009 - together
with action following the London G-20 summit to boost the Fund’s
resources - helped calm financial markets, which saw global bond spreads
ease from their elevated crisis levels. Yet demand for the IMF’s
existing country insurance instruments remained limited.
According to a recent review of crisis programs, most affected
countries turned to the IMF only once they had already been hit by the
crisis, and large policy adjustments were needed to stabilize the
markets and avoid worse outcomes (see Chart 2).
The reforms approved draw on these lessons, and will enable the IMF
to act pre-emptively when future crises threaten. Strong policies, that
increase countries’ resilience to shocks, will continue to be the first
line of defense in any crisis. The new crisis prevention tools will
enable the IMF to better tailor its lending to the different strengths
and circumstances of its members.
Refining the flexible credit line
The Flexible Credit Line provides upfront access to IMF resources to
countries with very strong policies without tying disbursements to
traditional policy conditionality. Countries that have made use of the
credit line have pointed to the important role it played in helping
maintain market access and creating room for accommodative policies
during the crisis.
The key to the Flexible Credit Line’s success has been its ability to
send strong signals to financial markets, based on its rigorous
qualification process.
The new reforms enhance the attractiveness of this credit line.
Specifically:
* The duration of the Flexible Credit Line is doubled to up to two
years, with a review after the first year to ensure uninterrupted access
to the line for a longer period of time.
* The amount of access available under the credit line was made more
flexible, by removing the implicit cap of 1,000 percent of quota.
Establishing the precautionary credit line
The new Precautionary Credit Line will extend the availability of
crisis insurance to countries with sound policies, that may not yet meet
the high Flexible Credit Line qualification standards, but do not
require the same large-scale policy adjustment normally associated with
traditional IMF Stand-by Arrangements. Salient features include:
Countries that request use of the Precautionary Credit Line are
assessed through a process of qualification (similar to that for the
Flexible Credit Line) aimed at establishing the presence of sound
policies and the absence of an immediate external financing need;
* The Precautionary Credit Line features streamlined conditionality
assessed through reviews every six months and focused on addressing
remaining vulnerabilities identified in the qualification assessment;
* This credit line could be established for a period of 1–2 years. It
provides upfront access to IMF resources of up to 500 percent of quota
for the first year and up to a total of 1,000 percent of quota after the
first year.
Responding to systemic events
The IMF’s Executive Board also continued its discussions about
developing a more comprehensive mechanism to reduce countries’
vulnerability to contagion during systemic events.
“The G20, led by the Korean Presidency, has played an important role
in generating the momentum for reform in advance of the November
Summit,” Deputy Managing Director John Lipsky said.
While different options are still being considered, the idea of the
so-called Global Stabilization Mechanism would be for the IMF to make
consensual and simultaneous multi-country offers to approve Flexible
Credit Line arrangements.
The coordinated provision of access to IMF financing would help
bolster market confidence during systemic crises and thus avoid a
large-scale withdrawal of liquidity.
It will be imperative for the IMF to coordinate its reforms with
other complementary efforts worldwide to develop an effective network of
crisis-prevention mechanisms. In this spirit, a high-level meeting in
Washington during the IMF-World Bank Annual Meetings in October - with
representatives from key regional financing arrangements and IMF staff -
will explore ways to promote greater synergies in regional surveillance
and lending activities, with the ultimate goal of a truly global
financial safety net.
IMF Strategy,
Policy, and Review Department |