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A Factsheet - March 2004

The IMF's Contingent Credit Lines (CCL)

The IMF introduced the Contingent Credit Lines (CCL) in 1999 as part of its efforts to strengthen member countries' defenses against financial crisis. For various reasons, the facility was never used. In November of 2003, the CCL was allowed to expire on its scheduled sunset date.

The CCL as a precautionary line of defense

As part of its response to the rapid spread of turmoil through global financial markets during the Asian crisis of 1997-98, the IMF introduced the Contingent Credit Lines (CCL) in the spring of 1999. The CCL was intended to provide a precautionary line of defense for members with sound policies, who were not at risk of an external payments crisis of their own making, but were vulnerable to contagion effects from capital account crises in other countries. Under the facility, an IMF member that met the demanding eligibility criteria could draw on a large pre-specified amount of resources if hit by a financial crisis due to factors outside of the member's control.

In the fall of 2000, several changes were made to the terms of the CCL to make it more attractive. These changes led to more automatic access to the first portion of the loan. In addition, the interest rate on the CCL was reduced relative to that applying to the Supplemental Reserve Facility, a facility used to support member countries that are already experiencing a crisis. The commitment fee was also reduced.

To qualify for the CCL, an IMF member would have had to meet four criteria:

1. No expected need for IMF resources. The member must have been pursuing policies that were considered unlikely to bring about a need for IMF financing-except because of contagion.

2. A positive assessment of policies and progress toward adherence to internationally accepted standards.

3. Constructive relations with private creditors and progress towards limiting external vulnerability.

4. A satisfactory macroeconomic and financial program and a commitment to adjust policies.

Commitments of funds under the CCL would have been made for up to one year on a stand-by basis. While there was no general access limit, it was expected that commitments under the facility would typically have been in the range of 300-500 percent of the member's quota. Countries drawing under the CCL would have been expected to repay within one year to 18 months of the date of each disbursement. The surcharge over the IMF's normal market-based loan rate would have begun at 150 basis points, rising to 350 basis points, depending on the duration of the drawing.

The 2003 review of the CCL

The CCL remained unused and, in March 2003, the Executive Board began a review of the facility. Directors considered a number of factors that may have discouraged use of the CCL. Potentially eligible countries may have lacked confidence that a CCL would be viewed as a sign of strength rather than weakness. These countries may also have been concerned about the risk of negative fallout if they were to be considered ineligible at a future date. There had been some uncertainty about whether Fund resources under a CCL would in fact be readily available in the event of need, as the release of funds would require Executive Board approval. And, finally, many potentially eligible countries had reduced their vulnerability to external shocks through reserve accumulation, the adoption of flexible exchange rates, and other reforms, reducing the perceived demand for insurance in the form of a CCL.

During the review, Directors gave extensive consideration to further modifications of the CCL, as well as to alternative ways to achieve its objectives. There was strong support among many Directors to extend the facility beyond the sunset date built into the CCL decision, allowing time for its design to be further improved or alternative means found to achieve its objectives. A few Directors felt that, even if the CCL were never used, it provided an incentive for countries to pursue good policies. Nonetheless, support for its extension fell well short of the 85 percent of votes necessary, and the CCL was allowed to expire on November 30, 2003.

Directors highlighted a number of considerations they thought should dispel possible concerns raised by the CCL's expiration. First, as the Fund's record of helping members facing capital account crises shows, the IMF stands ready to move quickly and flexibly to approve the use of Fund resources and to adjust the level and the phasing of access to the member's need when conditions so require and permit. Second, the Fund's strengthened surveillance, support for greater transparency, and technical assistance operations are contributing to promoting sound policies, and helping to prevent crises more generally. And third, recent innovations in the financial architecture, improvements in market differentiation across different borrowers, and stronger policy efforts by many emerging market countries seem to have lessened the threat of contagion that the CCL was intended to avert.

Moreover, Directors urged that efforts continue to assess the ways in which the IMF's instruments and policies could be further improved to strengthen their ability to prevent crises. A fuller accounting of Director's views on specific avenues for exploration can be found at /external/np/sec/pn/2003/pn03146.htm.


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