Strengthening the Financial Safety Net · 12/9/2014  · Dot-com crash Global financial crisis...

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Strengthening the Global Financial Safety Net Thanos Arvanitis International Monetary Fund December 9, 2014

Transcript of Strengthening the Financial Safety Net · 12/9/2014  · Dot-com crash Global financial crisis...

Page 1: Strengthening the Financial Safety Net · 12/9/2014  · Dot-com crash Global financial crisis Argentine default / US Tequila corporate crisis crisis (RHS) ‐200 0 200 400 600 800

Strengthening the Global Financial Safety Net

Thanos ArvanitisInternational Monetary Fund

December 9, 2014

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Systemic crises are not rare

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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)

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‐200

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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

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Potential for global spillovers has increased

Increased co‐movement in asset prices

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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

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2007 2008 2009 2010 2011 2012 2013

EM local government bonds(USD, billion)

Nonresident holdings

Daily trading volume

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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

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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

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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.

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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

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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?

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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

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Size of RFAs varies

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0.620.22

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AMF BRICS FLAR ESM CMIM

Size of RFA Relative to Region's 2013 GDP(In percent)

Source: RFA websites and IMF staff calculations.

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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?

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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

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Thank you