The IMF’s Emergency Line Backup

The Center for Global Development in Washington in a working paper called for expansion of the IMF’s two contingency facilities created in the 2008 crisis aftermath with current “volatile” emerging market conditions, as the US Treasury starts to fill its senior ranks amid a budget blueprint slashing multilateral development institution contributions, including all the Department’s own technical assistance to foreign counterparts. The separate Flexible (FCL) and Precautionary Liquidity (PLL) pools were designed for pre-qualification and lighter monitoring than traditional programs. Only a handful of countries—Colombia, Mexico, Poland, Macedonia and Morocco– have applied, with most renewing, as the instruments are bypassed in favor of reserve self-insurance, and regional and bilateral currency swap alternatives. The analysis points out widespread eligibility at reasonable cost, but acknowledges possible residual stigma following immediate creditworthiness gain. Mexico’s $90 billion is the largest, with the others combined less than $25 billion. Its term runs for two years with “strong” polices under the more stringent FCL, with the PLL demanding “sound” economic fundamentals.  Exclusionary factors include inability to access global capital markets, high public debt and bank insolvency, and poor data quality and transparency. Based on a series of institutional and macro-performance indicators thirty more countries could be added to the list, according to the Center. Fund resources could easily manage this demand under an assumed quota with $250 billion to be extended, out of $850 billion in total credit capacity. Other crisis buffers available through the ASEAN+3, BRICS, Latin American Reserve Fund, and European Stability Mechanism have more onerous guidelines and similar expense, with the first two requiring a formal IMF agreement in advance. Central bank swap commitments such as the Federal Reserve’s $30 billion to Brazil, Mexico, Korea and Singapore in 2008 soon expired, and they were the only approved recipients. Indonesia tapped the World Bank’s Deferred Drawdown Option instead under tougher terms, and private liquidity provision as organized in Latin America in the late 1990s has not been repeated since and lacks durability. Reserve accumulation continues to entail costs equal to 1 percent of GDP, and a better overall deal cannot be found than the FCL or PLL, the document argues.

A 2013 fifty-member IMF survey cited perceived negative image as the main obstacle, but it may be associated with the organization’s austerity reputation generally rather than the specific products. The financial market implications would seem to neutralize this concern, with Colombia seeing a 10 basis point sovereign bond yield reduction upon its move, while Morocco’s CDS fell by similar magnitude. With global reserves tapering with commodity export slowdown and capital outflows, the timing is right for wider participation which can contribute to global monetary safety, the paper concludes. Mexico has been in the cross-hairs in particular for stress response as the US formally signaled NAFTA renegotiation and preliminary immigration border wall construction in the coming months. Foreign investors have cut short-term Treasury ownership to 30 percent, and the central bank unveiled a new discretionary $20 billion foreign exchange hedging backstop to defend the peso. However growth will be less than 2 percent this year as inflation heads toward 5 percent on currency depreciation which may revive the relative value of IMF spurned innovations.

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