## Global Safety Nets: Crisis Prevention in an Age of Uncertainty

_IMF Blog, September 9, 2010_

## Source details

**Canonical URL:** [Global Safety Nets: Crisis Prevention in an Age of Uncertainty](https://www.imf.org/en/blogs/articles/2010/09/09/global-safety-nets-crisis-prevention-in-an-age-of-uncertainty)

## Other formats

- [Markdown version](/en/blogs/articles/2010/09/09/global-safety-nets-crisis-prevention-in-an-age-of-uncertainty/index.md)
- [Structured JSON version](/en/blogs/articles/2010/09/09/global-safety-nets-crisis-prevention-in-an-age-of-uncertainty/index.json)
- [Bundle manifest](/en/blogs/articles/2010/09/09/global-safety-nets-crisis-prevention-in-an-age-of-uncertainty/bundle-manifest.json)

## Bibliographic details
- Authors: Reza Moghadam
- Published: September 9, 2010

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### Crisis context and rationale
- 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.

### Flexible Credit Line (FCL)
- 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.

### Precautionary Credit Line (PCL)
- 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.

### A global financial safety net and broader policy work
- 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.*

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## Content in this bundle

- **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)](/external/np/pp/eng/2010/062910.pdf.md){rel="alternate" type="text/markdown"}
  - [The Fund’s Mandate—The Future Financing Role: Reform Proposals; IMF Policy Papers; June 29, 2010 (PDF)](/external/np/pp/eng/2010/062910.pdf){rel="external" type="application/pdf"}
- **082510**
  - [082510 (Markdown version)](/external/np/pp/eng/2010/082510.pdf.md){rel="alternate" type="text/markdown"}
  - [082510 (PDF)](/external/np/pp/eng/2010/082510.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2010/09/moghadam090910a.jpg](https://www.imf.org/wp-content/uploads/2010/09/moghadam090910a.jpg)
- [earlier reforms](http://www.imf.org/external/pubs/ft/survey/so/2009/POL041309A.htm)
- [decided to extend the safety net](http://www.imf.org/external/np/sec/pr/2010/pr10321.htm)
- [wrote about earlier this year](http://blogs.imf.org/2010/04/22/learning-from-the-crisis-future-imf-lending-role/)
- [https://www.imf.org/wp-content/uploads/2010/09/moghadam090910b3.jpg](https://www.imf.org/wp-content/uploads/2010/09/moghadam090910b3.jpg)
- [https://www.imf.org/wp-content/uploads/2010/09/moghadam090910c.jpg](https://www.imf.org/wp-content/uploads/2010/09/moghadam090910c.jpg)
- [https://www.imf.org/wp-content/uploads/2010/09/moghadam090910d.jpg](https://www.imf.org/wp-content/uploads/2010/09/moghadam090910d.jpg)

_Source: https://www.imf.org/en/blogs/articles/2010/09/09/global-safety-nets-crisis-prevention-in-an-age-of-uncertainty_