Transcript of a conference call with IMF First Deputy Managing Director John Lipsky
August 30, 2010August 30, 2010
ALISTAIR THOMSON: Thank you. Good afternoon, everybody. Thank you very much for dialing in. I’m Alistair Thomson of the IMF External Relations Department. I’m here at IMF Headquarters with the first deputy managing director, Mr. John Lipsky; the head of our Strategy Policy and Review (SPR) Department, Reza Moghadam; and the assistant director of the SPR Department, Lorenzo Giorgianni.
We’ll be talking to you today about the decisions taken by the Executive Board this morning to enhance the crisis prevention toolkit. And to say more about this subject, I’ll hand you over now to Mr. John Lipsky.
MR. LIPSKY: Thank you very much. Thanks, Alistair, and thank you all for joining us. And thanks to my colleagues for accompanying me here so we’re ready to answer any questions that you might have.
Let me begin with a few words of explanation before we open it up. As I suspect you’re aware, this morning our Executive Board took two significant decisions. First, it approved major enhancements to the Flexible Credit Line, our path-breaking facility that was adopted last year. The Board today also approved the introduction of a new crisis prevention instrument, the Precautionary Credit Line.
In broad terms, these decisions respond to our members’ requests to create more effective, flexible and accessible crisis prevention instruments. The Fund’s traditional financing instruments originally had been designed for an era in which cross-border capital flows were dominated by bank lending. It became clear in recent years that these instruments simply were not effective as a crisis prevention tool in a world dominated by high-speed, securitized, cross-border finance. The traditional instruments remain effective, however, for their original purpose, which was crisis resolution. Increasingly the need became clear to develop instruments that could serve as effective crisis prevention tools in a world of modern securitized finance.
So the decisions today take us further down the path towards meeting the needs of our members.
They also respond to the G-20’s calls to strengthen the global financial safety net. In broad terms, the goal is to better protect countries that are following sound policies from excessive market volatility and from external shocks. In other words, the insurance aspect of these facilities is designed to limit the risks that investors could perceive the emergence of risk asymmetries that would lead to a run for the exits, even though the authorities in the countries affected are following sound policies. It is our expectation that access to an appropriately designed financial safety net facilities will avoid the emergence of these risk asymmetries, thereby reducing the risk of market panics, and in this sense, strengthen the resilience of the global system.
The Board’s decision today introduced two major enhancements to the Flexible Credit Line. This innovative facility, as I mentioned already, was created in early 2009 at the height of the crisis. The FCL has proved its worth, in that its introduction and first implementation coincided with a positive turning point in global markets. The FCL provides access to Fund resources to countries with very strong policies without tying potential disbursements to traditional ex post Fund conditionality. The Board, today doubled the FCL’s duration to two years, with a midterm review. At the same time, the access amounts available under the FCL were made more flexible by removing what previously had been an implicit cap of 1,000 percent of IMF quota.
The second action today was the creation of the new Precautionary Credit Line or PCL. This facility was designed to cater to member countries that have sound policies, but that still may have some moderate vulnerabilities that need to be corrected by policy adjustment. The PCL will serve countries that seek insurance against financing shocks and that have been vetted through a process of qualification that is similar to that for the FCL. This new PCL also features streamlined ex post conditionality, monitored through semiannual reviews by the IMF Board and focused on reducing vulnerabilities identified in the qualification assessment. So the distinction between the two facilities should be clear. The FCL has no ex post conditionality – only ex ante qualification conditionality. The PCL has ex post conditionality but of a streamlined and flexible form. The PCL could be –made available for either one or two years. It provides upfront access to Fund resources of up to 500 percent of quota for the first year and up to 1,000 percent of quota for the second year.
In addition to the changes that were adopted today, work at the Fund is ongoing to further strengthen other aspects of the global financial safety net. In this context, the Board today also held useful preliminary discussion of various options under a possible Global Stabilization Mechanism. The GSM, as we’re calling it, is a potential framework aimed at enhancing the Fund’s ability to more effectively counteract systemic crises. The GSM could involve a special format or framework for making our crisis prevention facilities available in more difficult circumstances. This obviously is a complicated issue, and discussion of the options will continue in the coming months.
I’m confident that the improvements approved today are going to go a long way in our effort to become more effective in preventing crises. The new facilities will help to counter new destructive market volatility. They are designed both to promote sound economic and financial policies and to enhance the resilience and stability of the global system.
In our view, the global economic and financial environment is stronger than it was a year and a half ago at the height of the crisis. At the same time, we all know that the situation remains fragile in many ways, and we’re confident that the action taken today can play an important part in building confidence among investors, policymakers, and among the public in general. And enhancing confidence, as we know, is vital to a sustained recovery.
It’s also worth noting that the reforms that were adopted today and that were approved overwhelmingly by the Fund’s membership resulted first from our listening to our members and responding to what they indicated is likely to be useful. Strengthening the global financial safety net is a priority for our membership, as well as for the Group of Twenty Seoul Leaders’ Summit that will take place in November.
That concludes my introductory remarks. I’ll be happy to take your questions.
QUESTIONER: Hi. Thanks for having the call. I was wondering if I could do maybe a two-part question. The first is, will there be a public list of countries that qualify for either the flexible or precautionary? And why not, if not?
Second question is, on the global stabilization mechanism, what is the general consensus at this point and what is the goal as far as timing on getting this mechanism in place?
MR. LIPSKY: Thanks. I can respond directly to both. First, is there a list of eligible countries? No, such a list simply does not exist. Rather, there is a clear set of qualification criteria for each of these facilities. How they work in practice is that a specific country interested in utilizing these facilities would approach Fund management confidentially, and if there’s agreement that they meet the qualification criteria, we would bring it forward to the Executive Board with Fund management endorsement. As is the case for all Fund facilities, our Executive Board—representing our universal membership—has the ultimate power of decision about the use of any specific facilities.
Thus, the process responds to the interest and the initiative of our members, in collaboration with Fund management. This is exactly how we proceeded on regarding the use of FCL which has been viewed as one element, and an important one, in helping to turn the tide at the height of the crisis in early 2009.
GSM, is there a specific deadline for its creation? The answer is no, because it’s a rather complex issue. Essentially, we’re asking if we were once again approaching or in a global crisis situation, are there ways in which we could deploy our facilities that might be more effective in crisis prevention than under less stressed circumstances? Perhaps rather than deploy our facilities one country at a time, it might be useful to move on a broader, more rapid basis. That’s one aspect being discussed.
Another aspect is to consider whether in a circumstance like that we might best be served with a new kind of facility. Specifically, we’ve discussed the possibility of creating a short-term liquidity facility for use in these kinds of circumstances.
You can see easily that this is a rather complicated, and subtle, discussion. The Board’s deliberations today were constructive and positive. There’s certainly interest in pursuing the possibilities of a GSM and we will be doing so, but with no specific deadline. Our membership is interested in the possibilities and we’ll move forward to see if there’s a consensus regarding specific action.
OPERATOR: Yes, thank you for taking my question and thank you for the briefing. I’m wondering if you have assessed the potential panic-inducing effects of a PCL in a couple of different scenarios, one, where a government seems to be going for the FCL program, which has worked very well, and now you’re implicitly saying that they fall short of that?
And two, if after approval of the program you actually are not happy with their performance in a review, and have to take them out of the program?
MR. LIPSKY: First of all, would we induce panic by rejecting a candidate for FCL use? I don’t think so. And not only would we not intend to, the specific design of the qualification procedure should work against that. What you suggested is, if I could paraphrase, that a government might decide they wanted an FCL, and in discussion with the Fund it would be determined that they don’t meet the qualification criteria--and that fact being known would damage the countries’ credibility.
Your question implicitly points out exactly why the qualification process is, first of all, country-by-country, and secondly is confidential. In other words, that discussion would not be carried out in public in any way, shape, or form.
So, hopefully a damaging rejection would not be a risk.
QUESTIONER: Hello, Mr. Lipsky. Thanks for the presentation. I have two questions. Just taking up the question from my colleague, his second question, what would happen if a country has subscribed to the PCL and you have to decide that it will no longer be able to join the program? Could that induce some panic? And the second question is, in looking at the FCL, some people say, at least, it wasn’t as successful if just three countries have subscribed to that program, and I’m wondering why are you more optimistic that more countries are going to take the PCL, because you have the stigma effect nonetheless?
MR. LIPSKY: Thank you for that. And, forgive me, I did not respond to the second part of [the previous] question, but helpfully it’s been posed again. Namely, could there be a problem with a country failing its review, and the answer is, “yes”, of course there could be a problem. But the problem would arise because the country’s policies had deteriorated in a way that was inconsistent with the policy plans that had been described when the program was approved. But that, of course, means that entering into the facility would create an incentive to follow the policies that, after all, would explicitly have been proposed by the country itself. So, the idea here, as I hope is clear, is that the qualification criteria under a PCL would include ex post conditionality and these would be explicit. So, it would be very clear what policies were to be followed under the PCL, and if there was a failed review, it would be because the authorities failed to implement the policies that they had indicated they would.
Turning to the FCL, is there a problem that only three countries used it? I don’t think so. First of all, that the FCL was used, and used by three countries with different characteristics in different geographies, demonstrated that it’s versatile and proactive, and can be utilized effectively. All three countries that received an FCL benefitted from that use in terms of improved market perceptions. What this demonstrated is that if there’s an IMF stigma, in these cases it has been a positive stigma. Those countries that have used the FCL have been rewarded in terms of improved investor attitudes.
Moreover, all three have renewed their FCLs, so clearly those countries think that it was worthwhile. It is my view that demonstration that the facility is practical and beneficial, has given comfort to other countries, even if they haven’t used the FCL directly.
So, if market circumstances were to become more difficult, it’s quite plausible that additional countries that would qualify would choose to use the FCL.
QUESTIONER: Yes. Hello there. Thanks for the conference call.
I was following up on what you said, concretely, where you say you’ve been listening to members and their suggestions. Do you have members who have told you that they would have applied in the current or past, ending, crisis if it had existed?
The second question -- it’s a little bit related – is, do you think in the early stages of the European crisis something like this new PCL would have been a good thing and would have helped solve the crisis?
Last question, these talks are part of the G-20 [preparations] for the Seoul meeting talks, and they’re part of discussions on the doubling of IMF quotas. Could you give us an update on how, if you’re making progress on the doubling of quota issue and how important it is for you to have more resources with all the new instruments you’re working with, or working to create?
MR. LIPSKY: Well, let’s see. Taking your questions in turn, I’m a little reluctant on the first one because after all, the idea is confidentiality of approach. But I think in the current context if I answer your first question “Yes,” I suspect that the next question will be: “And who was it?”
QUESTIONER: It’s okay to say that, you can say that, but see if you can answer the first part.
MR. LIPSKY: So I won’t answer the second part, but I will state: We listened closely to our members in designing the Precautionary Credit Line. So we must have had some reason for thinking that it was a good idea. How’s that?
QUESTIONER: Not bad.
MR. LIPSKY: Okay. Would the PCL have been useful in Europe? Again, that’s hypothetical, but let’s say having this facility, having the criteria clear, having another tool in the tool kit couldn’t have hurt. But, I don’t want to suggest that if it existed several months ago, this country or that country might have used it. We don’t know, but I’m confident that the creation of the PCL represents an improvement in our crisis prevention tool kit.
The G-20 at Seoul and quotas. This obviously is an extremely complicated issue, as you understand very well. We have 187 members, each of them has a quota, and it’s a zero-sum game. So it is a complex process of discussion and negotiation. The important point is that there is a clear political commitment on the part of our members to reach agreement by that date, and we’re moving forward in a positive way.
Now remember that there’s not a formal linkage between the quotas, in terms of voting share, and the overall size of the Fund’s quota pool. Those decisions likely will be reached simultaneously--but they are formally separate.
But let me interpret your question in the sense of, whether there is likely to be a commitment on the part of the G-20, to provide the resources necessary to make the safety net credible. I think we’ve already witnessed a demonstration of that.
Think back, to the London Summit more than year ago. The FCL was created just before then, giving us the ability to create large contingent facilities. That’s why the G20 commitment to new IMF funding in London was so important in giving these facilities credibility. So far, we haven’t come close to needing in a direct way, the additional resources that were given to us in the wake of the London Summit. But the additional funding demonstrated a clear political commitment to provide the resources necessary to make these facilities credible and usable. I’m quite confident that this commitment continues to be relevant.
Let me put it another way. Having directed us to develop and strengthen the global financial safety net, having given us virtually unanimous support in expanding our crisis prevention tool kit today, it seems to me that it’s self-evident that the accompanying commitment exists, to make sure that the resources are there to make the safety net effective.
That being said, we are convinced that under foreseeable circumstances we already have resources that are very much adequate to fund these new facilities. Is that responsive?
QUESTIONER: Yes. Thank you.
MR. LIPSKY: Good.
MR. THOMSON: Thank you. We’ll just wait a minute in case any stragglers come in with questions. But if not, I’d like to thank everybody for dialing in this afternoon.
I’d like to just hand over for a couple of brief concluding remarks from John Lipsky, and if there are no final questions I’ll do that now.
MR. LIPSKY: Okay. Thanks, Alistair.
Thank you all for taking time to join us. Thanks for your questions. I hope we’ve responded adequately.
I just want to underscore that we’re very happy to continue to be responsive. My colleagues will be able to provide any detailed clarifications that you wish. It’s important that these facilities are well understood.
The innovative aspect of these facilities is the creation of a set of tools that have the prospect of providing successful crisis prevention in a world of modern finance, in a way that simply didn’t exist previously.
Does that guarantee success? Of course not. At the end of the day, it’s going to take more than just financing facilities, but coherence, and adequacy of policies. Together, they form the bedrock for creating a more resilient and stable international economic and financial system.
Nonetheless, we’re very pleased and satisfied, with the collaborative and cooperative fashion in which we’ve been able to move forward--with the support of our membership--to develop these facilities. We’re very heartened by the open and constructive attitude of our membership with regard to future progress, in developing a set of facilities that can respond better to the challenges that we’ve already experienced and to those that we imagine could lay before us. This has been challenging of course, but today it seems like this very constructive process is making progress.
We look forward to our Annual Meetings for further discussion at the senior political level with our membership, and ultimately to the Seoul Leaders’ Summit, where these issues will be joined at the most senior political level.
It’s an extraordinary process. It’s easy to take this for granted, but we can see that there has been decisive, significant reaction to the challenges that have emerged in the last few years. And there are grounds for optimism and confidence about the task before us, that is to restore stability and growth in the global economy.
Thank you very much.
MR. THOMSON: Thank you very much, Mr. Lipsky. Thanks also to Reza Moghadam and Lorenzo Giorgianni, and thanks to all the journalists who dialed in this afternoon. I wish you a good evening. Thank you and goodbye.