Global and Regional Financial Safety Nets: Lessons from Europe and Asia Rhee, Sumulong and Vallée Asian Development Bank and Bruegel 11 October 2013 The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent. 1
Table of Contents Rise of regional arrangements Two generations of Regional Financial Arrangements The European and the Asian experiences The new international and regional safety net architecture Cooperation challenges and policy prescriptions Strengthening existing global and regional arrangements Collaboration between the IMF and regional financial arrangements Cooperation with other stakeholders 2
Rise of regional arrangements 3
List of existing RFAs Arab Monetary Fund (AMF) Latin American Reserve Fund (FLAR) EU Balance of Payments (BoP) Assistance Facility Chiang Mai Initiative Multilateralization (CMIM) EURASEC Anti-Crisis Fund (ACF) European Stability Mechanism (ESM) European Financial Stabilization Mechanism (EFSM) European Financial Stability Facility (EFSF) 4
RFAs formation and mandate/objectives Arab Monetary Fund (1976) Correct disequilibria in BOP and promote exchange rate stability Eliminate trade restrictions, develop capital markets, develop policy coordination Fondo Andino de Reservas (1978) BoP support Improve international reserves Monetary, fiscal and exchange rate policy harmonization EEC-Medium-Term Financial Assistance (1971) ASEAN Swap Arrangement (1977) Fondo Latino Americano de Reservas (1989) EEC-Medium-Term Financial Assistance (1988) Chiang Mai Initiative (2000) Mitigation of foreign currency liquidity crises Crisis prevention EU-Balance of Payments Facility (2000) Medium-term financial assistance for BoP difficulties Eurasec Anti- Crisis Fund (2009) Chiang Mai Initiative Multilateralization (2010) Counteract effects of GFC Ensure financial stability Economic Integration European Financial Stability Facility (2010) 1970 1980 1990 2000 2010 European Stability Mechanism (2012) Provide temporary stability support Ensure long-run stability European Financial Stabilization Mechanism (2010)
First generation RFAs Includes EEC-MTFA, AMF, FAR Established not as a result of financial crisis, but in anticipation of BoP instability Started in the late 1970s with the demise and the perceived travails of the international monetary system Questions: Why didn t the large Latin American countries join FAR/FLAR? Why did oil-exporting Middle East countries see the need for an RFA? Why were they, in particular, EEC-MTFA, created when IMF has programs to address BoP problems? 6
Second generation RFAs Includes CMI, ACF, EFSF Established in response to Asian financial crisis and global financial crisis The result of the aggressive policies of the IMF in a number of places starting with Latin America / Asia Ex post resolution and IMF conditionality / stigma (e.g., CMI after the 1997/98 crisis) Necessity of ex ante mechanisms (e.g., CMIM during the 2008 crisis) Conflict between EU and IMF (e.g., Latvian program during the 2008 crisis) Questions: Why were there no RFAs established after the 1980s Latin American crisis? Why did Japan, a creditor, initiate the Asian Monetary Fund/CMI? 7
G20 and Global Safety Nets (GSNs) G20 Seoul Summit Initial Korean proposal: Institutionalize bilateral swaps (linkage between central banks and IMF) Strengthening GSN vs Moral Hazard: * FCL, PCL, Multi-country FCL, etc. Cannes Summit G20 principles for the IMF and Regional Financial Arrangements 8
Existing RFAs: Characteristics RFAs & No. of Members Legal basis Fund Size Paid-in Capital/ Pledge W/ Option to Issue Bonds? AMF 22 Agreement $2.7 Bn 600 Mn Arab Dinars Yes FLAR 7 Agreement $3.28 Bn $2.28 Bn Yes EU-BOP 27 Treaty 50 Bn 50 Bn Yes CMIM 13 Agreement $240 Bn Pledge No ACF 6 Treaty $8.513 Bn $8.513 Bn No ESM 17 Treaty 500 Bn 80 Bn Yes EFSM 27 Agreement 60 Bn Backed by EU Budget Yes EFSF 17 Agreement 440 Bn* Yes * Combined lending ceiling of ESM & EFSF raised to 700 Bn in July 2013 with 80 Bn pledged by Member States and the balance to be raised from capital markets Though a latecomer, ESM appears to be the strongest. 9
Existing RFAs: Instruments Loans, guarantees, swaps Maturity varies from short term (e.g., 30 days) to very long term (up to 20 years) Interest rates are either fixed or floating based on LIBOR Ex ante vs. ex post mechanisms Conditionality: not specified in detail yet 10
Existing RFAs: Instruments offered RFA Instrument Duration Grace/ Rollover period AMF FLAR Automatic loan Ordinary loan Extended loan Compensatory loan Structural Adj. facility Short-term liquidity BoP credit Foreign debt restructuring Liquidity credit Contingent credit Treasury credit 3 yrs 5 yrs 7 yrs 3 yrs 4 yrs 6 mos 3 yrs 3 yrs 1 yrs 6 mos 30 days EU BOP Loan/Credit line ~5 yrs on ave CMIM Swap, Precautionary line Swap, Stability Facility Both: 6 mos*; 1 yr** 3.5 yrs 3.5 yrs 1.5 yrs 2.0 yrs renewable, 2x 1 yr 1 yr renewable Both: renewable up to 2 yrs*; 3 yrs** Notes: * IMF-delinked; ** IMF-linked; STA- Subject to assessment of the designated decision-making group; SMSF Secondary Market Support Facility; PCCL Precautionary Conditioned Credit Line; ECCL Enhanced Conditions Credit Line 11
Existing RFAs: Instruments & Terms RFA Instruments & Terms Duration Grace/ Rollover period ACF Stabilization credit (low inc) Sovereign loans (middle inc) 20 yrs 10 yrs 5 yrs 5 yrs ESM Loan Credit line (PCCL & ECCL) SMSF STA 1 yr STA STA Renewable, 2x (6 mos ea) STA EFSM Loan/Credit line STA STA EFSF Loan Credit line (PCCL & ECCL) SMSF STA 1 yr STA STA Renewable, 2x (6 mos ea) STA Notes: * IMF-delinked; ** IMF-linked; STA- Subject to assessment of the designated decisionmaking group; SMSF Secondary Market Support Facility; PCCL Precautionary Conditioned Credit Line; ECCL Enhanced Conditions Credit Line 12
Existing RFAs: Link to IMF Programs RFA AMF FLAR EU-BOP CMIM ACF ESM EFSM EFSF Link to IMF Programs Ordinary loans usually accompanied by an IMF program (other assistance not necessarily linked) None but complements assistance provided by other IFIs including IMF Not formally but organized jointly in recent cases; members are obliged to consult EU before approaching IMF Beyond 30% of country s allotment, disbursements must be linked to an IMF program; the de-linked portion to be increased to 40% Guided by IMF recommendations on loan concessionality when lending to low-income countries MoU between EC, ECB, IMF (where applicable), and beneficiary Not legally but ECOFIN Council has explicitly stated that activation would only be in the context of a joint EU/IMF program Framework agreement provides that support be provided in conjunction with the Fund and subject to conditionality in an MoU negotiated in liaison with the IMF and ECB Except for CMIM and European RFAs, IMF involvement is optional. 13
Existing RFAs: Surveillance RFA AMF FLAR EU-BOP CMIM ACF ESM Surveillance No surveillance but with periodic consultations with members on their economic conditions Macroeconomic Surveillance Program introduced in July 2011 and in the process of being fully implemented to include financial and banking stability to follow-up and advise member countries ECOFIN and program partners including IMF shall verify compliance with the economic conditions of the MOU between the Commission and the member State prior to release of funds Regional macroeconomic surveillance through AMRO Yes, through EDB, the manager of ACF Complements the new framework for reinforced economic surveillance in the EU, which includes a stronger a focus on debt sustainability and more effective enforcement measures, focuses on prevention and will substantially reduce the probability of a crisis emerging in the future 14
Existing RFAs: cases of disbursement? RFA AMF FLAR EU-BOP CMIM ACF Fund utilization Structural loans to Jordan, Morocco, Mauritania Financial credit to Bolivia, Colombia, Costa Rica, Ecuador, Peru, Uruguay, Venezuela BOP assistance for Hungary, Latvia, and Romania Remains untapped since inception Financial credit to Belarus and Tajikistan ESM/EFSF ESM to be used in Cyprus for first time. EFSF for programmes in Greece, Ireland, Portugal and Spain. Hungary, Latvia, Romania with BoP assistance facility 15
Cooperation challenges and policy prescriptions 16
Pros Why do we need RFAs? Better information on local conditions Impose less stringent conditionality May be able to immediately address local shocks Cons More lenient on neighbors Limited resource pool Cannot address regionwide / global shocks Lack of ample surveillance capacity 17
Strengthening Existing GSNs and RSNs Bilateral Swaps & IMF Facilities: substitute or complements? Resources & linkages with central banks & central bank s unwillingness Is stigma effects unique to IMF? How to reduce stigma effects in RFAs? Multi-country offer Prequalification? Build reputation by positive cases Increasing Paid-in capital in RFAs Securing human capital for surveillance 18
Optimal coordination between RFAs and IMF (I) Recent European experience has underscored the difficulties and practical limitations due to different mandates and priorities: - Lativia(depreciation), Ireland(bail-in), Grece(debt reduction), Spain(stigma), Cyprus(debt trajectory) Degree of cooperation attained in Europe could hardly be replicated in other region: Asymmetry of bargaining power due to lack of power to print out international currency. Search for a new modality - the case of Peru (1978-90):Lombardi(2012) - the case of Cyprus: Pissany-Ferry, et.al (2013): from majority lender to small contributor without weakening conditionality 19
Optimal coordination between RFAs and IMF (II) Which conditionality to follow? - Ownership of reform can be enhanced by RFAs but can RFAs impose conditionality? (legal issues) - Linkages with IMF: Governance issues Decentralized and Complementary Surveillance - Track record of regional surveillance & capacity constraint - cross-regional linkages and spillovers can only be internalized by IMF Multi-layered and Multistakeholder lending - lend to countries or RFAs: joint lending system vs reinsurance/guarantee system - legal issues 20
Optimal coordination within RFAs What are the possible forms of cooperation? Information sharing Capacity building Risk sharing? 21
Optimal coordination between RFAs and RDBs What should be the role of regional development banks with the global/regional of safety nets? Guarantors/ loans ADB in 1997 and 2008 Providers of advice Providers of moral suasion / coordination Example is the Vienna initiative where EBRD/EIB initiated agreement among private banks not to withdraw funds from eastern Europe in 2009 Should other RFAs establish their version of Eurasian Development Bank to manage their funds? 22
Optimal coordination between RFAs and CBs What should be the role of central banks in the global system of safety nets? IMF coordinates swap arrangement with major central banks (Truman(2010, 2011), Korean G20) Linkages with through BIS? IMF coordinating SDR allocation & swap arrangements? 23
Thank you Economics and Research Department Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Philippines www.adb.org 24