Post on 22-Aug-2020
Strengthening the Global Financial Safety Net
Thanos ArvanitisInternational Monetary Fund
December 9, 2014
Systemic crises are not rare
0
5
10
15
20
25
0
5
10
15
20
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
FSI for stressed economies
Advanced economies
Emerging markets
US banking stress
October 1987 stock market crash
Nikkei crash, DBL bankruptcy, and
Scandinavian banking crisis
ERM crisis
Asian crisis
Russian default and LTCM collapse
Dot-comcrash
Global financial crisis
Argentine default / US
corporate crisisTequila crisis
(RHS)
‐200
0
200
400
600
800
1000
1200
1400
1600
1800
2000 2002 2004 2006 2008 2010 2012
Gross Capital Flows to EMs(In billions of USD)
Other Inflows
Portfolio Inflows
Direct Inflows
Gross Total Inflows
Source: FFA and IMF staff calculations.
Capital flow volatility continues to pose risks to EM economies
Potential for global spillovers has increased
Increased co‐movement in asset prices
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1998 2000 2002 2004 2006 2008 2010 2012 2014
Correlation between EM and AM asset prices (linear trend)
Bond yield Equity return
Increased liquidity risks
Sources: IMF Global Financial Stability Report, Fall 2014 and Fund staff calculations..19
0
100
200
300
400
500
600
2007 2008 2009 2010 2011 2012 2013
EM local government bonds(USD, billion)
Nonresident holdings
Daily trading volume
A multi‐layered global safety net has emerged
Self‐insurance
– Reserve accumulation
Bilateral
– Bilateral swap lines
Regional
– RFAs and BRICS CRA
Global
– IMF and other IFIs
There are important synergies across these four layers, but fragmentation has also increased
Sizable increase in reserves
Reserves can bring important benefits in terms of mitigating crises
But can also result in inefficiencies– Holding excessive reserves can be
costly– Potential market distortions (excess
demand for safe assets)– They may never be enough (race to
the top)
Self insurance
0
2000
4000
6000
8000
10000
12000
2000 2002 2004 2006 2008 2010 2012
Accumulation of FX Reserves(Bil of USD)
Emerging market economies
Advanced economies
Source: IFS and IMF staff calculations.
Bilateral Swaps
Potential for unconstrained supply
Provision of FX liquidity, with limited/or no stigma
Uncertain availability (concerns about credit risk and consistency with central bank mandate)
Subject to national preferences/interests
7
Regional Financing Arrangements
(Most) relatively limited in size
Unconditional support? How to deal with credit risk– Some rely on IMF programs/endorsement
Governance
Less stigma?
8
RFAs have expanded since the global financial crisis
ESM$685B
FLAR$2.3B
AMF$2.7B CMIM 1/
$240B 2/
1/ China participates in both of BRICS and CMIM2/ The Eurasian Economic Community Anti‐crisis Fund (ACF) has contributions of $8.5 billion.
BRICS 1/$100B
Size of RFAs varies
0.10
0.620.22
5.31
1.31
0
1
2
3
4
5
6
AMF BRICS FLAR ESM CMIM
Size of RFA Relative to Region's 2013 GDP(In percent)
Source: RFA websites and IMF staff calculations.
IMF reforms were a central part of the response to strengthening the GFSN
Quadrupled resources
Two new instruments (FCL and PLL)
Enhanced flexibility of existing instruments
Still relatively limited demand for precautionary instruments • Stigma limits role played by the Fund• Duration/exit issues for FCLs?
Options to strengthen the GFSN—Many proposals but still many questions
How to prevent fragmentation?
Cooperation between/with RFAs– How to strengthen coordination? Co‐financing?– G‐20 Principles for Cooperation between the IMF and RFAs
Support for central bank swap lines
Options to enhance the use of Fund instruments
Thank you