The IMF’s Regional Arrangement Disarray

The IMF, after clashing in particular with European partners over debt crisis rescues there, released a policy department paper attempting to chart cooperation strategy with regional financial arrangements also in effect in Asia, Latin America and the Middle East over past decades. Together they comprise the so-called global financial safety net which G-20 leaders endorsed in 2011 when outlining a broad set of joint principles to align conditionality and pricing while acknowledging the Fund’s senior creditor standing and surveillance sweep. Since 2008 the EU has introduced new mechanisms and East Asia has strengthened its currency swap network as former CIS countries inaugurated their own stabilization programs. Older regimes include the Latin Reserve and Arab Monetary Funds which remain tiny at under 0.5 percent of member GDP. By comparison the Eurozone’s ESM amounts to 5 percent of output, and features precautionary and adjustment lines modeled on IMF precedents. Most area facilities are instruments of international law and short-term in nature, although they can be renewed and Asia’s Chiang Mai Initiative presumes a Fund agreement. Before the burden-sharing with Brussels, the main regional experience dated to Mexican assistance under NAFA in the mid-1990s, when the US Treasury Secretary also needed a comfort letter from the Managing Director to draw on the bilateral Exchange Stabilization Fund. In recent years the IMF’s financial split has been over 50 percent in Hungary and Romania and 20 percent or less in Greece and Latvia.  In Spain its role was confined to banking system technical assistance, and it also advises regional counterparts on issues like bond market development. The “troika” relationship with the European Commission and Central Bank has become more structured so that macroeconomic frameworks can be approved in advance of country discussions and negotiations, but conflicting mandates and views continue to present “challenges,” and such consultations do not exist elsewhere, the analysis finds.  It recommends possible refinements of the current “flexible” partnership approach to enshrine Fund independent monitoring on debt sustainability and improve information and reporting procedures. Eventually detailed memoranda of understanding could be reached on a mutual and case-by-case basis, with the respective division of responsibilities and resources available for public inspection within the realm of confidentiality respect.

Internal reports especially on spillovers could be shared with staff working on these parallel constructs, the department urges. The paper circulated as slowing emerging market economies marred the mid-year growth outlook as asset class contagion spared few major components. The EMBI was down 10 percent with only Ecuador a major gainer at 7.5 percent. The core MSCI equity listing was off by the same degree with Indonesia, Malaysia, and the Philippines slightly ahead. The frontier segment was affected but still up almost 8 percent overall, with half the markets just in single digit loss territory and some Gulf, European and African ones with 40 percent arks in the arrangement.