Strengthening the Global Financial Safety Net Thanos Arvanitis - - PowerPoint PPT Presentation

Strengthening the Global Financial Safety Net

Thanos Arvanitis International Monetary Fund

December 9, 2014

Systemic crises are not rare

5 10 15 20 25 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-com crash Global financial crisis Argentine default / US corporate crisis Tequila crisis (RHS)

‐200 200 400 600 800 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

0.1 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

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

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 CMIM 2/ The Eurasian Economic Community Anti‐crisis Fund (ACF) has contributions of $8.5 billion.

BRICS 1/ $100B

Size of RFAs varies

0.10 0.62 0.22 5.31 1.31

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