## _091409

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---

### Overall assessment
- Fund-supported programs are delivering the policy response and financing needed to cushion the blow from the worst global crisis since the 1930s.
- Many severe disruptions seen in previous crises—currency overshooting and bank runs—have so far been avoided.
- Programs adapted to worsening economic circumstances; signs of stabilization are emerging in program countries, though challenges remain to secure sustained recovery in a number of countries.

### Manifestation of the crisis in emerging markets (Section I)
- Crisis propagation and impact:
  - The crisis began in advanced economies and spread to emerging markets with a lag; until Lehman’s bankruptcy in September 2008, emerging markets asset prices appeared to have decoupled.
  - Manifested as a sudden stop in capital inflows, compounded by collapse in global activity and commodity prices.
  - Central and Eastern European (CEE) countries and the CIS region became the epicenter when advanced country banks cut back exposures.
  - In the aftermath of Lehman’s bankruptcy: global industrial production declined over 20 percent and exports plummeted by over 40 percent.
- Bank flows and exchange-rate–adjusted positions: substantial swings across regions (chart period Mar-06 to Mar-09 referenced in source).

### Fund financing and crisis response (Section II and Box 1)
- Commitments and resources:
  - Commitments made to date amount to $163 billion.
  - Borrowed resources are to be increased by up to $500 billion, initially via bilateral borrowing agreements and note issuances, and eventually through the expansion of the New Arrangements to Borrow.
  - A large allocation of Special Drawing Rights (SDRs) injected $250 billion of liquidity into the global economy, of which some $100 billion is available to developing and middle-income countries.
- Lending framework changes:
  - On March 24, 2009, the Fund established the FCL—a flexible credit line of 6 to 12 months’ duration, with unlimited renewability and uncapped access—for countries with very strong fundamentals, policies, and track record of policy implementation, and not entailing traditional policy conditionality.
  - Conditionality framework modernized (structural performance criteria discontinued; structural policies monitored holistically in program reviews).
  - The SBA was made more flexible with high- and frontloaded-access precautionary features; access limits were doubled and criteria for approving exceptional access arrangements simplified and clarified.

### Recent program activity and the Flexible Credit Line (Box 2)
- Review coverage: 15 Fund-supported programs approved since September 2008.
- FCL usage and market reaction:
  - Mexico, Poland, and Colombia availed themselves of the FCL; total FCL access for these three around $82 billion.
  - Mexico: Access 1000 percent of quota (around $49½ billion). Fiscal stimulus up to 1½ percent of GDP in 2009. Cumulative 150 basis points reduction in interest rates since FCL approval.
  - Poland: Access 1000 percent of quota (around $21½ billion). Fiscal stimulus of almost 2 percent of GDP in 2009.
  - Colombia: Access 900 percent of quota (around $11 billion). Fiscal impulse in 2009 and 2010 of 0.2 percent and 0.9 percent of GDP, respectively. External financing secured of $4.7 billion, including a $1 billion bond issuance days before the FCL announcement.
  - Market reaction to FCL approvals was positive, with immediate declines in spreads and narrowing CDS spreads.

### Causes of program requests and pre-crisis vulnerabilities (Section I.B)
- Pre-crisis performance and vulnerabilities:
  - During 2003–07, median growth in emerging markets was about 6 percent per year.
  - By 2007 government deficits halved to 1¼ percent of GDP.
  - Vulnerabilities generated by the boom:
    - Median output gap rose to over 2½ percent of potential output by end–2007.
    - Large capital inflows fueled credit booms and overheated real estate markets (most notably in the Baltics).
    - Appreciating currencies and widening current account deficits; cross-country evidence indicated a statistically significant relationship between the output gap and the current account deficit.
    - With increasing share of deficit financed by debt-creating (non-FDI) inflows, external debt-to-GDP of program countries declined little or rose in some cases despite high growth.

### Program design, external adjustment, and conditionality (Section II)
- External adjustment and conditionality:
  - External balance adjustment generally less wrenching than in past crises due to timely, higher, and more frontloaded financing and supportive macro policies.
  - Large currency overshooting seen in past crises has largely been avoided.
  - Initial program conditionality has been more focused than in the past, with better compliance to date.
  - Improved country “ownership” of programs is suggested by program outcomes and supported by an opinion survey of the Fund’s role in selected program countries.
  - Implementing structural reforms to address underlying vulnerabilities remains important.

### Fiscal policy in the crisis (Section III)
- Aggregate and country-level fiscal stance:
  - Fiscal policy stance in most cases has been accommodative and adjusted to evolving conditions.
  - Deficits were allowed to rise in response to falling revenues; where financing was lacking, Fund resources were channeled directly to the budget in some cases.
  - In many instances concerns about debt sustainability and weak structural fiscal positions required limiting the full play of automatic stabilizers.
  - Program emphasis on social safety net spending, though measurement and cross-country comparison is difficult.
- Key fiscal metrics and outcomes (2009):
  - Projected average real growth decline for 2009 in countries with Fund-supported programs is around 5½ percent; for other emerging markets about 1½ percent.
  - Fiscal deficits for 2009 have been revised upwards and now range between zero and 13 percent of GDP.
  - Real revenues projected to fall sharply; estimated median inflation for 2009: emerging markets median declines five percentage points to 4½ percent, among program cases median around 7½ percent.

### Monetary and exchange rate policy (Section IV)
- Policy choices and outcomes:
  - Sharp spikes in interest and exchange rates have been avoided, minimizing negative balance sheet dynamics.
  - Real exchange rate adjustment needed to support lower current account deficits can hopefully be achieved gradually.
  - Median real exchange rate depreciation for October 2007 to July 2009 in program countries was negligible at 0.3 percent (compared with median appreciation of some 5 percent for nonprogram emerging markets and 33 percent depreciation in past crises).
  - Exception: Iceland experienced krona depreciation of more than 30 percent against the euro in months prior to Fund arrangement approval.

### Financial sector policies and outcomes (Section V and Box 11)
- Banking system performance and measures:
  - General avoidance of banking crises in program countries thus far is remarkable given prior externally-financed credit booms.
  - Contributing factors: strengthened regulation in advance, avoidance of currency/interest-rate overshooting, emergency measures including liquidity provision and deposit insurance.
  - Notable financial-sector crises or strains: Iceland (full-scale banking collapse), Latvia (deposit declines and run on second largest bank), Ukraine (liquidity and solvency problems; recapitalization needs estimated at least 8 percent of GDP).
- Financial policy toolkit used:
  - Liquidity support, expanded deposit insurance, central bank collateral broadening, reserve requirement cuts, targeted bank recapitalization, resolution frameworks, supervisory strengthening, and use of capital controls in extreme cases (Iceland).
  - Bank Coordination Initiative (BCI) in CEE: IMF, European Commission, and EBRD coordination; commitments by European parent banks to maintain exposure and recapitalize where necessary—commitments are nonbinding and difficult to monitor.
- Debt restructuring and repair:
  - Household and corporate debt restructuring efforts vary across countries; examples include Latvia’s comprehensive strategy and Iceland’s insolvency reforms.
  - Pakistan’s one-year deferral of all principal repayment noted as raising moral hazard and bank health concerns.
- Bank balance-sheet outlook:
  - Credit to the private sector continues to decline in most cases.
  - NPLs mostly benign so far but expected to peak with lags in deep recessions; recapitalization and restructuring progress needed to avoid renewed bank-sector problems.

### Crisis recovery, exit from Fund support, and remaining challenges (Section VI)
- Recovery prospects and exit dynamics:
  - Early signs of stabilization present, but exit from crisis and Fund programs may be prolonged.
  - Current account deficits still need to adjust in some cases; balance-sheet problems for banks, companies, and households may intensify during adjustment.
  - Countries facing greatest challenges include: Latvia (policies constrained by currency regime choice), Iceland (very heavy external debt burden), and Ukraine (financial and political fragility).
  - Program duration and potential extensions:
    - Current programs have an average duration of about two years at inception; extensions and successor arrangements are possible if downside risks materialize.
    - Past program durations cited as comparators: Uruguay 10 years, Turkey 9 years, Peru 8 years (examples of extended support in prior cases).

### Key empirical findings and regressions
- Predictors of program participation and adjustment:
  - Program countries had 6 percentage points of GDP higher current account deficit than nonprogram countries in 2007.
  - Median access in current programs: 7 percent of GDP; median access in past capital account crises: 4 percent of GDP.
  - Aggregate financing packages: $133 billion; the Fund committed about 56 percent of total financing package on average.
  - World Bank contributions: $11 billion; other bilateral creditors: some $26 billion; EU contributed $21 billion (noted large contributions to Latvia, Hungary, Romania).
- Regression results (current account change 2007–2009, 55 observations):
  - Intercept: -3.83, S.E.: 1.18, t Stat: -3.25, P-value: 0.00
  - External debt average (t-1, t): coefficient 0.06
  - Current account t-1: coefficient -0.43, S.E.: 0.09, t Stat: -4.56, P-value: 0.00
  - Program dummy: coefficient 0.52, S.E.: 1.52, t Stat: 0.34, P-value: 0.73
  - Multiple R: 0.75; R Square: 0.57; Adj. R Square: 0.54; Standard Error: 4.70; Observations: 55
- Regression of fiscal impulse on initial conditions (2009, 56 observations):
  - Cyclically Adjusted Primary Balance/GDP t-1: Coeff. -0.48, Robust S.E. 0.06, t Stat -7.39, P-value 0.00
  - Public Debt/GDP t-2: Coeff. 0.03, Robust S.E. 0.01, t Stat 2.30, P-value 0.03
  - Intercept: Coeff. -2.71, Robust S.E. 0.61, t Stat -4.44, P-value 0.00
  - Adj-R2 0.46

### Use of Fund resources for budgetary financing (Box 3 and Appendix II cases)
- Legal and economic rationale:
  - Direct budget support requires (i) a balance of payments need at purchase time and (ii) adequate safeguards via policies to address the BoP problem and ensure timely repayments.
  - Direct Fund financing can enable countercyclical fiscal policy when central bank intermediation is infeasible (e.g., central bank independence, monetary unions, currency boards, full dollarization) or when market access is impaired.
- Risks and mitigation:
  - Risks: repurchases subject to budgetary appropriation, fiscal reliance on Fund resources for permanent expenditures, potential misuse given safeguards focus on central banks.
  - Mitigation: require government cash buffers via overborrowing, clarify central bank/treasury servicing responsibilities, use members’ SDR accounts as quasi-escrow, report Fund borrowing and usage in central bank accounts, and emphasize well-designed fully-owned programs.
- Recent cases of direct budget support (examples and rationales):
  - Hungary (Nov 2008): purchases disbursed to government via Debt Management Office; part used for bank support and lending to domestic banks; sterilized via central bank bills.
  - Latvia (Nov 2008): quasi currency board; resources used to bolster banking system amid reserve loss.
  - Ukraine (Nov 2008): preserve central bank independence and rebuild gross international reserves; Fund resources financed budget deficit targeted in program.
  - Armenia (Mar 2009): increase gross reserves and address current account deficit; direct transfer to government to avoid more severe adjustment and social spending cuts.
  - Georgia (Aug 2009 augmentation): finance higher fiscal deficit due to sharper-than-expected slowdown; address under-developed domestic markets.
  - Pakistan (Aug 2009 augmentation): strengthen gross reserves and bridge social spending pending donor support; portion of Fund credit used as bridge loan.

### Fiscal policy—country specifics and social protection
- Country examples and policy choices:
  - Iceland and Latvia: larger deficit increases than predicted due to much larger nondiscretionary revenue declines.
  - Georgia and Armenia: accommodated large revenue losses and show large projected medium-term fiscal adjustments.
  - Costa Rica: increased education and labor-intensive infrastructure spending and expanded conditional cash transfers and noncontributory pensions totaling 1 percent of GDP.
  - Pakistan: prioritized stronger social safety nets.
  - Hungary: pursued structural reforms (pension reform, tax shifts, fiscal responsibility law, fiscal council) to strengthen sustainability while allowing temporary deficits in 2009–10.
- Social safety nets:
  - Authorities committed to sustain or expand social safety nets via conditional cash transfers, housing utility allowances, labor-intensive projects, expanded unemployment insurance, and noncontributory pensions.
  - Over time fiscal constraints pushed some countries to shift from higher spending to better targeting (examples: Bosnia & Herzegovina, Hungary, Mongolia).

### Appendices—arrangements current (As of August 6, 2009) and program aggregates
- Arrangements current (selected effective dates):
  - Armenia — 3/6/2009; Belarus — 1/12/2009; Bosnia & Herzegovina — 7/8/2009; Costa Rica — 4/11/2009; El Salvador — 1/16/2009; Georgia — 9/15/2008; Hungary — 11/6/2008; Iceland — 11/19/2008; Latvia — 12/23/2008; Pakistan — 11/24/2008; Romania — 5/4/2009; Ukraine — 11/5/2008.
  - Flexible Credit Lines: Colombia — 5/11/2009; Mexico — 4/17/2009; Poland — 5/6/2009.
- Appendix numeric aggregates and table excerpts (US$ m and quota percentages as presented):
  - Selected totals and table fragments: Total: 84,482; Flexible credit line totals: 900; 10,926; 49,451; 21,472; 81,849; 166,331.
  - Financing breakdown aggregates shown: 43,039; 21,164; 11,391; 25,814; 2,850.

### Conclusions and issues for discussion (Section VII)
- Overall conclusions:
  - Fund-supported programs have generally helped countries avoid worse outcomes; output losses in program countries—while large—have not been significantly worse than in comparator countries once controlling for pre-existing vulnerabilities, especially current account deficits and externally-financed credit booms.
  - Compared to previous capital account crisis cases, current programs have involved less compression of domestic demand.
- Continuing focus required on:
  - Implementing structural reforms to address underlying vulnerabilities.
  - Ensuring fiscal sustainability where debt burdens have increased.
  - Targeting social safety net spending effectively.
  - Managing financial sector risks and facilitating a durable exit from Fund support.

*Source: Executive Summary and excerpts from the IMF chapter and supporting boxes and appendices in content unit _091409 (content as supplied).*

### Executive Summary ......................................................................................................

### Executive Summary

### Overall assessment
- Fund-supported programs are delivering the policy response and financing needed to cushion the blow from the worst global crisis since the 1930s.
- While the crisis has had a profound effect on output and employment, many of the severe disruptions seen in previous crises—currency overshooting and bank runs—have so far been avoided.
- Programs adapted to worsening economic circumstances to attenuate contractionary forces; signs of stabilization are emerging in program countries, though challenges remain to secure sustained recovery in a number of countries.

### Manifestation of the crisis in emerging markets (Section I)
- The deepest global financial crisis of the post-war era began in advanced economies and spread to emerging markets with a lag; until Lehman’s bankruptcy in September 2008, emerging markets asset prices appeared to have decoupled from developments in advanced economies.
- The crisis manifested in emerging markets as a sudden stop in capital inflows, compounded by the collapse in global activity and commodity prices.
- Central and Eastern European (CEE) countries and the CIS region became the epicenter of the emerging market crisis when advanced country banks cut back exposures.
- In the aftermath of Lehman’s bankruptcy: global industrial production declined over 20 percent and exports plummeted by over 40 percent.
- Emerging markets saw large swings in bank flows; BIS reporting bank positions showed substantial exchange rate–adjusted changes across regions (chart period Mar-06 to Mar-09 in source).

### Fund financing and crisis response (Section II and Box 1)
- The global crisis greatly increased demand for Fund resources; the Fund moved quickly to expand lending capacity and flexibility.
- Commitments made to date amount to $163 billion.
- Resources: Borrowed resources are to be increased by up to $500 billion, initially via bilateral borrowing agreements and note issuances, and eventually through the expansion of the New Arrangements to Borrow.
- A large allocation of Special Drawing Rights (SDRs) was implemented, injecting $250 billion of liquidity into the global economy, of which some $100 billion is available to developing and middle-income countries.
- Lending framework changes:
  - On March 24, 2009, the Fund established the FCL—a flexible credit line of 6 to 12 months’ duration, with unlimited renewability and uncapped access—for countries with very strong fundamentals, policies, and track record of policy implementation, and not entailing traditional policy conditionality.
  - Conditionality framework was modernized (structural performance criteria discontinued; structural policies monitored holistically in program reviews).
  - The SBA was made more flexible with high- and frontloaded-access precautionary features; access limits were doubled and criteria for approving exceptional access arrangements were simplified and clarified.

### Recent program activity and the Flexible Credit Line (Box 2)
- The review covers 15 Fund-supported programs approved since September 2008.
- Mexico, Poland, and Colombia availed themselves of the FCL; total FCL access for these three around $82 billion.
- Mexico: Access 1000 percent of quota (around $49½ billion). Fiscal stimulus up to 1½ percent of GDP in 2009. Cumulative 150 basis points reduction in interest rates since FCL approval.
- Poland: Access 1000 percent of quota (around $21½ billion). Fiscal stimulus of almost 2 percent of GDP in 2009.
- Colombia: Access 900 percent of quota (around $11 billion). Fiscal impulse in 2009 and 2010 of 0.2 percent and 0.9 percent of GDP, respectively. External financing secured of $4.7 billion, including a $1 billion bond issuance days before the FCL announcement.
- Market reaction to FCL approvals was positive, with immediate declines in spreads and narrowing CDS spreads noted in each case.

### Causes of program requests and pre-crisis vulnerabilities (Section I.B)
- During 2003–07, median growth in emerging markets was about 6 percent per year.
- Strong growth coincided with improved institutions and policies, leading to drops in external and public debt ratios and the halving of government deficits to 1¼ percent of GDP by 2007.
- The boom generated vulnerabilities:
  - Median output gap rose to over 2½ percent of potential output by end–2007 (consistent methodology adopted for the paper).
  - Large capital inflows fueled credit booms and overheated real estate markets (most notably in the Baltics).
  - Appreciating currencies and widening current account deficits occurred; cross-country evidence indicated a statistically significant relationship between the output gap and the current account deficit.
  - With an increasing share of the deficit financed by debt-creating (non-FDI) inflows, external debt-to-GDP of program countries declined little or rose in some cases despite high growth.

### Program design, external adjustment, and conditionality (Section II)
- External balance adjustment has generally been less wrenching than in past crises due to timely, higher, and more frontloaded financing and supportive macroeconomic policies.
- Large currency overshooting seen in past crises has largely been avoided.
- Initial program conditionality has been more focused than in the past, with better compliance thus far.
- Improved country “ownership” of programs is suggested by program outcomes and supported by an opinion survey of the Fund’s role in selected program countries.
- Going forward, implementing structural reforms to address underlying vulnerabilities is important.

### Fiscal policy in the crisis (Section III)
- Fiscal policy stance in most cases has been accommodative and adjusted to evolving conditions.
- Deficits were allowed to rise in response to falling revenues; where domestic and external financing was lacking, this was facilitated by channeling Fund resources directly to the budget.
- In many instances, concerns about debt sustainability and weak structural fiscal positions required limiting the full play of automatic stabilizers.
- Countries experiencing significant increases in debt burdens will need to redouble efforts to advance structural fiscal reforms to secure fiscal sustainability.
- Fund-supported programs emphasized social safety net spending, though measurement and comparison across time and countries is difficult; more attention to providing adequate and tailored support is warranted.

### Monetary and exchange rate policy (Section IV)
- Sharp spikes in interest and exchange rates have been avoided, minimizing negative balance sheet dynamics—particularly important where borrowing is largely in foreign currency.
- The real exchange rate adjustment needed to support lower current account deficits can hopefully be achieved in a more gradual and less stressed environment.

### Financial sector policies and outcomes (Section V)
- The general avoidance of banking crises in program countries thus far is remarkable given prior externally-financed credit booms in many systems (especially in CEE).
- Contributing factors include:
  - Strengthened financial sector regulation in advance.
  - Avoidance of currency and interest rate overshooting.
  - Emergency program measures including liquidity provision and deposit insurance.
- Nonetheless, banking system vulnerabilities remain and financial sector policy considerations and measures were actively employed in program countries.

### Crisis recovery, exit from Fund support, and remaining challenges (Section VI)
- Early signs of stabilization are present in program countries, but exit from crisis and Fund programs may be prolonged.
- Current account deficits still need to adjust in some cases, and balance sheet problems for banks, companies, and households may intensify during adjustment.
- Countries highlighted as facing the greatest challenges going forward include:
  - Latvia (policies constrained by currency regime choice).
  - Iceland (crisis resulted in a very heavy external debt burden).
  - Ukraine (still affected by financial and political fragility).

### Conclusions and issues for discussion (Section VII)
- Fund-supported programs have generally helped countries avoid worse outcomes; output losses in program countries—while large—have not been significantly worse than in comparator countries once controlling for pre-existing vulnerabilities, especially current account deficits and externally-financed credit booms.
- Compared to previous capital account crisis cases, current programs have involved less compression of domestic demand.
- Continuing focus is required on:
  - Implementing structural reforms to address underlying vulnerabilities.
  - Ensuring fiscal sustainability where debt burdens have increased.
  - Targeting social safety net spending effectively.
  - Managing financial sector risks and facilitating a durable exit from Fund support.

*Source: Executive Summary of the IMF chapter titled “Executive Summary” (content as supplied).*

### 7.      These vulnerabilities were widely recognized in advance by market and other

### _091409 - 7.      These vulnerabilities were widely recognized in advance by market and other

### Vulnerability assessment and early warning (VEE)
- The confidential internal staff Vulnerability Exercise for Emerging Market Economies (VEE) highlighted weaknesses in sectoral fundamentals of many emerging market countries (and especially in the European emerging economies).
- Figure 3 (September 2007 VEE) findings:
  - All the new program cases were seen as having a medium or high external vulnerability.
  - All members requesting Fund-supported programs had vulnerabilities, in addition to the external sector, in another sector (fiscal or financial).
  - Countries identified as having fiscal or financial vulnerabilities but not external vulnerabilities did not approach the Fund for a program.
- VEE methodology note (as described):
  - The VEE was established in 2001 and classifies a country as having “low,” “medium,” or “high” underlying vulnerability in public, external, financial, and corporate sectors by comparing indicators against thresholds and applying country-specific judgments.

### Macroeconomic predictors of program participation
- External imbalances are statistically significant predictors of crisis:
  - Program countries have a 6 percentage points of GDP higher current account deficit than nonprogram countries in 2007.
  - These deficits were much higher than in previous crises.
  - Differences in total external debt are more subdued and not significant.
- Reserves and reserve coverage:
  - Reserve coverage in 2007 was significantly lower in program countries than in those without programs, and comparable to those observed in previous capital account crises.
- Credit and credit booms:
  - Credit growth is higher in program countries relative to nonprogram cases (and to previous capital account crises), but variance tends to be high.
  - Credit booms help explain program participation when interacted with external imbalances.
- Other initial conditions:
  - GDP growth, inflation, the government balance, and public debt were not significantly different between program and nonprogram countries.

### Growth outcomes, revisions, and regional patterns
- Projected and realized growth:
  - The projected average real growth decline for 2009 in countries with Fund-supported programs is around 5½ percent.
  - The comparable number for other emerging markets is about 1½ percent.
- Growth revisions:
  - CEE and CIS countries are outliers in downward revisions, with average downward revisions between October 2008 and the latest projections of about 12 percentage points of GDP.
  - Controlling for initial conditions, program participation is not associated with worse growth outturn.
- Decomposition and sectoral patterns:
  - Current programs show sharp declines in domestic demand; the decline is less extreme than in past crisis cases.
  - Turnaround in net exports in current cases is driven by dramatic import compression; exports are also declining because of subdued global demand.
  - Supply-side: bursting of pre-crisis boom in the nontradable sector (services and construction) in early data (2009Q1).

### Inflation and potential output reassessment
- Inflation outlook:
  - For emerging markets as a whole, median inflation is estimated to decline five percentage points to 4½ percent in 2009.
  - Among program cases, estimated median inflation for 2009 is around 7½ percent.
  - This contrasts with past capital account crises, which were marked by a spike in inflation.
- Potential output:
  - The years 2005–07 involved excess growth (“froth”) above underlying potential in many cases, with implications for fiscal policy and medium-term growth prospects.

### Program objectives and design
- Overall program design objectives (tailored to country circumstances) emphasized:
  - Smoothing current account adjustments and mitigating liquidity pressures.
  - Preserving market confidence by addressing underlying vulnerabilities over time.
  - Avoiding systemic banking crises or restoring bank solvency where needed.
  - Where weak structural fiscal positions existed, avoiding excessive frontloading of measures and pursuing medium-term fiscal consolidation plans backed by structural reforms.
- Table 1 (initial stated program objectives) indicates program objectives focused on:
  - Macro-economic stability/crisis response, adequate financing/reserves, confidence in currency stability/adjustment preparedness, financial sector stability/avoiding systemic crises, and fiscal sustainability/adjustment (country-level checkmarks shown in source table).

### Rapid Fund response, exceptional access, and frontloading
- Rapid response:
  - The Fund activated fast-track procedures under the Emergency Financing Mechanism and fielded missions within days in late 2008, approving exceptional access arrangements within 3½–6 weeks in several cases despite difficult negotiation conditions.
- Exceptional access and frontloading:
  - Almost all arrangements entailed exceptional access beyond usual limits and featured frontloaded disbursements.
  - Median access in current programs: 7 percent of GDP.
  - Median access in past capital account crises: 4 percent of GDP.
  - Frontloading has been higher than in previous crises, despite larger initial reserve buffers.

### Financing packages and burden sharing
- Aggregate financing and official creditor contributions:
  - Aggregate financing packages: $133 billion.
  - The Fund committed about 56 percent of the total financing package on average.
  - World Bank contributions: $11 billion.
  - Other bilateral creditors: some $26 billion.
  - The EU contributed $21 billion (with especially large contributions to Latvia, Hungary, and Romania noted in relative-share terms in the source).
  - Country examples of relative shares in specific packages (as presented in source text): Latvia 42 percent (in an example mentioning EU contribution), Hungary 33 percent, Romania 25 percent (shares referring to EU contribution to total financing package in those cases).
  - European member states’ pledges reached 31 percent in Latvia and 80 percent in Iceland in certain cases.
- Fund share versus past crises:
  - The Fund’s share of financing packages (56 percent) was considerably higher than in past crises (40 percent).
- Private sector involvement:
  - Private sector involvement was sought informally and through the Bank Coordination Initiative in some European programs (Bosnia & Herzegovina, Hungary, Romania, Serbia), where European parent banks agreed to maintain exposure and, if necessary, recapitalize subsidiaries.

### Direct budget support: legal basis, rationale, and risks
- Legal basis for Fund resources used for direct budget support:
  - Required that (i) the member country has an actual balance of payments need when making a purchase (either an above-the-line BoP deficit or inadequate reserves); and (ii) there are adequate safeguards via policies that address the BoP problem and ensure timely repayments to the Fund.
- Economic rationale:
  - Direct Fund financing can enable countercyclical fiscal policy when central bank intermediation is infeasible (e.g., central bank independence, monetary unions, currency boards, full dollarization) or when market access is impaired.
  - Channeling Fund resources directly to the government can be appropriate where restoring domestic and external stability requires a larger fiscal deficit than external or domestic sources can finance.
- Risks to the Fund from direct budget support:
  - Repurchases could become subject to budgetary appropriation processes and governments’ ability to generate surpluses or borrow.
  - Fiscal policy could become unduly reliant on Fund resources to finance potentially permanent expenditures.
  - Potential misuse of Fund resources given the current Safeguards Assessments framework’s main focus remains on central banks.
- Mitigation measures discussed:
  - Require the government to build minimum levels of cash deposits through overborrowing.
  - Put institutional arrangements in place to clarify responsibility of central bank and treasury for servicing the liability to the Fund.
  - Use members’ SDR accounts as a quasi-escrow account.
  - Report borrowing from the Fund and its subsequent use in central bank accounts.
  - Emphasize well-designed and fully-owned programs as the strongest safeguard for appropriate use and exit from Fund resources.

*Italic source attribution: Excerpt from IMF staff analysis as provided in the source content.*

### Box 3. Use of Fund resources for budgetary financing

### Box 3. Use of Fund resources for budgetary financing

### Context and need for flexibility
- The current crisis called for flexible fiscal responses.
- IMF financing is generally tied to policy conditions to ensure predictable access to financing, buttress policy credibility, and reduce repayment risks.
- Conditionality includes quantitative targets (performance criteria) on key policy variables (fiscal balance, international reserves, monetary aggregates) and structural policy measures (benchmarks).

### Financing versus adjustment
- The appropriate mix of external financing and macroeconomic adjustment is a key design issue in IMF-supported programs.
- General relationship: the greater the financing, the smaller the required short-run correction in the current account and vice versa, though not a simple dollar-for-dollar relationship because capital account flows react endogenously.
- For current program countries, lack of timely access to official financing would have forced more painful and disorderly demand contractions.
- Many current program countries entered the crisis with very large current account deficits and are experiencing sharp increases in external indebtedness that will need to be unwound through adjustment efforts.

### External adjustment outcomes and comparisons with past crises
- Median current account adjustment (from t-1 to t+1) for current programs: Median = 2.6 percent of GDP.
- Median current account adjustment (from t-1 to t+1) for previous crises: Median = 6.7 percent of GDP.
- Adjustments in 2009 are projected mainly to unwind deterioration observed in 2005–07 and accentuated in 2008; adjustments between 2005–07 and 2009–10 are much smaller than in previous crisis cases.
- Most programs envisage current account balances to remain below debt-stabilizing levels in 2009, allowing further accumulation of external debt to smooth the adjustment over the medium term.
- Some programs (Hungary, Iceland, Latvia, and Ukraine noted) aim at bringing down high initial debt levels—contrasting with previous capital account crises where current account balances were significantly above debt-stabilizing levels.

### Role of initial conditions (Box 4)
- A regression for the change in the current account (2007 to 2009) across program and nonprogram emerging market countries finds:
  - Initial external conditions explain a significant share of cross-country variance; higher external debt and deficits are associated with larger adjustments.
  - The program dummy is statistically insignificant, indicating current programs do not show larger adjustments than nonprogram emerging markets.
  - Dummies for pegged exchange rates or commodity exporters are also insignificant.
- Outliers relative to model predictions:
  - Iceland and Latvia adjusted significantly above model predictions.
  - Armenia, Mongolia, Belarus, and Georgia adjusted less than their comparators.
- Regression summary statistics (as reported):
  - Intercept: -3.83, S.E.: 1.18, t Stat: -3.25, P-value: 0.00
  - External debt average (t-1, t): coefficient 0.06
  - Current account t-1: coefficient -0.43, S.E.: 0.09, t Stat: -4.56, P-value: 0.00
  - Program dummy: coefficient 0.52, S.E.: 1.52, t Stat: 0.34, P-value: 0.73
  - Multiple R: 0.75; R Square: 0.57; Adj. R Square: 0.54; Standard Error: 4.70; Observations: 55

### Use of reserves and official financing
- Net reserve use (at t+1, percent of GDP) and net official financing patterns show programs allowing use of reserves and official financing to smooth adjustment when negative private capital flows occur.
- Figure annotation medians reported:
  - Median = 4.8
  - Median = 2.2
- Note: "Defined as net official financing plus decumulation of gross international reserves. Includes 2009 general and special SDR allocation."

### Program conditionality
- Conditionality is used to tie financing to policy implementation, reduce repayment risks, and buttress credibility; includes quantitative performance criteria and structural measures.
- Current SBAs carry fewer structural conditions than previous arrangements; consistent with recent conditionality reforms, current arrangements have fewer structural conditions than earlier nonconcessional arrangements.
- Structural conditions in current arrangements often focus on macro-critical policies; the number and focus of structural conditions vary considerably across countries and tend to rise over time as crises deepen.
- Financial sector conditions have featured a marked increase in share in several cases.

### Ownership and review progress
- As of end–August, quantitative and structural conditions were met—with some delays—in most cases.
- Among the 19 program countries (including reviews scheduled in September), only six have requested waivers for performance criteria, and only for a small proportion of indicators.
- Three programs suffered delays of over three months in completing reviews (Iceland, Latvia, El Salvador), linked to government changes, political transitions, and negotiation difficulties.
- Program implementation has been affected by political instability in many cases (fragile coalitions or government changes).

### Fiscal policy in the crisis
- Fiscal policy in program countries broadly sought to cushion the recession in the short run while ensuring sustainable long-run fiscal positions backed by structural reforms.
- Tight constraints (curtailed financing, debt intolerance, institutional factors such as EU-wide policy strictures) prevented massive increases in deficits and debt seen in the largest industrialized economies.
- Ahead of the crisis, many emerging market countries saw fiscal positions strengthen, but improvements were flattered by above-trend growth; structural fiscal positions had deteriorated despite modest headline deficits.

*Source: Box 3. Use of Fund resources for budgetary financing (extracted from the supplied IMF PDF content).*

### 31.      Fiscal policy has adapted to deteriorating conditions, with most programs now

### _091409 - 31.      Fiscal policy has adapted to deteriorating conditions, with most programs now

### Fiscal accommodation in 2009
- Most programs now showing net fiscal accommodation—i.e., rising overall or primary deficits (Figure 14).
- Repeated downward revisions to growth projections have resulted in increasingly negative output gaps in all program countries in 2009.
- Fiscal deficits for 2009 have been revised upwards and now range between zero and 13 percent of GDP.

### Real revenues and expenditures (2009)
- Real revenues are projected to fall sharply, and by more than in past crises (Figure 15).
- Revenues are falling faster than GDP in most program and nonprogram countries.
- Net tax policy changes are limited:
  - Net reductions limited to Armenia, Belarus, and Georgia.
  - Small net tax increases in Bosnia & Herzegovina, Iceland, Latvia, Pakistan, and Romania.
- Other significant sources of revenue weakness include:
  - Falling imports.
  - Declining asset prices.
  - Weak tax compliance.
- Figure 15 decomposition categories (as used in the source):
  - Real revenue decrease
  - Real primary expenditure increase
  - Real primary expenditure decrease
- Note from source: "Components may not add to total due to statistical discrepancy."

### Automatic stabilizers and fiscal stance
- Automatic stabilizers have been allowed to come into play, but not fully.
- Automatic stabilizers are larger on average in program countries than in nonprogram or past crisis cases.
- Because of "negative tax buoyancy" (revenues decline faster than GDP), automatic stabilizers tend to be underestimated in such cases.
- Relative to the size of estimated automatic stabilizers, the degree of actual fiscal accommodation in most program countries is being limited.
- Withdrawals of fiscal impulse (i.e., fiscal tightening relative to automatic stabilizers) are observed in a number of cases:
  - Hungary, Pakistan, Ukraine, Romania, and Bosnia & Herzegovina show the largest withdrawals.
- On average:
  - The average fiscal impulse in current programs is less restrictive than in past crisis cases, although it is tighter than in current nonprogram cases.

### Measuring fiscal stance (Box 6 — methodological points)
- Simple measures:
  - Change in overall fiscal balance (appeal: simplicity and correspondence with identities).
  - Change in primary balance (better when interest payments accrue to nonresidents).
- Alternative measure used: decomposition of change in fiscal balance into cyclical (automatic stabilizer) and discretionary (fiscal impulse) components.
- Cyclically-neutral policy defined as allowing revenue and expenditure to evolve in line with potential output.
- Interpretation:
  - A deficit increase greater (less) than the automatic stabilizer implies an expansionary (contractionary) stance or a fiscal impulse (withdrawal of stimulus), represented as a negative (positive) value in the charts.
- Caveats:
  - Assumption of unitary revenue elasticity to GDP implies tax buoyancy effects are attributed to discretionary action.
  - Expansionary effect may be underestimated for countries with large automatic stabilizers (e.g., generous unemployment benefits).
  - Decomposition around a crisis is tentative due to difficulty in estimating potential output.
  - A uniform methodology based on averages of several filtering techniques may differ from output gap estimates in program documents and may distort country-level findings (example: Latvia).
  - Literature on "expansionary fiscal contractions" noted but judged unlikely to be relevant in most current cases given external origins and scale of downturn.

### Initial conditions, cross-country variation, and regression results
- Cross-section regression of 55 program and nonprogram emerging market countries suggests:
  - Fiscal policy is less expansionary in countries with higher initial debt levels and lower starting cyclically-adjusted primary balances.
  - Current programs do not show larger adjustments than nonprogram countries (an SBA dummy was insignificant).
- Regression of fiscal impulse on initial conditions, 2009 (Dependent Variable: Fiscal Impulse)
  - Coefficients and statistics from source:
    - Cyclically Adjusted Primary Balance/GDP t-1: Coeff. -0.48, Robust S.E. 0.06, t Stat -7.39, P-value 0.00
    - Public Debt/GDP t-2: Coeff. 0.03, Robust S.E. 0.01, t Stat 2.30, P-value 0.03
    - Intercept: Coeff. -2.71, Robust S.E. 0.61, t Stat -4.44, P-value 0.00
    - Adj-R2 0.46
    - Observations 56

### Country-specific outliers and explanations
- Iceland and Latvia:
  - Exhibit larger deficit increases than predicted by the model.
  - Explained by much larger (nondiscretionary) revenue declines than assumed under unitary elasticity to GDP—these do not involve discretionary policy loosening.
- Georgia and Armenia:
  - Accommodating unexpected large revenue losses to prevent deeper downturns.
  - These countries also show largest projected medium-term fiscal adjustments.
- Costa Rica:
  - Credibility effects (not captured in regression) created space to expand social safety nets and undertake countercyclical policies.
- Pakistan:
  - An unexplained element of discretionary fiscal tightening is reconciled with relatively weak policy credibility.
- Belarus:
  - Unexplained fiscal tightening attributed to authorities' preference for a balanced budget and tighter credit policies to maintain confidence.
- Hungary:
  - Discretionary loosening limited by need to preserve policy credibility with financial markets given high debt ratio, large automatic stabilizers, and EU-related constraints.
- Ukraine:
  - Smaller-than-predicted fiscal expansion motivated by financing constraints and deterioration in finances of a state gas company due to sudden import price increases.
- Pre-crisis fiscal deterioration in some countries owed to collapse in commodity prices (energy and food subsidies), contributing to large fiscal deterioration.

### Medium-term fiscal adjustment and debt dynamics
- Most countries expected to face significant fiscal challenges in coming years.
- Some program countries entered the crisis with weak fiscal positions (large entitlement programs, rapid public wage growth, narrow tax bases).
- Even countries with stronger pre-crisis fiscal positions will experience large increases in public debt from:
  - Widening deficits during downturn.
  - Bank restructuring costs.
  - Adverse macro conditions (lower growth, higher interest rates, weaker exchange rates).
- Public debt projections and sensitivity:
  - Many countries projected to preserve public debt ratios comfortably below 50 percent of GDP in outer years, though sensitive to assumptions.
  - Latvia, Hungary and Iceland stand out with significant debt sustainability problems.
- Programs generally project medium-term fiscal adjustments somewhat beyond debt-stabilizing levels (i.e., aiming to reduce, not merely stabilize, public debt).
- The degree of "over-adjustment" is generally greater for countries with the heaviest debt burdens.
- Adjustments generally buttressed by fiscal structural reforms (see Box 7 and Section II.D references in source).

### Primary balance adjustments and debt-stabilizing benchmarks
- Figure 18 framing:
  - Programs rank countries by peak debt level during 2009-14 and show:
    - 2009 primary balance (percent of GDP).
    - 2014 primary balance (program projection) and the debt-stabilizing primary balance 1/ (defined in source as "Primary balance that stabilizes debt ratio using 2014 program projections for debt ratios, growth, interest and exchange rates").
  - Program countries shown include BLR, GTM, ROM, UKR, SLV, CRI, MNG, ARM, GEO, PAK, HUN, LVA, ISL, and averages.

### Country example — Hungary (Box 7 summary)
- Structural reforms under the program aim to strengthen fiscal sustainability while allowing temporary deficit increase in 2009-10.
- Reforms implemented:
  - Pension system reform.
  - Social transfers and subsidy reductions.
  - Tax reform shifting burden from labor to consumption and wealth.
  - Measures to boost labor participation and potential growth.
  - Institutional reforms including:
    - Adoption of a fiscal responsibility law establishing numerical constraints on debt and deficits.
    - Procedural rules aimed at containing expenditure growth.
    - A fiscal council to provide independent scrutiny of budget preparation and execution.
- Objective: increase affordability of reductions in spending and achieve permanent savings.

### Social spending and safety nets
- Authorities in all program countries committed to sustain or expand social safety nets (Table 2 in source).
- Policy mixes include preserving and/or expanding protection via:
  - Conditional cash transfer programs.
  - Housing utility allowances.
  - Labor-intensive infrastructure projects.
  - Expanded unemployment insurance and noncontributory pensions.
- Pakistan: stronger social safety nets made a key priority.
- Costa Rica: using "fiscal space" to increase education and labor-intensive infrastructure spending, and to expand conditional cash transfer programs and noncontributory pensions (totaling 1 percent of GDP).
- Over time, fiscal constraints have pushed some countries to shift from higher spending to better targeting (examples: Bosnia & Herzegovina, Hungary, Mongolia).

### Monetary and exchange rate policy (overview)
- Monetary and exchange rate policies during a crisis must trade off objectives: inflation, external adjustment, and financial stability.
- Monetary tightening may be required to stem currency runs or prevent exchange rate overshooting; exchange rate adjustment may be unavoidable when currencies are out of line with fundamentals.
- Exchange rate and interest rate exposures in balance sheets need to be accounted for; capital controls can be a tool in particular circumstances.
- In this crisis, only modest levels of interest rate increases, currency depreciation, and inflation were observed compared with past crises:
  - Falling food and fuel prices reduced inflation pressure, so modest nominal policy rate hikes typically sufficed to anchor medium-term inflation expectations and prevent large currency overshooting.
- Supportive factors cited:
  - Timely and frontloaded financing packages and larger initial reserve buffers removing tail-risk scenarios.
  - Sharp reductions in advanced country interest rates.
  - Greater emphasis on country ownership of currency regimes and varied exchange rate approaches.
  - Better-than-expected bank rollover rates.
  - Possibly reduced capacity for speculative attacks among hedge funds and other investors given their own conditions.
- Exception noted: Iceland required capital controls to deal with a free-falling currency and large deposit outflows.

*Italic source attribution: Content derived from the supplied IMF PDF chapter: _091409 - 31.      Fiscal policy has adapted to deteriorating conditions, with most programs now*

### 44.      The Fund has sought to respect the author choice of exchange rate regime,

### _091409 - 44.      The Fund has sought to respect the author choice of exchange rate regime,

### Exchange rate regime choices and program design
- The Fund sought to respect countries' choice of exchange rate regime while ensuring consistency with macro policies and program credibility.
- Changes in regime, even when warranted to unwind large currency misalignments, are often controversial and involve weighing costs and benefits (Latvia case highlighted).
- Only the Belarus and Ukraine programs involved a change in the de jure exchange rate regime toward greater flexibility.

### Exchange rate developments and stability
- After initial volatility, exchange rates tended to stabilize in most program countries (Figure 20), except for Hungary, Iceland, and lately Ukraine (which experienced some depreciation since late August).
- Very stable currency movements in some programs may hinder unwinding pre-existing currency misalignments or adjusting to large terms-of-trade shocks.
- In Iceland, the krona depreciated by more than 30 percent against the euro in the months prior to the approval of the Fund arrangement.
- Exchange rates are defined in the source as units of national currency per euro for Bosnia & Herzegovina, Hungary, Iceland, Latvia, Romania, and Serbia, and per U.S. dollar for remaining countries.

### Real exchange rates and competitiveness (Figure 21)
- Median real exchange rate depreciation for October 2007 to July 2009 in program countries was negligible at 0.3 percent.
- Comparisons cited:
  - Median appreciation of some 5 percent for nonprogram emerging market economies.
  - 33 percent depreciation in past crises at a similar stage.
  - Pegs have seen their real exchange rates appreciating on average by about 6 percent, further eroding competitiveness.
- The modest real depreciations mirror relatively mild current account adjustments and suggest that further real exchange rate depreciation may be needed to unwind large pre-crisis external imbalances.

### Latvia case (Box 8)
- Maintaining the exchange rate peg was a central element of Latvia’s Fund-supported program.
- Alternatives considered and rejected:
  - Widening exchange rate bands to full 15 percent range under ERM2 (could have facilitated recovery but entailed initial adverse balance sheet effects).
  - Concurrent euroization (could have forestalled speculation and boosted confidence).
- Reasons for maintaining the peg:
  - Strong popular and political support as an anchor of stability and growth for more than 15 years, including through the 1998 Russian crisis.
  - Changing the peg would have undermined ownership and risked significant economic and social disruptions.
  - Changing the parity along with immediate euroization would have been inconsistent with the Maastricht Treaty.
- Costs of abandoning the peg highlighted:
  - Devaluation would have led to immediate deterioration in private sector net worth. Some 70 percent of bank deposits and nearly 90 percent of loans are foreign currency denominated, and private sector net foreign currency debt is around 70 percent of GDP.
  - External financing needs would not have been significantly reduced; improvements in the current account could have been offset by deteriorating private sector roll-over rates as the external debt to GDP ratio increased sharply.
  - Potential spillover risks to neighboring economies, and possibly beyond, especially in the event of an unplanned and disorderly devaluation.
- Recognized trade-offs: commitment to the peg required challenging fiscal tightening and entailed the likelihood of protracted recession.

### Capital controls and foreign exchange intervention
- Capital controls were used in some cases to stabilize market conditions where loss of confidence and acute foreign exchange liquidity shortfalls could cause free-fall currency movements (Iceland) or deposit runs (Latvia).
- Programs allowed continuation of controls imposed before program start—including comprehensive controls in Iceland and the partial deposit freeze at Parex in Latvia—as part of bank restructuring strategies.
- Controls were planned to be lifted in stages as stability and confidence gradually return.
- In some programs (Ukraine and Pakistan), restrictions were imposed on current payments and transfers with the objective of encouraging greater currency stability.

### Monetary policy stance and outcomes (Figures 22)
- Recent Fund programs used a variety of nominal anchors: some countries not pegging established or maintained inflation targeting frameworks; others used quantitative targets on monetary aggregates (net domestic assets of the central bank or base money) or preserved central bank policy rate flexibility.
- Policy rates were adjusted in a discretionary way in the face of volatile market conditions; monetary policy goals were revised periodically as conditions changed (some programs relaxed targets on domestic credit).
- The increase in policy interest rates to bring real rates into positive territory and to stabilize market confidence has been modest compared to past crises.
- In some cases, tightening was accompanied by injections of liquidity (including foreign currency) to address shortages.
- Recent months: falling inflation and financial stabilization created space for monetary policy easing. The pace of interest rate cuts has been faster in nonprogram emerging market countries, suggesting potential room for further reduction in policy rates in program cases consistent with country constraints and inflation objectives.

### Financial sector incidence and policy responses
- Banking systems in program countries were largely shielded from the dislocations seen in some advanced countries or previous crises; notable exceptions where financial sector problems were key include Iceland, and to some extent Latvia and Ukraine.
- Iceland: full-scale banking crisis preceding the program, collapse of the country’s three largest banks; banking liabilities approaching almost 900 percent of GDP in the system (aggregate figure reported).
- Latvia: banking strains rising since mid–2008, deposits declining by some 10 percent between August and end-year following a run on the country’s second largest bank.
- Ukraine: banking system strain in second half of 2008 with liquidity and solvency problems; preliminary diagnostic tests revealed large capital deficiencies, with needed recapitalization estimated at least 8 percent of GDP.
- Relative resilience traced to prior institutional reforms and decisive policy responses; policy responses internalized potential for sharp reductions in cross-border flows from global deleveraging.
- Policies prioritized avoiding liquidity runs and addressing underlying bank vulnerabilities to contain crisis effects; program design accounted for country-specific vulnerabilities including pre-existing insolvency of key banks, corporate sector distress, and deficient supervisory and legal frameworks.
- Incidence of unhedged foreign currency liabilities noted as serious in Belarus, Georgia, Guatemala, Hungary, Iceland, Latvia, Serbia, and Ukraine; in many cases net external exposures were very large.

### Financial sector measures (Table 3, Box 10)
- Financial policies focused on maintaining liquidity and addressing financial stress, with immediate stabilization measures taking precedence over structural measures addressing solvency concerns.
- Measures varied by country and included central bank liquidity facilities, broadening eligible collateral, cuts in reserve requirements, deposit insurance, forbearance/freeze intervention for distressed banks, resolution frameworks, supervision strengthening, bank recapitalization, and debt restructuring.
- Bank Coordination Initiative (BCI) in CEE countries: IMF, European Commission, and EBRD involved to prevent disorderly deleveraging and reduce uncertainty; coordination meetings held for Bosnia, Hungary, Romania, and Serbia (other countries, including Latvia, expected to join).
- Foreign banks’ market share (percent of assets) cited under BCI participants: 95 percent, 70 percent, 88 percent, 75 percent (country mapping provided in source material).
- Concerns noted: commitments under the BCI are nonbinding and difficult to monitor; regional coordination is essential to prevent relocation of deleveraging.

*Source: IMF, International Finance Statistics and Fund staff estimates.*

### Box 11. Financial sector measures in program countries

### Box 11. Financial sector measures in program countries

### Liquidity support and deposit insurance
- Liquidity support has been substantial in some cases.
- Strengthening deposit insurance has included:
  - the creation of new frameworks,
  - extension of coverage, including blanket guarantees in some case
  - boosting of resources backi
- In some countries, measures in this area have been limited as insurance had already been strengthened in recent years, or the authorities were concerned about adverse signaling effects.
- Deposit freezes have been used sparingly and on a temporary basis. In some cases, the imposition of controls has effectively put limits on deposit withdrawals.
- Initial measures have generally avoided deposit runs and limited pressures on domestic and forex liquidity.
  - Liquidity support, complemented in some cases by admarly bank interventions, were successful in stemore inistrative measures and controls, as well as e ming deposit runs in Iceland, Latvia, and Ukraine.
  - The m persistent deposit declines in Georgia and, to a lesser extent, Mongolia and Ukraine, appear to reflect broader, including (in the case of Ukraine) solvency concerns.

### Bank interventions, recapitalization, and resolution
- Interventions of distressed banks have involved:
  - Iceland—three largest banks, via ado “new bank/old bank” approach, as well as four other financial institutions;
  - Latvia—takeover of 85 percent of the shares and a subsequent recapitalization of the second largest bank;
  - Mongolia—one bank was placed into conservatorship;
  - Serbia—a small bank was put under receivership;
  - Ukraine—the sixth largest bank, and a number of smaller banks, were put under receivership, and the authorities are resolving two systemic banks.
- Bank recapitalization is crucial to restore bank viability, but progress in this area has typically been slow reflecting a variety of factors including insufficient progress in resolving asset valuation issues, low private investor interest, and ambiguities on the role of the public sector.
- Key areas under the resolution framework include setting up mechanisms to support bank intervention, restructuring and recapitalization, including legislative changes where needed.

### Regulatory forbearance and supervisory responses
- Regulatory forbearance measures included easing prudential requirements or allowing banks more time to meet them.
- At the same time, supervisory powers were also strengthened in certain areas in response to the crisis.

### External bank funding and foreign ownership
- Bank external credit lines have held up better than initially assumed. For the most part, parent banks appear committed to funding their subsidiaries, and in some cases central banks of the parent s’ jurisdiction (e.g., Nordic central banks) have publicly committed the u s’ support of pro country initial concerns.
- Contrary to initial concerns, foreign bank ownership has so far proved a net strength, with foreign bank flows remaining much more stable than other types of private capital flows in most program countries.
- Recent figures suggest that external bank financing has shown marked declines in some cases, including U and, to a lesser extent, Georgia, Guatemala, Latvia, and Pakistan.

### Household and corporate debt restructuring (Box 12)
- Effective debt restructuring plays an important role in addressing debt overhangs and restart credit flows and investment. Progress has been uneven.
- In all cases (except for Pakistan), program measures were intended to support voluntary debt restructuring.
- Country examples:
  - Latvia is implementing a comprehensive debt restructuring strategy, ranging from changes to the insolvency regime to the establishment of a scheme providing incentives for banks to restructure mortgage loans, which is to be implemented as the fiscal situation improves.
  - Hungary strengthened the bankruptcy regime to create incentives for early debt restructurings; adopted relief to unemployed mortgage debt holders and a partial mortgage guarantee for debtors facing large debt-service-to-income burdens; schemes to partially guarantee loans to funding-constrained SMEs are also being considered.
  - Romania reached a voluntary agreement with banks to facilitate restructuring of mortgage debt in foreign currency.
  - Iceland is developing frameworks to facilitate household and corporate debt workouts, supported by legal changes to the insolvency regime to expedite court-approved reorganization agreements and deal efficiently with nonviable debtors.
  - Pakistan’s approach involves a one-year deferral of all principal repayment, which raises moral hazard issues and risks undermining the banks’ financial position.
- In all countries with high levels of foreign-currency borrowing, immediate debt service reductions were induced by the sharp cuts in advanced-country interest ra m her princyment col curre se of thines for liquid ty suram subsidiaries.

### Deposit, credit, and NPL developments; bank balance-sheet outlook
- Deposit and credit trends (figures summarized in the source):
  - Bank Deposits (Sept. 08 - latest, change in percent) — country list shown in source (e.g., HU N PAK GTM ...)
  - Private Sector Credit (Sept. 08 - latest, change in percent) — country list shown in source (e.g., GEO ARM BLR UKR SLV MNG PAK LVA GTM HUN BIH SRB CRI ROM)
- The asset side of banks’ balance sheets is evolving less favorably than originally envisaged in most programs:
  - Credit to the private sector continues to decline in most cases, reflecting weaker demand and tighter lending standards.
  - The evolution of non-performing loans (NPLs) has been mostly benign so far, but the experience of past crises suggests that NPLs are recognized with long lags and could be expected to peak in the next couple of years in countries experiencing deep recessions, putting renewed pressure on bank capital.
  - Rapid progress in recapitalizing banks and in restructuring household and corporate debts would prevent the recurrence of banking sector problems and pave the way for a recovery in credit flows.
- Bank balance-sheet indicators (from Figure 25 in the source) show past banking crises medians and interquartile ranges alongside current programs for Nonperforming loans, percent, and Capital adequacy ratio, percent.

### Recovery prospects, external sustainability, and exit from Fund support
- Stabilization has taken hold, although a slow recovery could jeopardize debt sustainability and exit from Fund support in some program countries.
- Trade and recovery prospects:
  - The recovery in program countries is projected to be slow, with large downside risks.
  - Current program countries are unlikely to be able to benefit from the buoyant external demand and large exchange rate adjustments that underpinned export-driven recoveries in past crises.
  - It is unclear whether potential growth can return to past rates, which puts a premium on making rapid progress in structural reforms.
- External debt and financing:
  - Given projected FDI, EU capital transfers, and other nondebt-creating flows, in most cases external debt is projected to remain manageable, though there are significant downside risks.
  - Iceland and Latvia face a very challenging debt burden, made heavier by low growth and deflation. Hungary also shows a slowl trend, with the external debt ratio remaining well above 100 percent of GDP mainly due to weak long-term growth.
  - Continued large financing needs and high debt ratios pose risks to regaining full market access, both for the private and public sectors. Timing and extent of market financing access affect capacity to repay the Fund.
- Exit from Fund support:
  - The length of current Fund arrangements is comparable to that of past cases at inception, but extensions and successor arrangements are a possibility.
  - Current programs have an average duration of about two years in line with past programs. Several past programs have been extended, with the overall duration of Fund support reaching 10 years for Uruguay, nine years for Turkey, and eight years—for Peru.
  - If downside risks to the global economy materialize, extensions of current arrangements or successor arrangements may be required for some current program cases. In contrast, early exits from Fund support and greater use of precautionary financing could occur if upside risks materialize.
  - Following the program period, capacity to repay the Fund would be monitored in most current program countries under Post-Program Monitoring.

### Policy questions and issues for discussion
- Was the mix of fiscal and monetary policy accommodation adequate or insufficient to deal with the large output losses observed in many countries?
- When should the focus shift to address underlying vulnerabilities that led countries to need support in the first place, including fiscal and external sustainability?
- Has the heterogeneous approach to exchange rate regimes been successful? Is there a risk that real exchange rates will be maintained at too appreciated a level?
- What explains the problems in bank credit quality, and will further efforts be required to address deteriorating credit quality?

*Source: Box 11 and Box 12, from the provided IMF content unit.*

### Appendix I. Current

### Appendix I. Current

### Access under arrangements current (As of August 6, 2009)
- The Appendix provides the list of IMF arrangements current as of August 6, 2009, with effective date of arrangement and program type (Stand-By Arrangements and Flexible Credit Lines noted).
- Country entries and effective dates (as presented):
  - Armenia, Republic of (ARM) — 3/6/2009
  - Belarus, Republic of (BLR) — 1/12/2009
  - Bosnia & Herzegovina (BIH) — 7/8/2009
  - Costa Rica (CRI) — 4/11/2009
  - El Salvador (SLV) — 1/16/2009
  - Gabon (GAB) — 5/7/2007
  - Georgia (GEO) — 9/15/2008
  - Guatemala (GTM) — 4/22/2009
  - Hungary (HUN) — 11/6/2008
  - Iceland (ISL) — 11/19/2008
  - Latvia, Republic of (LVA) — 12/23/2008
  - Mongolia (MNG) — 4/1/2009
  - Pakistan (PAK) — 11/24/2008
  - Romania (ROM) — 5/4/2009
  - Serbia, Republic of (SRB) — 1/16/2009
  - Seychelles (SYC) — 11/14/2008
  - Sri Lanka (SRL) — 7/24/2009
  - Ukraine (UKR) — 11/5/2008
- Flexible Credit Lines (FCLs) listed with effective dates:
  - Colombia (COL) — 5/11/2009
  - Mexico (MEX) — 4/17/2009
  - Poland (POL) — 5/6/2009

### Access amounts, quota and financing components (as presented)
- The Appendix reports amounts of arrangements (US$ m) and percent of quota, with financing components and burden sharing indicated in table fragments. Selected numeric values presented in the exhibit include:
  - 28; 838
  - 15; 3,560
  - 36; 1,592
  - 15; 772
  - 14; 806
  - 36; 121
  - 32; 1,172
  - 18; 989
  - 17; 16,529
  - 24; 2,196
  - 27; 2,387
  - 18; 240
  - 23; 11,349
  - 24; 17,948
  - 27; 4,108
  - 20; 2,594
  - 24; 17,253
  - Total: 84,482
  - 12; 10,926
  - 12; 49,451
  - 12; 21,472
  - 81,849
  - 166,331
- Table excerpts showing financing breakdowns and balances (US$ m):
  - Example row fragments: 525; 637; 2,000
  - 470; 1,499; 0; 200; 1000; 4,760
  - 200; 287; 137; 259; 74; 2,062
  - 300; 240; 0; 0; 500; 500; 1,772
  - 300; 257; 0; 0; 450; 900; 2,156
  - 17; 0; ...; ...; ...; 121
  - 4; 186; 452; 184; 328; 606; 2,290
  - 3; 200; 0; 0; 393; 361; 1,743
  - 716; 11,900; 8400; 1300; 0; 26,229
  - 595; 878; 100; 0; 9000; 11,296
  - 533; 840; 4382; 565; 3251; 10,584
  - 200; 120; 0; 60; 125; 425
  - 365; 7,376; 0; 3400; 6800; 21,549
  - 555; 6,854; 6550; 1310; 1310; 27,118
  - 249; 1,100; 411; 350; 0; 4,869
  - 100; 12; ...; ...; ...; 28
  - 240; 325; ...; ...; ...; 2,594
  - 401; 10,979; 1000; 1750; 1250; 21,253
  - Aggregates shown: 43,039; 21,164; 11,391; 25,814; 2,850
  - Flexible credit line totals: 900; 0; ...; ...; ...; 10,926
  - 1,000; 1,000; 0; ...; ...; ...; 49,451
  - 1,000; 1,000; 0; ...; ...; ...; 21,472
  - 0; 81,849

### Notes and terminology (as presented)
- "Programs with total access of over 600 percent" and "exceptional access" are referenced in the notes.
- "Precautionary" arrangements: members indicating desire not to draw on available resources are termed "precautionary" arrangements.
- "Total access in terms of quota divided by length of arrangement (in years), except where otherwise specified."
- Specific country exceptions noted: Gabon, Seychelles, and Sri Lanka.
- Table shows amounts post augmentation for access under arrangements current.

### Appendix II. Recent Cases of Direct Budget Support

### Country cases and rationale for direct budget support
- Hungary (November 2008)
  - Central bank independence: Yes, direct central bank lending to the government not allowed.
  - BoP need justification: Multiple needs, including financing of the current account deficit, financial sector support, and increasing gross reserves.
  - Rationale: The first two purchases under the SBA were disbursed to the government through its agent, the Hungarian Debt Management Office. Part of the resources were set aside for the bank support package and some were lent to domestic banks to help with immediate funding needs. The government also used the domestic currency counterpart of part of the Fund purchase to meet the government’s financing need, partly due to nonresidents reducing their holdings of domestic currency government bonds. The associated increase in domestic liquidity was sterilized through the issuance of central bank bills.

- Latvia (November 2008)
  - Central bank independence: Yes, quasi currency board arrangement.
  - BoP need justification: Loss of international reserves, needed to bolster the banking system.
  - Rationale: The government faced acute liquidity constraints because of the increasing fiscal deficit and the need to provide liquidity assistance to a systemically important bank (and potentially others) that could not be channeled through the Bank of Latvia.

- Ukraine (November 2008)
  - Central bank independence: Yes. Its preservation is a key program objective.
  - BoP need justification: Rebuild gross international reserves.
  - Rationale: Sharp revenue shortfalls, the lack of access to international capital markets, and an underdeveloped domestic bond market meant there were no realistic alternatives but to finance the programmed budget deficit target using Fund resources. Direct budgetary support from the Fund was seen as preferable to (indirect) central bank financing of the deficit as it helped preserve the independence of the central bank and prevented the entrenchment of monetization mechanisms that would burden the institutional set up in Ukraine going forward.

- Armenia (March 2009)
  - Central bank independence: Direct central bank lending to the government not allowed.
  - BoP need justification: Increase gross reserves and address the current account deficit.
  - Rationale: Fiscal policy was eased in response to the crisis, which led to pressure on the balance of payments, and resources from the augmentation were therefore transferred directly to the government to address the resultant balance of payments needs. In the absence of additional financing for fiscal purposes, Armenia would have been forced into a more severe external and domestic adjustment that would further worsen growth and require sizeable cuts in social spending.

- Georgia (August 2009 Augmentation)
  - Central bank independence: Direct central bank lending to the government not allowed.
  - BoP need justification: Increase gross reserves, address current account deficit in the face of a more prolonged global crisis than originally envisaged.
  - Rationale: Part of the support provided by the Fund in 2009 and all the support for 2010 is to be used to finance directly a higher fiscal deficit stemming from a sharper-than-expected economic slowdown. Given Georgia’s under-developed domestic financial markets, Fund financing would allow a less restrictive fiscal policy while avoiding funding pressures and maintaining adequate reserve coverage.

- Pakistan (August 2009 Augmentation)
  - Central bank independence: Limits on direct central bank lending to the government.
  - BoP need justification: Allow for a further strengthening of gross reserves to deal with increased risks to the external outlook.
  - Rationale: The augmentation was also designed to pave the way for a donor-supported relaxation of the fiscal deficit target in 2009/10. The program envisages that a portion of Fund credit (92 percent of quota) be used to finance the social spending element of the expanded budget as a bridge loan in advance of pledged donor support so as to reduce pressure from associated budgetary imports as a result of backloaded donor inflows.

### Key takeaways (as presented)
- IMF arrangements as of August 6, 2009 include a mix of Stand-By Arrangements and Flexible Credit Lines with a wide range of access levels and financing compositions.
- Several crisis-era augmentations involved direct budget support where central bank lending to governments was constrained or undesirable, with rationales focused on restoring gross international reserves, preventing central bank monetization, supporting bank-sector needs, and bridging donor-financing gaps.
- Specific numeric aggregates and program amounts are reported in the Appendix tables, including totals such as 84,482; 81,849; and 166,331 (US$ m) among numerous country- and program-level figures.

*Source: Appendix I. Current (As of August 6, 2009) and Appendix II. Recent Cases of Direct Budget Support.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_091409.pdf_