THE SEVERITY OF AND POLICY RESPONSES TO SYSTEMIC CRISES. Lorenzo Giorgianni July, 2011

Transcription

1 THE SEVERITY OF AND POLICY RESPONSES TO SYSTEMIC CRISES Lorenzo Giorgianni July, 211

2 OUTLINE Increasing linkages Anatomy of systemic crises Policy Responses to Past Systemic Crises Key Lessons

3 Based on recent IMF work on financial linkages and systemic crises Analytics of Systemic Crises and the Role of Global Financial Safety Nets Mapping Cross-Border Financial Linkages: A Supporting Case for Global Financial Safety Nets

4 Increasing linkages have created more complicated financial networks 2 1,6 EM financial openness Europe: Cross-Country Bank Liabilities (in percent of GDP of debtor country) 1,2,8 1999, Number of cross-border links in the global banking network Increasing linkages

5 Capital flows surged at various points but tended to end in a synchronized manner Capital Inflow episodes (one per line) 5% of cases 5% of cases 8% of cases Emerging Advanced Increasing linkages Ongoing

6 as linkages could shift quickly and create nonlinear impact during systemic crises Received Net Volatility Received by Emerging Markets (pairwise contributions) Fed fund rate Commodity price index S&P 5 VIX Net volatility received by EMs Transmitted Increasing linkages

7 increasing the risk of systemic instability Probability of individual/systemic failure System Individual country Interconnectedness Increasing linkages

8 OUTLINE Increasing Linkages Anatomy of systemic crises Policy Responses to Past Systemic Crises Key Lessons

9 A systemic crisis is a severe stress event that spreads across countries with rapid virulence Severe stress Contagion Systemi c crisis Anatomy of systemic crises

10 and measured using a global financial stress indicator and an economic stress indicator One standard deviation above mean World Financial Real GDP Stress Growth Index One standard deviation below mean / World financial stress index is a simple average of each country's (normalized) financial stress index (advanced economies) or exchange market pressure index (emerging markets). World real GDP growth is a simple average each country s (normalized) real GDP growth (yoy). What makes a crisis systemic?

11 Four systemic crises were identified Systemic-weighted and Equal-weighted Global Systemic Debt crisis Number of countries affected Equal-weighted Systemic-weighted Threshold: one SD above mean Nikkei crash, DBL bankruptcy, and Scandinavian banking crisis ERM crisis Asian crisis Russian default and LTCM collapse Global financial crisis Q1 198Q4 1981Q3 1982Q2 1983Q1 1983Q4 1984Q3 1985Q2 1986Q1 1986Q4 1987Q3 1988Q2 1989Q1 1989Q4 199Q3 1991Q2 1992Q1 1992Q4 1993Q3 1994Q2 1995Q1 1995Q4 1996Q3 1997Q2 1998Q1 1998Q4 1999Q3 2Q2 21Q1 21Q4 22Q3 23Q2 24Q1 24Q4 25Q3 26Q2 27Q1 27Q4 28Q3 29Q2 21Q1 21Q4 Source: WEO database and IMF staff calculations. 1/ A country is considered "affected" if its country-level crisis indicator (a simple average of FSI/EMPI and real GDP growth, both normalized) is above one standard deviation from its mean. Global systemic crisis indicators are constructed as a simple average of normalized global real and financial stress indices, which aggregate country-level indicators using either "systemic importance" as weights (systemic-weighted) or equal weights. Both global crisis indicators are normalized for easy presentation and comparison. Anatomy of systemic crises

12 Underlying vulnerabilities varied with external factors playing a larger role in systemic events Underlying factor Debt ERM Asia Russia Globa l Domestic factors Balance sheet mismatches Public debt sustainability Unsustainable ER pegs Asset price bubble External factors Monetary policy in major AMs Commodity prices Anatomy of systemic crises

13 of which, advanced countries monetary policy could carry systemic implications for others G7 Policy Rates Across Systemic Crises 2 15 Debt crisis Crisis period US recession SDR rate ERM crisis Asian/ Russian crisis Global crisis Fed Fund rate Q1 1982Q1 1987Q1 1992Q1 1997Q1 22Q1 27Q1 Sources: IFS and staff estimates. Anatomy of systemic crises

14 Even EMs with relatively strong fundamentals ( crisis bystanders ) not spared 25 EM Crisis Bystanders During Systemic Crises 1/ 2 Low vulnerability Relatively strong fundamentals Medium vulnerability High vulnerability Crisis bystanders Debt crisis ERM crisis Asian/Russian/LTCM crisis Global crisis 1/ An emerging market (EM) is considered to have relative strong fundamentals if it had low or medium pre-crisis external vulnerability (overall vulnerability for the global crisis). An EM is considered affected during a systemic crisis if its systemic crisis index exceeded one standard deviation above its own mean or it had an IMF arrangement starting during Anatomy of systemic crises

15 as these EMs were neither immune to large net capital outflows nor to output collapse -4-8 Affected EMs: Median Net Inflows (peak-to-trough deviation in period T-3 to T+3 percent of GDP) Debt crisis Asian/ Russian/ LTCM crisis Global crisis L/M H L/ H L/ H Affected EMs: Median output loss (peak-to-trough, percent) L/M H L/M H L/M H Debt crisis Asian/Russia crisis Global crisis Anatomy of systemic crises

16 OUTLINE Increasing Linkages Anatomy of systemic crises Policy Responses to Past Systemic Crises Key Lessons

17 Policy responses have involved multiple institutions Global monetar y response PSI DOMESTIC RESPONSE IMF Policy responses to systemic crises RFA and Bilatera l

18 Domestic liquidity responses varied across crises, particularly interest rate response 6% 5% 4% 3% ER Reserve Interest Debt crisis Mexico default Median 3M-moving average 15% 1% 5% ERM crisis 2% 1% % -1% -2% 4% 35% 3% 25% 2% 15% 1% 5% % -5% -1% -15% 198M4 198M7 198M1 1981M1 1981M4 1981M7 1981M1 1982M1 1982M4 1982M7 1982M1 1983M1 1983M4 1983M7 1983M1 1984M1 1984M4 1984M7 1996M2 1996M5 1996M8 1996M M2 Asian crisis Thai baht float 1997M5 1997M8 1997M M2 Russia default 1998M5 1998M8 LTCM collapse 1998M M2 1999M5 1999M8 1999M11 % -5% -1% -15% 2% 15% 1% 5% % -5% -1% -15% Danish referendum 199M4 199M7 199M1 1991M1 1991M4 1991M7 1991M1 1992M1 1992M4 1992M7 1992M1 1993M1 1993M4 1993M7 1993M1 1994M1 1994M4 1994M7 27M2 27M5 27M8 27M11 28M2 Global Financial crisis 28M5 28M8 Lehman bankruptcy 28M11 29M2 29M5 29M8 29M11 21M2 21M5 21M8 21M11 Policy responses to systemic crises

19 Moreover, there were also diminishing returns to reserve accumulation 5 Emerging Markets: Foreign Reserves and Growth in the Recent Crisis Peak to Trough Real GDP Growth Reserves/(Short-term Debt at Remaining Maturity + Current Account Deficit), 27

20 Global responses activated during systemic crises centered on liquidity provision Global monetar y response DOMESTIC RESPONSE Policy responses to systemic crises

21 Liquidity injection by major CBs varied depending on whether AMs were directly affected 4 Annual change in global liquidity 1/ (In percent of GDP) 3 Debt crisis ERM Asian/ Russian crisis Global crisis Crisis period US recession Liquidity injection Liquidity contraction 1977Q1 1982Q1 1987Q1 1992Q1 1997Q1 22Q1 27Q1 1/ Global liquidity is calculated as average quarterly narrow money (divided by country GDP) in the U.S., Euro Area, Japan, and the U.K. Figures for the Euro Area refer to M1. Policy responses to systemic crises

22 Policy responses to systemic crises National Bank of Denmark Sveriges Riksbank National Bank of Latvia Bank of England ECB National Bank of Poland National Bank of Hungary Swiss National Bank Bank of Korea Federal Reserve Bank of Japan Bank of Mexico Monetary Authority of Singapore Central Bank of Brazil Reserve Bank of Australia Reserve Bank of New Zealand In the latest crisis, global liquidity response was unprecedented with swap lines by the Fed, paralleled by the

23 Instant but short-lived market reaction, until Fed announced asset purchases plus G-2 summit/imf lending reforms Market Reaction to Fed Swaps (USD billion) Fed swap lines to BRA, MEX, KOR, SGP G-2 London Summit IMF lending reforms EMBIG VIX CDS (AUS, DNK, NZL, SWE) CDS (BRA, KOR, MEX) Mar-1 Jan-1 Dec-9 Oct-9 Sep-9 Aug-9 Jun-9 May-9 Apr-9 Feb-9 Jan-9 Nov-8 Oct-8 Sep-8 Jul-8 Jun-8 Apr-8 Mar-8 Feb-8 Dec-7 Policy responses to systemic crises

24 The third layer of global response is IMF financing Global monetar y response DOMESTIC RESPONSE IMF Policy responses to systemic crises

25 modalities changed in response to global crisis more frontloaded and larger precautionary access Frontloading Precautionary 3 25 (First disbursement as percent of total access) 6 5 (Access approved on a precautionary basis, in percent of total) Asian/Russian Crisis Global Crisis Asian/Russian Crisis Global Crisis Policy responses to systemic crises

26 As a result, market conditions improved quicker than in past crisis Asian and Russian Crisis Global crisis Money market rates (Jan -96=1) ASEAN 4 + KOR = 1 percent of quota ARG PHL CPV BIHZWE EST UKR THA PAN LVA IDN PAK UKR YEMIDNKOR BGR RUS/BRA LTCM bailout BRA URY JOR PER MEX RUS ZWE ROM LVA KAZ COL TUR Jun-96 Oct-97 Feb-99 Jul GEO Fed swap lines with 4 key EMs PAK ISL LVA SYC BLR SRB SLVARM UKR HUN MNG = 1 percent of quota IMF facilities reform (FCL) CRI MEX GTM ROM POL COL BIH LKA EMBI spreads (bps) DOM AGO MDV SYC MDA JAM COL IRQ GRC SLV MEX Aug-8 Mar-9 Sep-9 Apr-1

27 and EMs with Fund arrangements weathered the global crisis with less CA adjustment than in the past Peak-to-trough CA Deficit Adjustment by Crisis Episode (Fund arrangements, average, in percent of GDP) Asian/Russian/LTCM Crisis Global Crisis Asian programs only (H vulnerability) (L/M vulnerability) (FCL arrangements) Source: WEO and IMF staff calculations.

28 and large Fund financing also allowed more fiscal room than past crises T Fiscal balance Non Program countries T FCLs (average) Past Crisis -6 Wave 1 Program countries 1/ Public debt (medians, percent of GDP) 1/ Exclude Euro zone program countries.

29 However, the Fund succeeded in ring-fencing only over a third of the strong performers 1 9 Fund Arrangements to EM Crisis Bystanders (in percent of crisis bystanders) Debt crisis ERM crisis Asian/Russian/LTCM crisis Global crisis Policy responses to systemic crises

30 The fourth and fifth layers include contributions from other official creditors and private sectors Global monetar y response PSI DOMESTIC RESPONSE IMF Policy responses to systemic crises RFA and Bilatera l

31 OUTLINE Increasing Linkages Anatomy of systemic crises Policy Responses to Past Systemic Crises Key Lessons

32 Despite improved coordination, policy responses during the global crisis remained piecemeal Reserves: Diminishing returns visà-vis large domestic and global costs RFSNs: No focus on crisis prevention and catalytic finance CBs Swaps: Swap lines ad hoc and discretionar y; Domesticall y oriented mandate Fund: Significant financing but delayed/limited liquidity support to crisis bystanders Key lessons

33 Lessons Systemic crises relatively rare but virulent and costly Instability from boom/bust AM monetary policies Strong linkages widespread contagion Severe global output loss Crisis bystanders not immune to impact Liquidity responses ad hoc and reactive Multiple layers of liquidity provision helped, but only in a limited way Crisis bystanders not fully ring-fenced CB liquidity support uncertain going forward Key lessons

34 Where to from here? Lessons for the IMF Better Surveillance requires more attention to Financial risks Hidden linkages Risks of systemic crisis Need better global financial safety net Improve global coordination mechanism Enhance RFAs Improve liquidity provision to crisis bystanders to limit contagion Key lessons

35 Background

36 Detecting future systemic crises is more art than science, requiring large dose of judgment Financial stress indicators 9 Interquartile range Asian crisis Average of stress index std Countries under stress (RHS) Russian default/ltcm crisis Global financial crisis One SD threshold -4 Jan-97 Sep-97 May-98 Jan-99 Sep-99 May- Jan-1 Sep-1 May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Jan-11 Source: IMF staff calculations. 1/ A simple average of (normalized) monthly FSI of both advanced economies and emerging markets is used for real-time detection of systemic crises. The final global financial stress indicator is normalized for easy presentation. All normalizations use past information only. Looking ahead: Detecting a systemic crisis

37 which allowed burden sharing with the Fund on crisis resolution, but not on crisis prevention 35 3 Burden Sharing between IMF, RFAs, and Other Official Creditors (average financing package in percent of GDP) Bilateral & other IFIs Bilateral (second line of defence) 1 Rollover of Parent Banks' Exposures in CESE Countries 28Q3-29Q EU (BoP facility, EFSF, GRC bilateral loans) IMF In percent Latam Crisis ARG, BRA, MEX Asian Crisis IDN, KOR, THA Global Crisis EU Programs BCI Program cases Other program cases Non-program cases Source: BIS. Policy responses to systemic crises