Global Safety Nets: Crisis Prevention in an Age of Uncertainty

IMF Blog, September 9, 2010

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The recent global crisis began in advanced economies but put most emerging markets under pressure; "no country, especially those most interconnected, was immune from tremendous economic strain."
Emerging consensus: a better safety net is needed to enable countries with good policies to insure against bad outcomes, particularly when they are "innocent bystanders" in financial turmoil.
The IMF enhanced its country insurance facilities to extend contingent financial support more broadly and to tailor support to members’ needs and circumstances.
A new staff paper and supplement describe the main elements of these reforms.

Purpose: flagship insurance option for countries with very strong policies and economic fundamentals; intended to be "reserve-like" and more flexible.
Early users: Mexico, Colombia, and Poland have made use of the FCL; all three FCLs have been renewed.
Reported benefits by member countries: role in soothing market sentiment and providing "policy space" to take countercyclical measures.
Two principal changes to the FCL:
- An FCL can be longer—up to two years, with a country’s policy strength reviewed after a year—providing an increased measure of predictability.
- The implicit cap on its size has been removed, allowing size to be determined by the amount of insurance that a member actually needs.

Rationale: many countries with improved policy frameworks still have moderate residual weaknesses (including fiscal and financial areas and linkages to foreign banks) and lacked contingent protection during the crisis.
Gap identified: the FCL’s high qualification bar made it unavailable for these countries; the Stand-by Arrangement (including precautionary forms) was not used much for crisis-prevention by these members.
PCL design features:
- Intended to fill the gap for members with sound policies but moderate vulnerabilities.
- Rigorous qualification process provides a "seal of approval" regarding policy strengths while identifying residual vulnerability.
- Limited ex post conditions are used to address identified vulnerability, providing contingent financing as well as credibility to authorities’ policies.
Access levels specified:
- As much as 500 percent of a country’s IMF quota could be available during the first year of the PCL.
- Up to a total of 1000 percent of quota could be available after a year.

Good policies and frameworks, endorsed with FCLs and PCLs, are the first line of defense.
Crises can be triggered by localized events that spark investor panic and contagion irrespective of fundamentals; investor withdrawals during the recent crisis were unusually intense.
IMF and international community actions under consideration:
- Reform of the Fund’s lending facilities (already undertaken as one layer).
- Establishing synergies in lending and surveillance with key regional financing arrangements.
- Consulting with various stakeholders on these synergies.
- Considering a Global Stabilization Mechanism: a framework to allow proactive provision of financing during a systemic crisis to stem contagion.
Process: the Executive Board has had a preliminary discussion; staff will develop these ideas further in the months ahead. Reader feedback is invited.

Source: Reza Moghadam, September 9, 2010.

The Fund’s Mandate—The Future Financing Role: Reform Proposals; IMF Policy Papers; June 29, 2010
- The Fund’s Mandate—The Future Financing Role: Reform Proposals; IMF Policy Papers; June 29, 2010 (Markdown version)
- The Fund’s Mandate—The Future Financing Role: Reform Proposals; IMF Policy Papers; June 29, 2010 (PDF)
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- 082510 (Markdown version)
- 082510 (PDF)