## _020609a ## Source details **Canonical URL:** [_020609a](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_020609a.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_020609a.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_020609a.pdf.json) --- ### Scope - Examines the analytical basis for Fund lending in emerging market countries and provides a broad-ranging perspective for reforming the General Resources Account (GRA) lending toolkit. ### Fund lending role: defining characteristics - Fund’s crisis-lending comparative advantages: - ability as a nonatomistic lender to provide large-scale financing and reduce likelihood of a run by private creditors; - cooperative institution with near-universal membership to agree conditionality with members, providing a commitment tool to underpin confidence and catalyze private lending; - de facto preferred creditor status (PCS), allowing crisis financing when private creditors may be reluctant to lend. ### Crisis prevention: evidence and implications - Empirical sample and events: - 27 emerging market countries, period 1994–2004. - 32 episodes of “heightened market pressure”: 11 turned into a capital account crisis; 21 did not. - Fund disbursements (or on-track precautionary purchases) occurred in the year before the event in 10 episodes; 22 episodes had no such Fund disbursements. - Main findings: - Fund financing is significantly associated with a lower likelihood of a crisis; both liquidity and signaling matter. - The Fund financing variable is significant even controlling for country gross reserves; on-track program dummy alone is not statistically significant. - Complementarity: when fundamentals are strong, Fund financing has a large marginal impact; when fundamentals are weak, marginal impact of Fund financing is small. - Macroeconomic policies are stronger where a Fund-supported program was in place. - Key implications: - A contingent Fund financing instrument could be highly useful in crisis prevention. - Prevention instruments need disbursements significant in relation to stock vulnerabilities (e.g., short-term external debt). - Instruments should incentivize stronger policies through ex ante qualification. ### Crisis resolution: evidence and implications - Intended purposes of Fund financing: - ease burden of adjustment by giving more time to adjust; - help restore confidence and reduce risk of excessive adjustment from private financing withdrawal. - Crisis duration evidence: - Two metrics (IKAC index and IMF staff reading) show crises last about two years with variation. - Reported means: mean = 7.3 quarters (IKAC index); mean = 8.5 quarters (IMF staff assessment). - Excessive external adjustment: - Actual current account adjustments in capital account crises generally exceed programmed amounts. - Regression reported: CAerr = 1.69 + 0.35 (St. debt-Res) - Coefficients: (1.82) (0.13**) - R2 = 0.46 - Policy considerations: - Fund financing cannot solve solvency problems; countries must adjust to restore debt sustainability. - Insufficient upfront financing makes excessive adjustment or default more likely. - Upfront disbursements may need to be considerably larger in a global deleveraging scenario. - Given resource limits, greater voluntary private and other official financing involvement is required. ### Preferred creditor status (PCS) - Origins and function: - Concept originates from Paris Club debt restructuring context. - PCS reflects public good nature of Fund financing and creates incentives for Fund involvement in BOP problem resolution. - Generally accepted by private creditors; PCS facilitates Fund’s crisis lending. ### Characteristics defining Fund’s unique crisis-lending role - Three defining characteristics: - (i) multilateral nature and inherent interest in global financial stability; - (ii) experience in crisis prevention/resolution; - (iii) surveillance-based knowledge of members’ economies. - Near-universal membership implies efficient risk-sharing. - Elements—large-scale financing, conditionality, PCS—are mutually reinforcing. ### Private sector instruments: observations and constraints (Box 1) - Examples of instruments: commodity options, catastrophe bonds, GDP-indexed bonds, inflation-indexed bonds, private contingent credit lines (Argentina 1996: $6.1 billion; Mexico 1997: $2.7 billion). - Practical limitations: - Markets too small for broad macro-insurance; limited use of VIX/EMBI options; GDP-indexed bonds rarely tradable. - Supply-side constraints: first-mover costs, lack of liquidity, legal verification complications, moral hazard. - Demand-side constraints: political economy concerns, ex post IFI assistance availability, cost and counterparty risk, limited technical expertise. - Roles for Fund/IFIs: - technical support on risk management and pricing; - data verification services and promotion of data dissemination standards; - possible international clearing house to reduce counterparty risk. ### Private sector involvement in crisis financing - Determinants of success: - number of creditors (collective action/free-rider problems); - form/nature of at-risk flows (FDI, equity portfolio, carry trade); - strength of program to restore confidence. - Creditor motives: - In global deleveraging, creditor liquidity needs can drive withdrawals independent of borrower fundamentals. - Creditor concentration: - Fewer creditors can ease collective action but concentration raises vulnerability to creditor-specific funding problems. - Historical scale example: - Thailand 1998 capital outflows ~12 percent of GDP; total official financing ~9 percent of GDP. - Approaches to encourage voluntary involvement (Box 3): - moral suasion, forbearance on regulatory requirements, conditional capital injections, guarantees (with credit risk and Articles constraints). - Less-voluntary measures (capital controls/standstills) are risky and may exacerbate contagion. - When restructuring unavoidable, IMF programs have accompanied sovereign debt restructuring in eight cases. ### Is the BOP need criterion an undue constraint? — Legal framework - Requirement: member must have a balance of payments (BOP) need at time of drawing Fund resources; use cannot exceed that need. - Article V, Section 3(b)(ii): member representation that it “has a need to make the purchase because of its balance of payments or its reserve position or developments in its reserves.” These are exclusive but alternative conditions. - Interpretations: - “Balance of payments” need follows accepted definitions. - “Reserve position” need is country-specific; Fund has wide discretion. - “Developments in its reserves” can create need absent a BOP deficit. - Timing: BOP need required at time of purchase; arrangements may be approved on the basis of prospective need (precautionary arrangements). ### Causes of BOP need (enumerated) - Current account problems (terms of trade shocks) and capital account crises. - Other circumstances: - budget financing causing current account deficits financed by monetary expansion; - deposit run in a dollarized economy weakening reserves; - deposit run in local currency inducing currency substitution and import pressure; - private-to-private external funding needs causing central bank FX lending or sales; - trade credits facilitated by central bank FX loans. ### Targeting Fund lending and alternative modalities (Box 4) - Standard modality: resources buttress central bank reserves; members can use FX flexibly within program context. - Arguments for direct targeting: - ensure resources used for targeted purposes, enhance confidence, reduce domestic stigma. - Targeted examples: explicit deposit insurance escrow, capital injections to troubled banks. - More fundamental proposals (would require Articles changes): Fund buying sovereign bonds in secondary markets; Fund guarantees of external debt; Fund issuing paper in local markets. - Operational example: Uruguay 2002 escrow of gross reserves to cover unrestricted dollar deposits helped stop a deposit run. ### Rethinking the GRA toolkit — starting point (Section A) - Objectives for toolkit adaptation: - include effective contingent credit window for crisis prevention; - design instruments for members with different policy framework strengths; - ensure flexibility in access levels and repayment periods for diverse BOP needs. - Emphasis on credit tranche lending framework (SBA) as main vehicle and streamlining special facilities. - SBA features: - meets any BOP problem on actual or precautionary basis; - arrangement length between six months and legal maximum of three years; - size uncapped though exceptional access policy applies for above-normal access; - shortcomings deterring precautionary use: cumbersome exceptional access for high access, rigid conditionality, phasing/staircase purchases, data blackout lags, proliferation of ex post conditionality and waiver-related stigma. - Multiple special facilities overlap operationally; difficult to distinguish by BOP problem ex ante. ### Conditionality and Exceptional Access reform observations (Box 5) - Conditionality reform options: - (i) make reviews primary monitoring device and discontinue use of performance criteria (PCs); - (ii) encourage greater ex ante conditionality (including outright purchases as in SLF) where justified; - (iii) hybrid review/ex ante approach. - Exceptional Access Policy (EAP) inconsistencies: - asymmetry: capital versus noncapital account crises treated differently (criteria must be met for capital account but only assessed for noncapital); - debt sustainability criterion: effectively precludes exceptional access in capital account crises where debt judged unsustainable even if sustainability could be restored via adjustment or restructuring. - Proposed principle: eliminate capital/noncapital distinction and permit lending above normal limits if credible strategy exists to restore sustainability; clarify debt sustainability assessment guidance. ### Streamlining current facilities (Section B) - Consider eliminating all special GRA facilities except emergency assistance for post-conflict/natural disasters due to weak demand and difficulty forecasting BOP need. - Compensatory Financing Facility (CFF): - Created 1963; last used 1999; access limits: export and cereal components 45 percent of quota each; combined 55 percent of quota. - Underused even during high food/fuel prices. - Extended Fund Facility (EFF): - Designed for longer-term BOP difficulties; no stand-alone demand since 2002. - Recent use mainly for blending with PRGF-ESF Trust for some LICs. - Supplemental Reserve Facility (SRF): - Created December 1997 for large upfront financing of short-term capital account crises; no limits on access; shorter maturity than credit tranches; higher time-based surcharges. - No use since 2002; considered inappropriate in several recent exceptional access arrangements. - Short-term Liquidity Facility (SLF): - Introduced October 2008 for members with solid track records facing quick-reversing/self-correcting BOP needs. - Features: absence of ex post conditionality; ex ante qualification; outright purchase (prevents precautionary use); capped access at 500 percent of quota; repurchase period of three months; maximum three drawings per 12-month period; service charge of 50 basis points each purchase. - If design issues persist and instrument remains unused, SLF could be phased out. ### Possible SLF modifications (Box 6) - Make SLF precautionary by changing delivery from outright purchase to arrangement allowing precautionary approval. - Extend repurchase period: proposals include extending from three months to six months and reducing successor purchases from two to one to lengthen effective financing from 9 to 12 months per 12-month period. - Reduce costs: reducing successor purchases from three to two lowers service charges from 150 to 100 basis points if all purchases are made in a 12-month period; borrowers above 300 percent of quota would also benefit from proposed surcharge reform. ### Strengthening crisis prevention and resolution (Section C) - Principle: flexibility to address varied BOP problems and provide breathing space to members to repay as situations improve. - Consider establishing crisis prevention instrument as a window in the credit tranches (encompassing SLF features) catering to members with very strong track records and fundamentals. - For members not qualifying for that instrument, clarify and elaborate precautionary SBA (HAPA) framework to be an effective prevention device. - Integrate flexibility by tailoring delivery to members’ policy strength. ### Flexible Credit Line (FCL): design and features (Section 37) - Objective: provide rapid and upfront access to Fund resources with no ex post conditionality for members meeting strong qualification criteria. - Scope: address all types of BOP problems; apply on actual and precautionary basis; provide flexible repayment. - Established as a window in the credit tranches with standard repurchase period "3¼–5 years". - Key design issues: - Access: trade-off between fixed/quota-based predictability and uncapped flexibility; option to keep access uncapped and base on country-specific potential financing needs and capacity to repay. - Phasing/delivery: entire approved access could be made available upfront in a single purchase; arrangement could expire after a purchase or allow multiple drawings up to approved access; post-program monitoring (PPM) on expiration when outstanding GRA credit exceeds 100 percent of quota. - Qualification/conditionality: rigorous ex ante criteria focusing on policy frameworks, institutions, and track record; assessment confidential upon request or during Article IV. - Length: crisis-prevention perspective favors one-year arrangement; alternatives include six-month initial with Board approval for additional six months. - Terms: subject to same charges, surcharges, and repurchase periods as other credit tranche lending; default repurchase period "3¼–5 years"; shorter repurchase would constrain flexibility. ### High-Access Precautionary Arrangements (HAPAs) - Purpose: ensure access to effective crisis prevention for members not qualifying for FCL. - Key features: - Access tailored to country-specific needs; access levels would not normally exceed the proposed cumulative limit of 500 percent of quota. - Phasing: could be frontloaded for stronger members; uniform phasing for those needing significant adjustment. - Conditionality: periodically monitored on pre-announced review schedule; monitoring could be review-based instead of formal PCs. - Safeguards: rigorous justification for frontloaded phasing including debt sustainability assessment, strong track record, commitment to sound macro management, and limited adjustment needs. - Procedural framework protections for exceptional access provide additional safeguards when triggered. - Policy implication: clarifies dual SBA modality—traditional SBA for crisis resolution and SBA on precautionary basis (HAPA) for crisis prevention. ### Risks with crisis prevention instruments - Risk of overstretching Fund resources: significant precautionary commitments could crowd out crisis-resolution resources; simultaneous drawings could occur with contagion. - Moral hazard risk: members may overinsure; mitigation via exceptional access scrutiny and possible price mechanisms (adjusting commitment fee structure). - Stigma risk: targeting strong performers with FCL could exacerbate stigma for nonqualifiers; mitigation by adapting SBA modalities (HAPAs). ### Commitment fees (Box 8) - Current schedule (introduced 2000): two tiers - 25 basis points on amounts up to 100 percent of quota that could be purchased over each twelve-month period. - 10 basis points on amounts in excess of 100 percent of quota that could be purchased over the same period. - Commitment fees apply to all Fund arrangements (precautionary or not) and are refunded to the extent that available amounts are purchased. - Observations: - Monitoring cost does not necessarily vary with size of arrangement; other costs/risks linked to size. - Pricing implication: a weighted average fee that increases with access level may be justified, balancing disincentives against need to encourage early approaches. - Decision rule: changes to commitment fees require a 70 percent majority of total voting power. - Historical note: prior to 2000, commitment fee was 25 basis points for all access levels; 10 bps for access above 100 percent adopted to avoid discouraging CCL use. ### Issues for discussion and reform options (Section 45) - Key questions: - Is there a need for a high-access, precautionary instrument with flexible repayment? - Should Fund rely on credit tranche framework for all BOP problems and eliminate special policies (except emergency assistance)? - Do Directors concur with eliminating SRF, CFF, and EFF given inflexibility, overlap, and limited use? - Modify SLF for precautionary use or replace with FCL? - Do Directors agree with FCL design regarding access, length, and credit tranche terms? - Clarify role and design of HAPAs and consider commitment fee reform to discourage excessive large arrangements? - Agreement on simplifying the exceptional access framework and addressing asymmetries in debt sustainability treatment? - Selected facility specifications from Table 1 (attributes preserved): - Stand-By Arrangement (1952): Annual 100 percent of quota; Cumulative 300 percent of quota; Repayment (years): 3¼–5 (charges), 2¼–4 (surcharges); Level-based surcharges: 100 bps above 200 percent of quota, 200 bps above 300 percent of quota; service fee and commitment fee apply. - Extended Fund Facility (1974): Repayment (years): 4½–10 (charges), 4¼–7 (surcharges). - Supplemental Reserve Facility (1997): No access limits; time-based surcharges starting 300 bps rising by 50 bps every six months up to 500 bps; Repayment (years): 2½–3 (charges), 2–2½ (surcharges). - Compensatory Financing Facility (1963): Access limits: 45 percent of quota each for export and cereal components; combined limit of 55 percent of quota; Repayment (years): 3¼–5 (charges), 2¼–4 (surcharges). - Short-term Liquidity Facility (2008): Access up to 500 percent of quota; up to three outright purchases per 12-month period; Repayment: single repurchase three months after purchase. ### Comparison of alternative proposals for a new liquidity instrument (Table 2) — key contrasts - FCL: - Purpose: crisis prevention/resolution for members at risk of any BOP shock. - Eligibility: ex ante qualification as in SLF (sound policy track record, strong frameworks, sustainable debt). - Access: no predetermined limit option; based on net borrowing needs and capacity to repay. - Monitoring/length: 6- or 12-month arrangement; expires upon drawing in full; no ex post conditionality; post-drawing monitoring (PPM). - Drawing/terms: one or multiple drawings; standard credit tranche terms (maturity/charges/surcharges); arranged as window in credit tranches. - RAL / FSL / RLL: contrasted in Table 2 by purpose, eligibility, access limits (examples: FSL up to 500 percent of quota automatically available), monitoring cadence, and drawing/phasing rules. (Full table preserved in source.) ### Formal model implications (Appendix I summary) - Country finances investment from short-term and long-term private creditors; productivity shock θ determines outcomes. - Thresholds θ1, θL, θD define regions of default, liquidity runs, and solvency. - Key model implications: - Without PCS or conditionality, Fund cannot lend without expected losses; broader default range. - With PCS only: Fund can offset liquidity runs over a wider shock range, reducing ex ante borrowing cost and run likelihood. - With conditionality only: similar but ex post benefits shift to long-term creditors. - With both PCS and conditionality: smallest default shock range; Fund support reduces run likelihood further. - Contingent Fund financing (prevention) can further reduce shock range producing runs. ### Lending instruments of MDBs and other IFIs and numeric operational parameters (Appendix II and Liquidity Program for Growth Sustainability) - World Bank (IBRD): DPL-DDO features borrower deferring disbursement up to three years, renewable; annual fee 0.25 percent on undrawn balance; maturity limits up to 18 years (blend up to 30 years); special DPL terms: Front-end Fee 100 bps; Minimum Interest rate: LIBOR+400 bps. - IDB PBL design and terms: - Preconditions: Fund Article IV within last 18 months and assessment letter at loan consideration. - Eligibility/scale: sovereign borrowers with sovereign guarantee; could participate up to $500 million per country. - Multi-Tranche PBL: 12-47 conditions (sample from 2000-02). - Disbursement periods up to 18 months. - Example US$ facility: interest = six-month U.S. dollar LIBOR + 400 bps; five-year term; three-year grace period. - IDB amortization: 15 to 25 years options. - Fund for Special Operations (concessional): 40 year amortization; 10 year grace period; interest rate 1% for 10 years, 2% thereafter; eligibility GDP per capita below $2,193. - ADB Special Program Loan (SPL): - Maturity: five years including three-year grace period. - Program lending ceiling: total annual program lending cannot exceed 20 percent of total lending on a 3-year moving average basis. - SPL charge floor: 400 basis points above LIBOR. - EBRD crisis response instruments: - 2009 signings target: €7 billion. - Typical transaction size: $10–50 million; maximum around $250 million. - Lending terms generally linked to floating rates such as LIBOR. - Key numeric terms extracted: - Article IV consultation requirement: within the last 18 months. - Multi-Tranche PBL: 12-47 conditions (sample). - Program participation cap: up to $500 million per country. - Disbursement period: up to 18 months. - US$ facility example: six-month LIBOR + 400 bps; five-year term; three-year grace period. - IDB amortization options: 15 to 25 years. - FSO amortization/grace: 40 year amortization; 10 year grace; interest 1% for 10 years, 2% thereafter. - FSO eligibility threshold: GDP per capita below $2,193. - ADB program lending limit: total annual program lending cannot exceed 20 percent of total lending on a 3-year moving average. - SPL maturity: five years incl. three-year grace period. - SPL charge floor: 400 basis points above LIBOR. - EBRD 2009 signings target: €7 billion. - Typical EBRD transaction size: $10–50 million; maximum around $250 million. *Source: Excerpts from IMF staff paper _020609a (selected sections and boxes).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Scope - In the context of the ongoing review of Fund facilities, this paper examines the analytical basis for Fund lending in emerging market countries and provides a broad-ranging perspective for reforming the General Resources Account (GRA) lending toolkit. ### Fund lending role - The Fund’s important lending role in crisis prevention and resolution is buttressed by its unique characteristics: - its ability as a nonatomistic lender to provide large-scale financing and reduce the likelihood of a run by private creditors; - its ability as a cooperative institution with near-universal membership to agree conditionality with members, thus providing national authorities with a policy commitment tool to underpin confidence and catalyze private lending; and - its de facto preferred creditor status, which allows it to provide crisis financing when private creditors may be reluctant to lend. ### Crisis prevention role - Both theory and empirical evidence suggest that an explicit Fund crisis prevention instrument could have an appreciable impact on lowering the likelihood of a crisis. - Effective crisis prevention requires upfront Fund financing sufficient to cover a significant proportion of stock vulnerabilities, such as the country’s short-term external debt. ### Crisis resolution role - Fund financing is intended to ease the burden of adjustment both by giving the country more time to adjust and by helping to restore confidence. - Evidence on crisis resolution suggests that greater access to upfront financing relative to the country’s stock vulnerabilities has a better chance of catalyzing creditors. - Given limited Fund resources, this requires greater voluntary involvement of private and other official sources of finance. ### Basis of Fund lending - The requirement that a member must have a balance of payments (BOP) need at the time of drawing Fund resources is not an undue constraint on the Fund’s ability to lend in crises. - Most problems warranting Fund lending (e.g., trade shocks, budget financing, deposit runs, private-to-private external funding needs) typically give rise to a BOP need. ### Simplifying the lending toolkit - Any GRA lending reform needs to take into account the ever-changing nature of crises—particularly, their increased complexity and unpredictable duration. - Uncertainty about the depth and pace of the present global deleveraging process underscores the importance of flexibility, especially with regard to access levels and repayment terms, as well as having in place an effective crisis prevention instrument. - This suggests the advantage of relying more on the general credit tranche lending framework, which can be used to meet any type of BOP problem on an actual or precautionary basis, as applies to Stand-By Arrangements (SBAs), and phasing out most special facilities catering to particular BOP problems and carrying special repayment terms. ### Addressing stigma - Ultimately, to be successful, any reform needs to alleviate the stigma associated with Fund lending, which stands in the way of members approaching the Fund before the onset of a crisis. - This points to a need to tailor Fund conditionality to the varying strengths of members’ policies and fundamentals—e.g., where justified by the member’s economic position and track record, by relying more on ex ante conditionality and outright purchases (as in the Short-term Liquidity Facility (SLF)), and less on ex post conditionality and phasing. - A companion paper considers reforms to conditionality, including along these lines. ### Reform options - Building on the above considerations, this paper lays out the following reform options: - eliminating all special GRA facilities; and - tailoring the precautionary use of credit tranche resources to the strength of members’ policy track records and fundamentals. - Consideration could be given to introducing a new crisis prevention instrument, the Flexible Credit Line (FCL), catering to high-performing members. - Alternatively, the SLF could be modified by allowing it to be used on a precautionary basis and lengthening its maturity. - Even with these changes, however, the SLF’s repayment period may still be short relative to the time that members may need to recover from the current deleveraging process. - Consideration could be given to clarifying the use of high-access precautionary SBAs for members that may not qualify for the FCL or the modified SLF. ### Flexible Credit Line - The FCL synthesizes earlier proposals considered by Executive Directors for a crisis prevention instrument and aims to provide rapid access to large and upfront disbursements of Fund resources to members with strong policies and sound fundamentals. - The FCL would be designed to address all types of BOP problems, to apply both on an actual and precautionary basis, and to provide flexible repayment terms. - To achieve this, it would be set up as a window in the credit tranches with the standard repurchase period (3¼–5 years). - Key design issues would include the length of the arrangement and whether to cap access in the absence of an actual BOP need. ### High Access Precautionary Arrangements (HAPAs) - The clarification and elaboration of HAPAs would ensure that all members, particularly those that do not qualify for a modified SLF or the FCL, also have access to an effective crisis prevention window. - Improving the effectiveness of the precautionary SBA as a crisis prevention device would require establishing unambiguous modalities for frontloading access and for customizing program design based on the member’s policy track record and the required policy adjustment. - A key design issue is whether to establish a ceiling on access to avoid undue tying up of Fund resources. ### Vision - The reform options in this paper together with the reforms of conditionality, access limits, and surcharges (considered in companion papers) would increase the effectiveness of the Fund’s crisis prevention and resolution efforts while considerably simplifying the existing GRA lending toolkit. - In particular, the suggested tailoring of the use of credit tranche resources on a precautionary basis to the strength of members’ policy track records and fundamentals would help encourage members to approach the Fund early, thereby reducing the likelihood of crises. *Source: Executive Summary of IMF staff paper _020609a - Executive Summary.* ### 12. Preferred creditor status. While the atomism of the private sector generally impedes it ### 12. Preferred creditor status. While the atomism of the private sector generally impedes it from acting as a provider of crisis financing, the Fund’s ability to lend in situations where other creditors may be rushing for the exit is buttressed by its PCS. ### Preferred creditor status and the Fund’s crisis-lending role - The concept of PCS originates in the context of debt restructuring by the Paris Club, where official bilateral creditors have been willing to exclude the Fund from the restructuring process. - PCS reflects the public good nature of Fund financing: it is provided in the context of an agreed program designed to help the member regain external viability, thus ensuring that the other creditors will have their restructured claims repaid. - PCS creates an in-built incentive to ensure the involvement of the Fund in resolving the member’s BOP problems. - With some exceptions, PCS has generally also been accepted by private creditors, since public good aspects of Fund financing normally inure to their benefit. - The Fund’s PCS facilitates its ability to provide crisis lending; borrowers and other creditors have an incentive to recognize PCS because of the public good nature of the Fund’s lending. ### Characteristics that together define the Fund’s unique crisis-lending role - Three defining Fund characteristics relative to other IFIs or mechanisms: - (i) its multilateral nature and, based on its mandate, an inherent interest in global financial stability; - (ii) its experience in crisis prevention/resolution; - (iii) through the surveillance process, its ability to acquire knowledge about members’ economies. - The near-universal membership of the Fund implies efficient risk-sharing compared to regional pools. - These elements—large-scale financing, conditionality, PCS—are mutually reinforcing and together enable a crisis-lending role under a large set of shocks. ### A. Crisis Prevention: Evidence and implications - Empirical basis: - Sample: 27 emerging market countries over the period 1994–2004. - Identified 32 episodes of “heightened market pressure.” - Of these 32 episodes: 11 turned into a capital account crisis while 21 did not. - Fund disbursements (or, in two cases, available purchases under on-track precautionary arrangements) occurred in the year before the market pressure event in 10 episodes, while 22 episodes did not have such Fund disbursements. - Main empirical findings: - Fund financing is significantly associated with a lower likelihood of a crisis. - There is both a liquidity and a signaling aspect: (i) Fund financing—not just the existence of a program or possible future drawings—lowers the crisis probability; and (ii) the Fund’s “seal of approval” has an added crisis-prevention benefit as the Fund financing variable is significant even controlling for the country’s own gross reserves. - The simple dummy variable for an on-track Fund-supported program is not statistically significant, but the Fund financing variable is significant, suggesting the strength and credibility of the Fund’s signal depends at least partially on the magnitude of the resources the Fund is willing to put on the line. - Strong complementarity between Fund financing and the country’s policies and other “fundamentals.” - When fundamentals are weak, crisis probability is high, and the marginal impact of additional Fund financing on lowering crisis risk is small. - When fundamentals are strong, crisis probability is low, and Fund financing has a large impact on further reducing the probability. - Macroeconomic policies are stronger in cases where a Fund-supported program was in place, contributing to lower likelihood of a crisis. - Three key implications: - (i) a contingent Fund financing instrument could be highly useful in crisis prevention, especially given the limited scope for the private sector to fulfill this role; - (ii) to materially reduce crisis probabilities, a prevention instrument would need to provide disbursements that are significant in relation to stock vulnerabilities such as short-term debt; - (iii) since policies are stronger under a Fund-supported program, and there is complementarity between policies and Fund financing, such an instrument would ideally incentivize stronger policies through ex ante qualification. ### Box 1. Private Sector Instruments — empirical observations and constraints - Examples of market-based instruments: - commodity options, catastrophe bonds, options related to global financing conditions, GDP-indexed bonds, inflation-indexed bonds. - Private contingent credit lines (examples cited in text): Argentina in 1996 ($6.1 billion) and Mexico in 1997 ($2.7 billion). - Practical limitations observed: - Few countries use these instruments; markets are generally too small to deliver macro-insurance to a broad set of emerging markets (exception: some commodity derivatives such as oil). - Options on the VIX or EMBI spread are very limited; put options on S&P500 correlated instruments are likely expensive for governments. - Global catastrophe reinsurance market (in excess of $100 billion) is mainly within advanced economies. - GDP-indexed bonds are rarely used and generally not tradable; Argentine issuance never exceeded the equivalent of a few billion U.S. dollars in valuation. - Inflation-linked bonds are probably the widest available form of state-contingent debt, although foreign ownership is hard to assess. - Supply-side reasons for limited market development: - first-mover costs of financial innovation, prospective lack of liquidity in secondary markets, lack of natural counterparties, disagreement on a standard pricing model; - legal complications in measuring/verifying contingencies, and moral hazard if contingencies can be influenced by the insured country. - Demand-side reasons: - political economy concerns (cost of insurance perceived as wasteful if crisis does not materialize); - potential short-term horizon of policy makers; - availability of ex post assistance from IFIs or governments; - cost and counterparty risk; limited technical expertise in public administrations. - Roles for the Fund and other IFIs: - offer technical support on risk management, pricing models, and standardization of financial products; - provide data verification services and promote adherence to data dissemination standards for contingent instruments; - other IFIs could establish an international clearing house to reduce counterparty risk or provide contingent credit lines that disburse on the basis of an exogenous indicator of financial stress (e.g., the VIX). ### B. Crisis Resolution: Evidence - Intended purposes of Fund financing in crisis resolution: - ease the burden of adjustment by giving the country more time to adjust; - help restore confidence and reduce the risk of excessive adjustment forced by withdrawal of private financing. - Empirical experience: - Most Fund-supported programs have met important successes, but once a capital account crisis has erupted it may take several years to restore normal capital flows. - During crises, there may be excessive correction of the current account balance through compression of imports and contraction of activity. - Crisis duration evidence (Figure 2): - Two measures used: IKAC index (reserves, nominal exchange rates, spreads, private capital flows) and Fund staff reading of country reports. - By both metrics, crises last about two years, with substantial variation across cases. - Reported means: - mean = 7.3 quarters (IKAC index) - mean = 8.5 quarters (IMF staff assessment) - Excessive external adjustment evidence (Figure 3): - Comparing actual current account balance to programmed balance in capital account crises: virtually all points lie above the 45° line (actual adjustment greater than programmed). - Excess adjustment related to stock imbalances such as short-term debt not covered by reserves. - Regression reported: - CAerr = 1.69 + 0.35 (St. debt-Res) (1.82) (0.13**) R2 = 0.46 - Possible reasons for excess adjustment: - program policies or implementation inadequate; - programs overburdened with structural measures and conditionality, creating doubts about ownership and undermining confidence; - programs may have been underfinanced. ### C. Crisis Resolution: Implications and policy considerations - Fundamental points for program financing decisions: - Fund financing cannot solve a solvency problem: the country must undertake sufficient adjustment, reduce the present value of its obligations, or both, to maintain medium-term debt sustainability. - If policies are inadequate, simply providing more financing will not restore confidence. - More financing is not a guarantee against excessive external adjustment. Conversely, inadequate upfront financing will make excessive adjustment difficult to avoid (without a default). - Historical pattern and forward-looking considerations: - Although access to Fund resources was exceptionally large in capital account crises, disbursements were phased and fell far short of measures of potential capital outflows such as the stock of short-term debt. - In a global deleveraging scenario, upfront disbursements of Fund financing may need to be considerably larger than in past crises, depending on: - the magnitude of balance sheet exposures; - the nature of capital at risk; - the scope for involving the private sector. - Given the magnitudes, it may be neither feasible nor desirable for the Fund to provide all official financing. - Reasons: the scale could be overwhelming; risk official financing would simply finance larger private outflows; routinely financing private sector outflows could lead to moral hazard. - Greater efforts at private sector involvement may be required; involving other official lenders in financial rescues may be desirable (alternative options discussed elsewhere in the source). *Source: IMF chapter section titled "Preferred creditor status. While the atomism of the private sector generally impedes it" from the provided PDF content.* ### 22. Success at voluntary private sector involvement likely depends, inter alia, on the number ### 22. Success at voluntary private sector involvement likely depends, inter alia, on the number of creditors involved (due to collective action and free-rider problems), the form and nature of the flows (FDI, equity portfolio investment, and “carry trade” flows) at risk, and the strength of the program to help restore confidence. ### Determinants of private sector involvement success - Success depends on: - the number of creditors involved (collective action and free-rider problems); - the form and nature of at-risk flows (FDI, equity portfolio investment, and “carry trade” flows); - the strength of the program to help restore confidence. - Creditor motives matter: - In a global deleveraging scenario, creditors may be driven more by their own liquidity needs than by borrower fundamentals; restoring confidence (including through strong adjustment measures) may do little to stem outflows in such cases. - Creditor concentration effects: - Fewer creditors can make collective action problems easier to overcome in the event of a run, but a concentration of creditors can make the country more vulnerable to withdrawal decisions driven by those creditors’ own funding difficulties. - Historical scale reference: - Capital outflows from Thailand in 1998 were around 12 percent of GDP, while the total official financing package amounted to some 9 percent of GDP. ### Box 2 — Alternative official financing options (summary) - Options to supplement Fund financing given large crisis financing needs: - Involve official creditors in financial packages (e.g., broker central bank swap lines, formal pari passu co-financing arrangements). - Support reserve pooling arrangements: Fund could provide technical and financial services to a common pool of official foreign reserves for crisis lending. - Guarantee official financing: Fund could leverage its balance sheet by providing guarantees for other official credits, though Articles would need amendment and this could muddy the Fund’s PCS or prompt repeated guarantee requests. - Historical caveats: - Other official creditors may seek to impose their own conditions or fail to disburse timely (example: official bilateral credits that formed Korea’s “second line of defense” in 1997 were never disbursed). ### Increasing program financing — findings and examples - Increasing program financing (official or private) is not the only answer; program design and policy implementation are crucial. - Greater upfront financing in relation to a country’s stock vulnerabilities is likely required to catalyze creditors. - Recently-approved arrangements for Iceland, Hungary, Latvia, Ukraine, and Pakistan provided exceptionally large amounts of Fund financing—often with support from other official sources and voluntary private sector involvement—with focused conditionality. - Residual financing risk: - In some cases residual financing needs may exceed amounts the Fund could prudently lend given the revolving nature of its resources; then some current account overshooting may be inevitable and program design should cushion the adjustment’s impact on the economy and society. ### Box 3 — Private sector involvement: approaches and risks - Past practice: - Attempts have been limited, mainly voluntary informal discussions with international banks to maintain exposure or lengthen credit lines to domestic banks or subsidiaries (examples: Brazil 1999, Thailand 1997, Korea 1998). Uruguay (2003) is noted as a successful “pre-crisis” case. - Voluntary incentives (examples): - Moral suasion: creditor country supervisors encourage banks to maintain credit lines to domestic banks or foreign subsidiaries. - Forbearance: creditor country regulators could temporarily forbear capital adequacy requirements to relieve deleveraging pressure. - Capital injection conditionality: creditor country governments could make assistance contingent on banks maintaining emerging market exposure. - Guarantees: the Fund could guarantee private rollovers—leveraging its balance sheet but exposing the Fund to credit risk and raising Article of Agreement constraints. - Less-voluntary measures and risks: - Capital controls and standstills are less voluntary, hard to enforce, and could increase investor skittishness, potentially exacerbating contagion. - In a global deleveraging, involuntary measures risk creditors pulling funds from other countries without Fund-supported programs. - When restructuring is unavoidable: - When no mix of feasible adjustment and financing can deliver debt sustainability, restructuring may be the only feasible option; eight countries have had IMF programs amidst a sovereign debt restructuring. ### IV. Is the BOP need criterion an undue constraint on Fund lending? — Legal framework (key points) - Fundamental prerequisite: - A member must have a BOP need to use Fund resources; use cannot exceed that need. - Article V, Section 3(b)(ii) requires a member’s representation that it “has a need to make the purchase because of its balance of payments or its reserve position or developments in its reserves.” These are three exclusive but alternative conditions. - Interpretations: - “Balance of payments” need: member has a BOP deficit according to accepted definitions, including the above/below the line distinction. - “Reserve position” need: member’s gross reserves position is relatively weak; reserve adequacy is country-specific and requires judgment (factors include volume and variability of exports/imports, past reserve behavior, seasonal factors, size of short-term liabilities). The Fund has wide discretion here. - “Developments in its reserves”: an unfavorable development (e.g., impending discharge of liabilities) may create need even absent a BOP deficit or inadequate reserves. - Timing: - The three conditions are exclusive and alternative; meeting any one satisfies the requirement. - A BOP need is required at the time of a purchase, not necessarily at arrangement approval; arrangements may be approved on the basis of a prospective need (e.g., precautionary arrangements). ### Causes of BOP need (enumerated circumstances) - Current account problems (e.g., terms of trade shocks) and capital account crises. - Other circumstances that can give rise to BOP need: - Budget financing: expansive fiscal policies financed by monetary expansion producing a current account deficit requiring external financing. - Deposit run in a dollarized economy: withdrawals of foreign currency deposits by residents weaken reserves and can give rise to BOP need, even if not strictly a BOP deficit. - Deposit run in local currency: if monetary expansion raises imports and currency substitution, there is pressure on the BOP that could be met with foreign reserves. - Private-to-private external funding needs: private sector rollover difficulties may lead the central bank to lend foreign currency to the banking system or sell foreign exchange to meet private FX demand, reducing reserves and causing BOP need. - Trade credits: central bank foreign exchange loans to facilitate trade can reduce reserves and result in BOP need. ### Box 4 — Targeting Fund lending? (modalities and proposals) - Standard modality: - Fund resources typically buttress central bank reserves and members can use FX to optimize effectiveness within program context (often via open market FX sales by central banks). - Arguments for more direct targeting: - Direct use of Fund financing could: (i) ensure resources are used for targeted purposes and avoid cumbersome conditionality; (ii) transparently direct resources to where needed to enhance confidence; (iii) alleviate domestic political stigma associated with standard Fund support. - Example targeted uses: - Support an explicit deposit insurance fund to halt an incipient FX-deposit run. - Support capital injections to troubled banks. - Alternative, more fundamental proposals (would require Articles changes and raise operational questions): - Fund buying sovereign bonds in secondary markets as financing to achieve market-based debt restructuring or stabilize debt markets; issues include whether purchases would reduce spreads sufficiently, whether to purchase domestic currency instruments, preferred creditor status, government guarantees, and bond portfolio management. - Fund guarantees of external debt issued by sovereigns with good fundamentals temporarily unable to roll over debt (would require Articles change; effectiveness likely requires covering full bond maturities and could tie up resources for prolonged periods). - Fund issuing paper in local markets to add lending resources and provide a domestic “risk-free” asset if sovereign debt is not perceived as such. - Operational example: - Uruguay 2002: a portion of gross reserves received under the Fund arrangement was deposited into an escrow account excluded from central bank reserves and earmarked to cover unrestricted dollar deposits; the signal that unrestricted dollar deposits would be fully repaid helped stop the deposit run. ### V. Rethinking the GRA toolkit — considerations for reform - Key considerations: - The Fund has a unique lending role for crisis prevention and resolution that private or other official sources cannot readily meet; Fund financing needs to be upfront and significant relative to stock vulnerabilities such as short-term debt. - Ongoing global deleveraging has produced a steep decline in capital flows with uneven impact across emerging markets; some need crisis resolution now, others need crisis prevention instruments (including contingent financing) for possible sudden deleveraging accelerations. - Crisis duration is hard to predict; the current global turmoil’s recovery phase may take longer and the deleveraging may cause a structural downward shift in capital flows. Financing instruments need flexibility and sufficiently long repayment terms. - Stigma deters members from approaching the Fund before crises are advanced; there is a need for more systematic tailoring of Fund conditionality to members’ policy strength and track record—relying more on ex ante conditionality, including outright purchases, and less on ex post conditionality and phasing. *Italicized source attribution: Excerpt from IMF document titled "_020609a - 22. Success at voluntary private sector involvement likely depends, inter alia, on the number of creditors involved (due to collective action and free-rider problems)" (PDF).* ### 30. To operationalize these ideas, the lending toolkit could be adapted to ensure its ### _020609a - 30. To operationalize these ideas, the lending toolkit could be adapted to ensure its ### A. The Starting Point - The lending toolkit should be adapted so instruments: (i) include an effective contingent credit window for crisis prevention; (ii) are designed to cater to members with different strengths of policy frameworks and fundamentals; and (iii) are flexible enough (especially with regard to access levels and repayment periods) to deal with a wide range of BOP needs and crisis situations. - Greater emphasis on the flexible framework of general policies and terms for Fund lending to address all types of BOP problems (referred to as “credit tranche” policies, or lending “in the credit tranches”) and streamlining most existing special facilities is proposed, leaving the credit tranches as the main vehicle for delivery of GRA financing. - The SBA in the credit tranches is described as the workhorse of the Fund’s current GRA-lending toolkit: - It can be used to meet any type of BOP problem on an actual or precautionary basis. - The length of the arrangement may lie anywhere between six months and a legal maximum of three years. - The size of financing is uncapped, although access above normal limits is subject to the strictures of the exceptional access policy. - Despite flexibility, the SBA has mostly been used in actual crisis situations and by members often requiring significant policy adjustments. - Shortcomings deterring use of SBAs for crisis prevention: - A cumbersome exceptional access framework for lending above normal access limits. - A rigid conditionality framework (see Box 5). - Specific deterrents for strong performing members include: (i) phasing of purchases resulting in a “staircase” pattern of access; (ii) lags in data provision causing “blackout” periods limiting availability of financing; and (iii) proliferation of ex post conditionality and waivers of nonobservance for missed PCs, fomenting domestic political stigma. - The GRA toolkit includes multiple special facilities with overlapping features; operationally, it is often difficult to distinguish between different types of BOP problems. ### Box 5 — Conditionality and Exceptional Access Policy - Conditionality reform options considered: - (i) Making reviews the primary device for program monitoring under GRA arrangements and discontinuing the use of PCs, thus eliminating the need for waivers. - (ii) Encouraging greater use of ex ante conditionality (including outright purchases as in the SLF), where justified by the strength of the member’s policies, fundamentals, and track record. - (iii) A hybrid approach involving elements of both review-based and ex ante conditionality. - Exceptional Access reform observations: - The EAP (adopted 2002–03 and revised 2004) establishes safeguards of close Board consultation and enhanced transparency for large-scale lending. - Two inconsistencies in the EAP: - Asymmetry in treatment of capital versus noncapital account crises: exceptional access criteria must be met for capital account shocks but need only be assessed (not satisfied) for noncapital account crises, creating perceptions of ad hoc and unpredictable decisions. - Debt sustainability criterion: In capital account crises, exceptional access is effectively precluded where the debt position is judged unsustainable even if sustainability can be restored through policy adjustment and/or debt restructuring; the same restriction does not apply in noncapital account crises. The policy provides little guidance on how to assess debt sustainability, including whether it involves both public and private external debt. - Proposed principle: eliminate the distinction between capital and noncapital account crises and the prohibition to lend above normal access limits in capital account crises when the external debt burden is very heavy or unsustainable; permit such lending if there is a credible strategy to address the debt situation and restore sustainability. Clarify definitional uncertainties and provide guidance on the debt sustainability criterion. ### B. Streamlining Current Facilities - Consideration of eliminating all special GRA facilities and policies (other than emergency assistance for post-conflict situations and natural disasters) due to difficulty in determining ex ante duration/type of BOP need and weak demand for these facilities. - Compensatory Financing Facility (CFF): - Created in 1963 for low-conditionality assistance for export shortfalls and excess cereal import costs; last used in 1999. - Most appropriate for middle-income members given nonconcessional terms, but these countries generally have market access; CFF remained unused even during recent high food and fuel prices. - Use often requires combination with arrangement with upper credit tranche conditionality; need to demonstrate satisfactory BOP position apart from CFF shocks may reduce demand. - Extended Fund Facility (EFF): - Designed for BOP difficulties requiring policies over an extended period. - No demand for a stand-alone EFF arrangement since 2002. - Decline in demand may reflect less need for long-term financing given access to capital markets by emerging market economies. - Recent use mainly as a blend with PRGF-ESF Trust resources for some LICs transitioning out of low-income status. - If eliminated, one alternative is to use SBAs for blending with concessional facilities. - Supplemental Reserve Facility (SRF): - Created December 1997 to provide large and upfront financing for short-term capital account crises; shorter maturity than credit tranches and higher time-based surcharges. - No use since 2002; SRF was considered inappropriate in recent exceptional access arrangements (Georgia, Iceland, Hungary, Latvia, Pakistan, and Ukraine) due in part to mismatch between short SRF maturity and expected crisis duration. - Proposed surcharge reforms would keep SRF purchases much more expensive than purchases in the credit tranches, discouraging demand. - SRF is little-used and overlaps with other instruments; if retained, it complicates Fund lending structure. - Short-term Liquidity Facility (SLF): - Introduced October 2008 to help members with solid policy track records and strong fundamentals deal with quick-reversing and self-correcting BOP needs. - Innovative features: absence of ex post conditionality; reliance on ex ante qualification; financing by outright purchase (prevents precautionary use). - Design aspects possibly deterring use: - Outright purchase nature prevents precautionary use. - Capped access at 500 percent of quota and short repurchase period of three months, with a maximum of three drawings per 12-month period, may not give adequate time for scale and persistence of global deleveraging. - High borrowing costs: service charge of 50 basis points each time a purchase is made (up to three times per 12-month period). - Concurrent Fed swap lines may have reduced urgency to tap the SLF. - If design issues persist and instrument remains unused, the SLF could be phased out. - Reforming the SLF (Box 6 summary): - Turn SLF into dual-modality instrument (crisis prevention and crisis resolution) for high-performing members by allowing precautionary use and lengthening effective repayment to a maximum of one year. - Even with changes, SLF repayment would remain relatively short compared to recovery time from deleveraging; SLF qualification remains constrained by the nature of the special BOP shock. ### Box 6 — Possible Modifications to the Short-term Liquidity Facility - Proposed modifications to enhance SLF relevance and flexibility: - Make the SLF precautionary: change delivery from an outright purchase to an arrangement so approval of SLF financing is possible on a precautionary basis. - Extend the repurchase period: current repurchase period is three months; proposals include extending to six months and reducing number of successor purchases allowed within a 12-month period from two to one, extending effective length of possible financing under the facility from 9 to 12 months per 12-month period. - Reduce costs: reducing successor purchases from three to two would lower service charges from 150 to 100 basis points if all allowed purchases are made during a 12-month period; borrowers above 300 percent of quota would also benefit from proposed reform of surcharges. ### C. Strengthening Crisis Prevention and Resolution - Principle: Flexibility in lending instruments to attend to a variety of BOP problems and to provide adequate breathing space to members to repay the Fund as their BOP situation improves. - Consider establishing a crisis prevention instrument as a new window in the credit tranches: - Like the SLF, it would cater exclusively to members with very strong policy track records and fundamentals. - Because of built-in flexibility, the new instrument would encompass the SLF and could be an alternative to modifying the SLF. - For members not qualifying for the new instrument, clarify and elaborate the existing framework for precautionary SBAs to ensure effectiveness as a crisis prevention tool. - Options integrate flexibility by tailoring the delivery of Fund lending to the strength of members’ policies and fundamentals. *Italic: Content unit _020609a - 30. To operationalize these ideas, the lending toolkit could be adapted to ensure its (extracted text).* ### 37. Specific proposals for a crisis prevention instrument (the “RAL”) have been considered ### 37. Specific proposals for a crisis prevention instrument (the “RAL”) have been considered ### Flexible Credit Line (FCL): Objective and Rationale - Main objective: provide assurances to eligible members of rapid and upfront access to resources from the Fund with no ex post conditionality. - Intended beneficiaries: members meeting strong qualification criteria with sound fundamentals and a strong policy track record. - Scope: would address all types of BOP problems and would not rule out lending against an actual need, including financing pressures from the ongoing global deleveraging. - Relationship to prior proposals: attempts to synthesize the RAL, FSL, and RLL while building on reform options emphasizing ex ante conditionality. ### Key design elements of the FCL - BOP need - Addresses full-range of BOP problems, from global changes in risk aversion to exogenous current account shocks. - Established as a window in the credit tranches. - Expected to be requested and approved on a precautionary basis, but could also be approved on a nonprecautionary basis. - Access - Trade-off: fixed access in relation to quota (predictability/evenhandedness) versus uncapped access (flexibility). - Option: keep access uncapped and base it on country-specific potential financing needs and capacity to repay indicators (absence of a cap is a key feature of the RLL). - Procedural safeguards: the procedural requirements (albeit not the numerical limits) under the exceptional access policy could apply as a safeguard. - Phasing - Entire approved access could be made available upfront in a single purchase, which the member could make at any time during the period of the arrangement. - Arrangement could expire after a purchase or allow multiple drawings up to the overall approved access. - On expiration of the arrangement, the member would immediately go into post-program monitoring (PPM) mode, unless a successor arrangement is requested. - PPM activation threshold referenced: members with outstanding GRA credit exceeding 100 percent of quota (PPM is not applicable under the SLF because of the very quick repayment schedule). - Qualification and conditionality - Access based on rigorous qualification criteria (ex ante conditionality) similar to the SLF but broader in scope if uncapped. - Qualification framework to focus on policy frameworks, quality of economic institutions, and track record of performance. - Qualification could be confidentially assessed upon request by the member or in the context of Article IV consultations. - Length of the FCL - Crisis-prevention perspective: ideally, a one-year arrangement would provide sufficient flexibility. - Safeguard concern: longer-term commitments without review are riskier from a safeguards standpoint. - Consideration: limit duration to six months, with Board approval possible for additional six-month arrangements at the request of the member. - FCL terms - Established as a window in the credit tranches and thus subject to the same charges, surcharges, and repurchase periods as other lending in the credit tranches. - Default repurchase period noted: "3¼ to 5 years" repurchase period specified in the Articles of Agreement; charges must be “uniform” for members. - Argument considerations: shorter repurchase period could be justifiable but would require articulating a special BOP problem and would constrain FCL flexibility. - Members expected to repay the Fund as BOP and reserve positions improve; possibility of early repayment if Fund adopts policies to this effect. - Practical expectation: strong members likely to seek early repayments for positive signaling effect. ### Mode of delivery and institutional implications - Represents a significant change: dedicated window in the credit tranches for a category of high-performing members is relatively new. - Consistent with streamlining facilities and designing remaining instruments to maximize flexibility for a wide range of circumstances. ### High-Access Precautionary Stand-by Arrangements (HAPAs) - Purpose: clarify and ensure emerging market members not qualifying for the FCL have access to an effective crisis prevention window. - Key features: - BOP need and access: access tailored to country-specific circumstances and potential needs; access levels would not normally be expected to exceed significantly the new proposed cumulative limit of 500 percent of quota. - Phasing: could be frontloaded for stronger members; countries needing significant policy adjustment would have more uniform phasing. - Conditionality: periodically monitored based on a pre-announced review schedule, anchored to goals in a letter of intent; monitoring could be review-based in lieu of formal performance criteria. - Safeguards: - Presumption of more uniform phasing for countries needing significant adjustment. - Rigorous justification for eligibility to frontloaded phasing, including assessment of debt sustainability, relatively strong policy track record, commitment to sound macroeconomic management, and need for only limited adjustment. - Protections in the procedural framework for exceptional access would provide additional safeguards when triggered. - Policy implication: clarifies dual modality of the SBA—traditional SBA for crisis resolution and the SBA on a precautionary basis (HAPA) for crisis prevention. ### Risks with crisis prevention instruments - Risk of overstretching Fund resources - Committing significant resources under precautionary arrangements could crowd out resources for crisis resolution. - Possibility of a large stock of outstanding commitments being simultaneously drawn (e.g., contagion from an exogenous shock). - Mitigation: ongoing assessment of adequacy of Fund’s loanable resources (references to Review of the Adequacy and Options for Supplementing Fund Resources, 1/12/09; and PIN/09/24, 2/26/09). - Moral hazard risk - Members may overinsure with excessively large precautionary arrangements. - Weigh cost of moral hazard against benefit of reducing “real hazard”. - Safeguard: exceptional access policy scrutiny; consideration of price mechanisms to reduce incentive for large precautionary use by modifying commitment fee structure. - Stigma risk - Targeting strong performers under the FCL could exacerbate stigma of requesting SBAs for those unable to qualify. - Mitigation: adapt regular SBA modalities (HAPAs) to enhance effectiveness and flexibility. ### Commitment fees (Box 8): role and design considerations - Current schedule introduced in 2000: two tiers - 25 basis points on amounts up to 100 percent of quota that could be purchased over each twelve-month period. - 10 basis points on amounts in excess of 100 percent of quota that could be purchased over the same period. - Result: weighted average fee schedule that decreases in relation to the level of borrowing (Figure referenced). - Commitment fees apply to all Fund arrangements (precautionary or not) and are refunded to the member to the extent that available amounts are purchased. - Rationale and observations - Financial rationale: cover cost of establishing and monitoring the credit line and setting aside financial resources. - Fund-specific observations: - Cost of monitoring does not necessarily vary with size of arrangement—monitoring costs for large arrangement not necessarily greater than for small arrangement. - Other costs and risks (management of finite pool of liquidity and credit risks) are linked to size of the arrangement. - Pricing implications - Costs and risks may justify a schedule of weighted average fees that increases in relation to the level of access. - Any price disincentive should avoid discouraging early approaches to the Fund. - Specific reform options to be covered by ongoing review of charges and maturities. - Decision rule: any changes to commitment fees would require a 70 percent majority of the total voting power. - Historical note: prior to 2000, commitment fee was 25 basis points for all access levels; the lower 10 basis point fee for access above 100 percent of quota was adopted to avoid discouraging use of the CCL. *_Source: _020609a - 37. Specific proposals for a crisis prevention instrument (the “RAL”) have been considered_* ### 45. A number of options have been raised in the paper, which together with the reforms of ### _020609a - 45. A number of options have been raised in the paper, which together with the reforms of ### Overview of proposed reforms and objective - Purpose: Increase effectiveness of the Fund’s crisis prevention and resolution efforts while streamlining the existing GRA lending toolkit. - Central proposal: Tailor the use of credit tranche resources in a precautionary setting to the strength of members’ policy track records and fundamentals to encourage early engagement with the Fund, reduce likelihood of crises, and ease policy adjustment. ### Issues for discussion (directors’ questions) - Need for a high-access, precautionary instrument with flexible repayment: - Should the Fund’s lending toolkit include an instrument that is high-access, precautionary, and with a sufficiently flexible repayment period? - Simplification of lending framework: - Should the Fund utilize the general framework for financing in the credit tranches (addressing all BOP problems) and eliminate all special policies (except emergency assistance)? - Elimination of specific facilities: - Proposed elimination of the SRF, the CFF, and the EFF on grounds of relative inflexibility, overlap, and limited use. - Short-term Liquidity Facility (SLF) modification or replacement: - Option to modify the SLF to enable precautionary use vs. replacing it with a more encompassing instrument, the FCL. - Flexible Credit Line (FCL) design: - Do Directors concur with the FCL’s flexible design, particularly regarding access, length, and (credit tranche) terms? - Role of High-Access Precautionary Arrangements (HAPAs): - Clarify framework for HAPAs for members that do not qualify for an FCL. - Reforming the commitment fee schedule as an option to discourage excessive use of large arrangements. - Exceptional access framework concerns: - The framework is asymmetric in its application to capital and noncapital account crisis cases, especially in treatment of debt sustainability. - Is there agreement on reducing the complexity of the exceptional access framework? ### Key specifications from Table 1: Fund GRA facilities and policies (selected attributes preserved) - Stand-By Arrangement (1952) - Purpose: For all types of BOP need (including precautionary) of short-term character. - Annual: 100 percent of quota. Cumulative: 300 percent of quota. Limits can be exceeded in exceptional circumstances. - Purchases: Quarterly purchases contingent on observance of performance criteria and other conditions. - Charges: Basic rate of charge. - Surcharges: Level-based: 100 basis points on outstanding access above 200 percent of quota, and 200 bps on access above 300 percent of quota. - Other: Commitment fee and service fee. 2/ - Repayment (years): 3¼–5 (charges), 2¼–4 (surcharges) [as shown in table columns] - Extended Fund Facility (1974) - Purpose: For BOP need of a longer-term character for members with limited access to capital markets. - Access limits: Same as above. - Purchases: Quarterly or semi-annual purchases contingent on observance of performance criteria and other conditions. - Charges and surcharges: Basic rate of charge; same surcharges as SBA. - Other: Commitment fee and service fee. 2/ - Repayment (years): 4½–10 (charges), 4¼–7 (surcharges) - Supplemental Reserve Facility (1997) - Purpose: For exceptional, short-term BOP (capital account) need resulting from a sudden and disruptive loss of market confidence. - Access limits: No limits. SRF used only when access under associated stand-by or extended arrangement would be exceptional. - Purchases: Front-loaded access with two or more purchases. - Charges: Basic rate of charge. - Surcharges: Time-based: From the date of the first purchase, the surcharge is 300 bps and rises by 50 bps at the end of the first year and every six months, up to a maximum of 500 bps. - Other: Commitment fee and service fee. 2/ - Repayment (years): 2½–3 (charges), 2–2½ (surcharges) - Compensatory Financing Facility (1963) - Purpose: For BOP need related to temporary export shortfalls or cereal import excesses that is largely beyond the member’s control. - Access limits: 45 percent of quota each for export and cereal components; and combined limit of 55 percent of quota. - Purchases: Typically available over a minimum of six months. Can be outright purchases, or together with an arrangement. - Charges: Basic rate of charge. - Surcharges: None. - Other: Commitment fee and service fee. 2/ - Repayment (years): 3¼–5 (charges), 2¼–4 (surcharges) - Short-term Liquidity Facility (2008) - Purpose: For short-lived and self-correcting BOP needs arising from external market developments despite strong fundamentals. - Access limits: Up to 500 percent of quota. - Purchases: Up to three outright purchases per 12-month period; no ex post conditionality. - Charges: Basic rate of charge. - Surcharges: Same as the SBA. - Other: Service fee. 2/ - Repayment (years): Single repurchase three months after the date of purchase. - Notes from Table 1 footnote: - 1/ As of December 31, 2008. - 2/ The commitment fee is 25 basis points on access up to 100 percent of quota; and 10 bps on access above that level. The service fee of 50 bps on each purchase. ### Comparison of alternative proposals for a new liquidity instrument (Table 2) — key contrasts - Instruments compared: FCL, RAL, FSL, RLL - Purpose and BOP need: - FCL: Crisis prevention/resolution for members at risk of any BOP shock. - RAL: Crisis prevention for members with market access at risk of being hit by a capital account shock. - FSL: Crisis prevention for members at risk of a short-term liquidity need arising from an exogenously-driven financial stability crisis. - RLL: Dual purpose: credit line for countries with broadly adequate policies hit by turmoil in global capital markets, but not because of inadequate domestic economic policies. - Eligibility and qualification highlights: - FCL: Ex ante qualification as in the SLF (sound policy track record, strong policy frameworks and underlying fundamentals, sustainable debt position). Assessment done upon request. - RAL: Members with meaningful degree of integration into capital markets; four criteria (no immediate BOP need, good policies, sustainable debt, and data transparency). Assessment done upon request. - FSL: Qualification at end of each Article IV consultation; staff statement can be included if authorities agree. - RLL: Eligibility based on sound policies and meaningful integration into capital markets; Board considers management’s recommendation when member requests RLL. - Access: - FCL: If no predetermined limit, access would depend on net borrowing needs and potential liquidity drains, given buffers and global economic risks, and capacity to repay. - RAL: Open issue. Two options: (i) predetermined at 500 percent of quota; or (ii) on a case-by-case basis within a range of 300–500 percent of quota. - FSL: Up to 500 percent of quota automatically available and remain valid for 12 months or until the next Article IV cycle, whichever is shorter. - RLL: No predetermined limits. Amount should be sufficient to rapidly restore market access. - Monitoring and length: - FCL: Either a 6- or 12-month arrangement, with option to renew on member’s request. Expires upon drawing in full. No ex post conditionality. Post-drawing monitoring with PPM. - RAL: One to two years arrangement with six monthly Board reviews. Review-based conditionality. Post-drawing informal Board review. - FSL: Assessments of continued eligibility during Article IV; Board could reverse credit line for flagrant departure. Drawing triggers post-drawing Board review. - RLL: Half-yearly monitoring (or shorter if policy adjustments required). No ex post conditionality; mid-cycle staff visit generates Board report. - Drawing and phasing and terms: - FCL: One or multiple drawings when actual BOP need arises. Standard credit tranche terms for maturity, charges, and surcharges. - RAL: One large and frontloaded drawing if large short-term financing need. SRF repurchase periods; subject to charges and surcharges. - FSL: Automatic and frontloaded drawing if short-term liquidity need; additional financing under SRF/SBA. Maturity and charges should discourage excessive and/or prolonged use; minimum commitment fees. Cost neutral to Fund. - RLL: Member draws if exogenous capital account shock and contagion. Repayment periods have varied between two to three years. Charges initially cost neutral to Fund, but surcharges applied to discourage excessive and/or prolonged use. ### Appendix I — Formal model of IMF lending (summary of model implications) - Model setup: Borrowing country finances investment from short-term and long-term private creditors; output and debt-servicing capacity increase in productivity shock, θ. - Thresholds defined: θ1, θL, θD (notation in text: ( , DL θθ )) - If θ < θ1 (notation indicates Dθθ? source uses symbols), the country defaults. - If θ1 < θ < θL, there is a liquidity run by short-term creditors that requires value-destroying liquidation unless offset by Fund lending. - Key model findings: - Without preferred creditor status (PCS) or conditionality, the Fund cannot lend without incurring expected losses; country defaults across a broad range of shocks. - With PCS only: Fund can lend to offset liquidity runs in a wider shock range (e.g., when 2 DL θθθ<< in the source notation), preventing costly liquidation, lowering ex ante borrowing cost, and reducing likelihood of runs over some ranges. - With conditionality only: Similar result, but ex post benefits shift from country to long-term creditors. - With both PCS and conditionality: Range of shocks over which the country defaults is smallest (source notation: 321 DDD θθθθ<<<), and prospect of Fund support further reduces likelihood of runs over another range (source notation: 31 LL θθθ<<). - Note: Model can be extended to consider pure crisis prevention role of contingent Fund financing, further reducing range of shocks producing initial runs. ### Appendix II — Lending instruments of MDBs and other IFIs (selected examples) - World Bank (IBRD) - Development policy lending (DPL) and DPL with deferred drawdown option (DPL-DDO). - DPL-DDO features: borrower may defer disbursement of a DPL for up to three years, renewable for an additional three years; annual fee on 0.25 percent of the undrawn balance charged while undrawn. - Special DPL terms currently: Front-end Fee: 100 bps; Minimum Interest rate: LIBOR+400 bps. - Maturity limit on all IBRD loans up to 18 years and final maturity limit for blend instruments up to 30 years; usually provided as Fixed Spread Loan (FSL) or variable spread loans (VSL). - IFC - Expanded trade finance program; Bank Recap Fund; Infrastructure Crisis Facility. - Financing expected to total about $30 billion over the next three years (includes IFC funds and mobilized resources). - Inter-American Development Bank (IDB) - Emergency Lending: Fast-disbursing emergency lending as part of international effort; requires IMF-supported program and policy matrix. - Disbursement periods can range up to 18 months. - US$ funding with interest rate tied to the six-month U.S. dollar LIBOR rate, plus 400 bps. Five-year term and a three-year grace period. *Italicized source: _020609a - 45. A number of options have been raised in the paper, which together with the reforms of* ### 2. Liquidity Program for Growth Sustainability (2008). ### 2. Liquidity Program for Growth Sustainability (2008). ### PBL design and objectives - Purpose: Provide liquidity to regulated financial institutions facing reduced access to foreign credit so that they can provide trade credit to domestic exporters and producers, and maintain firms’ access to working capital to offset temporary impact of external credit shock. - Types: - Multi-Tranche PBL: Support for institutional and policy changes through fast-disbursing funds. Approval of a loan with multiple tranches, each disbursed after verifying completion of conditions. 12-47 conditions (sample from 2000-02 PBLs). - Programmatic PBL: Phased support to a multiyear program of policy reforms and institutional change through fast-disbursing funds. Approval of a series of operations that are each disbursed in a single tranche upon achievement of pre-established triggers. - Preconditions: Require a Fund Article IV Consultation within the last 18 months and an assessment letter at the time of consideration of the loan. - Eligibility: All sovereign borrowers or borrowers with a sovereign guarantee are eligible to borrow from the ordinary capital of the Bank; could participate in the program up to $500 million per country. ### Disbursement terms and interest rate features (selected instruments) - Disbursement periods can range up to 18 months. - Example US$ facility: interest rate tied to the six-month U.S. dollar LIBOR rate, plus 400 bps. Five-year term and a three-year grace period. - Ordinary Capital (IDB) lending rate options: - (i) Pool-based adjustable lending rate option: interest rate tied to the average cost of a pool of medium-to-long term borrowings in each loan currency plus the IDB’s standard lending spread for that semester. Amortization may go from 15 to 25 years. - (ii) LIBOR-based lending rate option: interest rate based on three-month LIBOR in the loan currency, plus a cost margin, plus the IDB’s standard lending spread. Amortization is 15 to 25 years. - Fund for Special Operations (concessional financing): 40 year amortization period, 10 year grace period, interest rate 1% for 10 years, 2% thereafter. - FSO eligibility and blending: FSO resources available to countries with GDP per capita below $2,193 through a blend of OC and FSO in predetermined ratios. ### Asian Development Bank — Special Program Loan (SPL) - Purpose: BOP and budget support; part of an international support package that may include the IMF. Address crisis situations (e.g., large reversals of capital flows and unexpected swings in relative prices) by providing large-scale lending as part of an international package, usually including IMF and World Bank. - Characteristics: Short-term time horizon, large size, quick disbursing (up to three years), nonstandard lending terms, focus on reducing severity of the crisis. - Program basis: Broad-based sector reform/development plan comprising in particular policy changes and institutional enhancement, set forth in a policy statement by the DMC government concerned. - Eligibility: To avail of the SPL, a DMC must be Ordinary Capital Resource (OCR) eligible. Countries that have graduated out of regular ADB assistance are eligible for SPLs. - Limits and charges: - For all program lending, no individual country ceilings. Total annual program lending cannot exceed 20 percent of total lending on a 3-year moving average basis. - Maturity period of an SPL is five years including a grace period of three years. - The floor for SPL charges 400 basis points above LIBOR, and the spread is fixed for the life of the loan. - Other charges applicable to regular OCR loans also apply to SPLs. ### EBRD crisis response instruments - Instruments listed: - Investment lending for crisis response: Corporate Support Facility (ST refinancing, working capital). - Trade Finance Program (liquidity, bank guarantees). - Bank Recapitalization Program (equity, sub-debt). - Unfunded Risk Participations (syndications). - Objectives: Support bank balance sheets and corporate sector investment financing and working capital, and to ensure that financing flows (including trade) are not disrupted at times of severely restricted access to finance. - Approach: Predominantly private sector operations. Public sector loans (ca. 25 percent of volume) can carry sector policy conditionality. Policy dialogue on bank restructuring and capital market regulation. - Scale and terms: - 30 EBRD member countries; target signings 2009 €7 billion. - Scale of operations varies case-by-case, mostly in the range $10–50 million and up to a maximum of around $250 million per transaction. - Lending terms client driven, but generally linked to a floating rate such as LIBOR. Local currency lending encouraged where local reference rate (e.g., MosPrime, KievPrime). - Equity terms individually negotiated; quasi-equity usually floating rate basis with a cap or a collar. ### Key numeric terms and operational parameters (extracted) - Article IV consultation requirement: within the last 18 months. - Multi-Tranche PBL: 12-47 conditions (sample from 2000-02 PBLs). - Program participation cap: up to $500 million per country. - Disbursement period: up to 18 months. - US$ facility example: interest = six-month U.S. dollar LIBOR + 400 bps; term = five-year; grace period = three-year. - IDB amortization options: 15 to 25 years. - FSO amortization and grace: 40 year amortization period, 10 year grace period; interest rate 1% for 10 years, 2% thereafter. - FSO eligibility threshold: GDP per capita below $2,193. - ADB program lending limit: total annual program lending cannot exceed 20 percent of total lending on a 3-year moving average basis. - SPL maturity: five years including a grace period of three years. - SPL charge floor: 400 basis points above LIBOR. - EBRD 2009 signings target: €7 billion. - Typical EBRD transaction size: $10–50 million; maximum around $250 million. *Source: 2. Liquidity Program for Growth Sustainability (2008).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_020609a.pdf_