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The Role of the IMF in the Global Financial Crisis
Miranda Xafa
Hellenic Bank AssociationJune 2009
1
I. Economic and financial I. Economic and financial developmentsdevelopments
2Global economy faces its most severe recession Global economy faces its most severe recession since WWIIsince WWII
-4
-2
0
2
4
6
8
10
Real GDP Growth(Annual percent change)
901970 80 2000
Advancedeconomies
Emerging and Developing economies
World
10
3
WEO Real GDP Growth ProjectionsWEO Real GDP Growth Projections((In percent change from a year earlier)In percent change from a year earlier)
U.S.U.S. Euro Japan China India WorldEuro Japan China India World
2002009 (Apr. 09) 9 (Apr. 09) --2.8 2.8 --4.2 4.2 --6.2 6.5 4.5 6.2 6.5 4.5 --1.31.32002009 (Oct. 08) 9 (Oct. 08) --0.7 0.7 --0.5 0.5 --0.2 8.5 6.3 2.20.2 8.5 6.3 2.2Change Change --2.1 2.1 --1.5 1.5 --6.0 6.0 --2.0 2.0 --1.8 1.8 --3.53.5
202010 (Apr. 09) 0.0 10 (Apr. 09) 0.0 --0.4 0.5 7.5 5.6 1.90.4 0.5 7.5 5.6 1.9202010 (Oct. 08) 1.5 0.9 1.1 9.5 6.810 (Oct. 08) 1.5 0.9 1.1 9.5 6.8 3.83.8Change Change --1.5 1.5 --1.5 1.5 --0.6 0.6 --2.0 2.0 --1.2 1.2 --1.91.9
Source: IMF, World Economic Outlook, April 2009 Update.Source: IMF, World Economic Outlook, April 2009 Update.
Global outlook deteriorated sharply since October 08; Global outlook deteriorated sharply since October 08; modest turnaround expected with policy stimulusmodest turnaround expected with policy stimulus
4
0.0
0.2
0.4
0.6
0.8
1.0
1.2
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090
10
20
30
40
50
60
70
VIX and Standard Deviation of Forecasts (in percent)
VIX Index(RHS)
U.S. Consensus Forecasts (STDEV; following
year; LHS)
Gulf War I
AsianCrisis LTCM 9/11
Apr. 09
Heightened uncertainty a defining feature of the crisis
5Tentative signs of stabilization emerged Tentative signs of stabilization emerged in Aprilin April--May 2009...May 2009...
Retail Sales(Annualized percent change of 3mma over
previous 3mma)
30
35
40
45
50
55
60
65
Euro areaUnited StatesEmerging economies
Manufacturing PMIs(Values greater than 50 indicate expansion)
042000 02 May09
06-15
-10
-5
0
5
10
15
20Emergingeconomies
Advancedeconomies World
20002000 Apr. Apr. 0909
0202 0404 0606
6
40
50
60
70
80
90
100
110
120
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
U.S.
Japan
Euro area
U.K.
...as equity markets andconsumer confidence recovered
0
20
40
60
80
100
120
140
160
180
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
U.S.
Japan
Euro area
U.K.
Equities(1/1/2007=100; FTSE)
Consumer Confidence(Jan. 2005=100)
LehmanBrothers
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Causes of output collapse – Advanced countries
Negative feedback loop between financial sector and real economy
Deleveraging → Market correction → Lower wealth, collapsing confidence, falling demand
Recession → NPLs → provisioning, bank losses
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Causes of output collapse – emerging markets
Declining external demand and exports
External financing constraints
Lower commodity prices
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Recovery prospects and risks
Recovery prospects based on:
Slow improvement of financial systemHousing price stabilizationFiscal stimulus
Risks:
Real and financial feedback loopDeflation risksFiscal concerns/debt dynamics Negative feedback from emerging economies
10U.S. housing – Signs of stabilization
Real House Prices(index, 1995 = 100)
Housing Inventories(new homes)
50
100
150
200
250
70 75 80 85 90 95 00 05
FHFA
Case-Schiller
NAR (median prices)
FHFA trend
CS trend
NAR trend
100
200
300
400
500
600
70 75 80 85 90 95 00 050
2
4
6
8
10
12
14
Months of supply
(RHS, SA)
Thousands of units(LHS)
CDS Spreads for High-Grade Financials (basis points)
0
50
100
150
200
250
Jan-07 Jul-07 Jan-08 Jul-08 Jan-090
100
200
300
400
500
600
Europe
US (rhs)
2
Systemic risks remain elevated despite government interventions
Bear Stearns collapse
Lehman Bros. Bankruptcy
Banks begin issuing govt. guaranteed debt
Bleak Economic Releases Globally
Source: Bloomberg
12Rising concerns over fiscal sustainability...Rising concerns over fiscal sustainability...
10 Year Government Bond Yield
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-0
7Aug-07Sep
-07Oct-
07Nov-0
7Dec-0
7Ja
n-08Feb
-08Mar-
08Apr-0
8May
-08Ju
n-08Ju
l-08
Aug-08Sep
-08Oct-
08Nov-0
8Dec-0
8Ja
n-09Feb
-09Mar-
09Apr-0
9May
-09Ju
n-09
GREECE GERMANY ITALY PORTUGAL SPAIN IRELAND FRANCE
13...are reflected in wider spreads ...are reflected in wider spreads over Bundsover Bunds
Spreads From the 10-Year German Bond Yield
0
50
100
150
200
250
300
350
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-0
7Aug
-07Sep
-07Oct-
07Nov-07Dec
-07Ja
n-08Feb-0
8Mar-
08Apr
-08May
-08Ju
n-08
Jul-0
8Aug-08Sep
-08Oct-
08Nov
-08Dec
-08Ja
n-09Fe
b-09Mar-0
9Apr-0
9May
-09Ju
n-09
GREECE ITALY PORTUGAL SPAIN IRELAND FRANCE
14Corporate bond spreads also remain wide;Corporate bond spreads also remain wide;Credit is sharply curtailed as banks deleverCredit is sharply curtailed as banks delever
-400
0
400
800
1200
1600
2000
2400
High Yield
High Grade
Advanced Economies: Corporate Bond Spreads
(basis points)
2002 Apr.2009
04 06
US and EU:Credit Growth in Private Sectors
(q/q changes; in billions of local currency)
-500
0
500
1000
1500
2000
2500
-40
0
40
80
120
160
200
United States (RHS)Euro area (LHS)
042002 08:Q4
06
15The global banking system The global banking system remains under stressremains under stress
0
1
2
3
4
5
Interbank Markets(3-month LIBOR minus T-bill rate; in percent)
UnitedStates
Japan
Euroarea
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22006 2007 2008 2009
0
100
200
300
400
500
600
United States
Euro area
Bank CDS Spreads(High-grade; in basis points)
2007 May09
08
-1800
-1400
-1000
-600
-200
200
600
1000
1400
Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Related officesInterbankNonbanksMonetary authoritiesTotal
BIS Cross-Border Bank Liabilities (Exch. Rate adjusted changes, in billions of U.S. dollars)
Cross-border bank flows have dropped sharply
Source: BIS
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Banking Systems Exposures to Emerging Markets( as % of Mature Market’s GDP )
Source: BIS
0 10 20 30 40 50 60 70 80 90 100
Austria
Greece
France
Germany
Italy
Netherlands
Spain
Sweden
Switzerland
UK
USAsiaEMEALatin America
Deterioration in emerging markets may, in turn, be transmitted back to mature markets’ banks
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II. Policy InitiativesII. Policy Initiatives
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Policy Implications – Macro Policies
Get consumers to spend more; target credit constrained consumers and firms
Government-financed infrastructure spending
Easy monetary policy to reduce interest rates;
BUT:Essential need for credible medium-term fiscal programs to ensure debt sustainability
Many countries starting from an already dangerous position (aging, health care)
20Fiscal stimulus and automatic stabilizers are Fiscal stimulus and automatic stabilizers are expected to boost activityexpected to boost activity
-10
-8
-6
-4
-2
0
2
General Government Fiscal Balances(Percent of GDP)
042000 02
Advancedeconomies
Emerging and Developing economies
1006 08
21Monetary and credit policies have been Monetary and credit policies have been eased massivelyeased massively
0
2
4
6
8
10
12
14
01 02 03 04 05 06 07 08 09
UnitedStates
Euro area
Japan
Emerging markets
Central Banks Total Assets(Index; 1/5/2007 = 100)
Policy Rates(Percent)
50
100
150
200
250
300
350
400Euro areaUnited KingdomUnited StatesJapan
082007 Apr.09
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Policy Implications –Financial Sector
Restoring the financial system has three elements:
Liquidity provision and measures to preserve functioning financial markets (Central banks)
Bank recapitalization (Fiscal authority)
Taking bad assets off the books; sell T-bills and use the funds to buy risky assets; “bad bank” (Fiscal authority)
To be effective, financial policies need to be To be effective, financial policies need to be comprehensive and internationally coordinatedcomprehensive and internationally coordinated
23Credit deterioration is feeding back to higher expected writedowns across all sectors
Origin of Estimated Writedowns Debt Outstanding October 2008 GFSR April 2009 GFSR Banks
United StatesLoans 13,507 425 1,068 601Securities 13,047 980 1,644 1,002 Loans and Securities 26,554 1,405 2,712 1,604
EuropeLoans 20,759 … 888 551Securities 3,048 … 305 186Loans and Securities 23,807 … 1,193 737
Japan 7,358 … 149 129
Emerging markets … … … 340
Total allLoans and Securities 57,719 … 4,054 2,810
Estimates of Potential Writedowns, 2007-2010(billions of US dollars)
4
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Global Policy Initiatives
GG--20 Leaders20 Leaders’’ Summit in Washington on Nov 15, 2008 Summit in Washington on Nov 15, 2008 agreed on 5 objectives:agreed on 5 objectives:
Common understanding of the root causes of the global crisisReview of countries' actions addressing the crisis Agreement on common principles for reforming financial marketsAction plan to implement those principles and to develop further recommendations for later reviewReaffirmation of commitment to free market principles
Working groups set up to make specific proposals at Working groups set up to make specific proposals at next Gnext G--20 Leaders20 Leaders’’ Summit in London on April 2, 2009Summit in London on April 2, 2009
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Global Policy initiativesGlobal Policy initiatives
GG--20 Leaders20 Leaders’’ Summit in London on April 2 agreed to:Summit in London on April 2 agreed to:
Restore confidence, growth and jobsRepair the financial system to restore lendingStrengthen financial regulation to rebuild trustFund and reform IFIs to overcome this crisis and prevent future onesPromote global trade and investment, reject protectionismBuild an inclusive, green, and sustainable recovery
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GG--20: Restoring growth and jobs20: Restoring growth and jobs
Unprecedented fiscal expansion of $5 trillion by endUnprecedented fiscal expansion of $5 trillion by end--20102010Comprehensive support to banking systems through Comprehensive support to banking systems through liquidity, capital, dealing with impaired assets to restore liquidity, capital, dealing with impaired assets to restore normal flow of creditnormal flow of creditIMF to IMF to ““assess regularly the actions taken and the global assess regularly the actions taken and the global action requiredaction required””
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GG--20: Strengthening financial 20: Strengthening financial supervision and regulationsupervision and regulation
Recognition that major failures in financial regulation Recognition that major failures in financial regulation and supervision were key causes of crisis; implement and supervision were key causes of crisis; implement Action Plan to address shortcomingsAction Plan to address shortcomingsEstablish new Financial Stability Board (FSB); FSB to Establish new Financial Stability Board (FSB); FSB to collaborate with IMF to provide collaborate with IMF to provide ““early warning systemearly warning system””of macroof macro--financial risksfinancial risksExtend perimeter of regulation to all systemically Extend perimeter of regulation to all systemically important financial institutionsimportant financial institutionsPrevent excessive leverage; improve valuation Prevent excessive leverage; improve valuation standards; end bank secrecystandards; end bank secrecyIMF, FSB to monitor progress, report to GIMF, FSB to monitor progress, report to G--20 Ministers in 20 Ministers in NovemberNovember
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GG--20: Strengthening IFIs20: Strengthening IFIs
Significantly increase IMF resources to $750 bl Significantly increase IMF resources to $750 bl Support a $250 bl SDR allocation to increase global Support a $250 bl SDR allocation to increase global liquidityliquiditySupport $100 bl of new lending by MDBsSupport $100 bl of new lending by MDBsWelcome IMFWelcome IMF’’s new Flexible Credit Line (FCL) which s new Flexible Credit Line (FCL) which provides large, upfront access to financing without provides large, upfront access to financing without conditionality to countries with solid policy frameworks; conditionality to countries with solid policy frameworks; Mexico was Mexico was ““first moverfirst mover”” in requesting an FCLin requesting an FCLCommit to complete IMF quota and voice reform by Commit to complete IMF quota and voice reform by January 2011January 2011
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Why expand IMF Resources?Why expand IMF Resources?Without adequate IMF support, countries may be forced to contract or let their currencies weaken sharply, triggering corporate and financial insolvencies.
The NAB enhances international stability by providing an insurance policy for the global economy. The NAB is a set of credit arrangements that the IMF maintains with 26 countries to obtain supplemental resources temporarily when the IMF's existing resources are substantially drawn down in circumstances that threaten the stability of the international monetary system.
Ensuring adequate IMF resources through an expanded NAB provides immediate benefits in terms of confidence to markets, reducing the need for more costly rescues of crisis countries. An adequately funded IMF promotes market confidence that emerging market and developing countries have the financing they need to address the effects of the current crisis.
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Large IMF financial packages since September 2008Large IMF financial packages since September 2008
CountryCountry IMF ($ bl)IMF ($ bl) Total ($ bl.)Total ($ bl.) % of GDP% of GDP
BelarusBelarus 2.52.5 7.47.4 1313
HungaryHungary 15.715.7 25.425.4 1616
IcelandIceland 2.12.1 10.910.9 6565
LatviaLatvia 2.42.4 10.510.5 3333
PakistanPakistan 7.67.6 12.412.4 77
UkraineUkraine 16.416.4 18.018.0 1010
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...and Precautionary Flexible Credit Lines...and Precautionary Flexible Credit Lines
CountryCountry IMF ($ bl)IMF ($ bl) Total ($ bl.)Total ($ bl.) % of GDP% of GDP
MexicoMexico 4747 4747 66
PolandPoland 2020 2020 55
ColombiaColombia 1010 1010 55
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III. Five priorities for III. Five priorities for regulatory reformregulatory reform
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1. Extending perimeter of regulation1. Extending perimeter of regulation
““ShadowShadow”” banking system was key regulatory failurebanking system was key regulatory failurePerimeter of regulation must include all systemically Perimeter of regulation must include all systemically important institutions & markets to capture & mitigate important institutions & markets to capture & mitigate systemic risksystemic riskAt same time, need to avoid At same time, need to avoid ““rush to regulaterush to regulate”” that that could stifle innovation & impose unnecessary could stifle innovation & impose unnecessary administrative burdens.administrative burdens.IMF has made significant analytical contribution to the IMF has made significant analytical contribution to the measurement of systemic risk that can help define measurement of systemic risk that can help define perimeter of regulation (GFSR, April 2009)perimeter of regulation (GFSR, April 2009)
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2. Reducing excessive leverage and 2. Reducing excessive leverage and procyclicalityprocyclicality
Safeguards against systemic risk: Safeguards against systemic risk:
Tighter capital & liquidity rules would would contribute to crisis prevention by discouraging contribute to crisis prevention by discouraging accumulation of risks & leverage in good accumulation of risks & leverage in good timestimesMeasures to reduce procyclicality would create a cushion that could be drawn upon in a downturn
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OriginateOriginate--andand--Distribute Model (O&D)Distribute Model (O&D)
Although somewhat tainted now, O&D is Although somewhat tainted now, O&D is conducive to financial stability by reducing conducive to financial stability by reducing leverage without hindering credit supply.leverage without hindering credit supply.Leveraged institutions (e.g. banks) should keep Leveraged institutions (e.g. banks) should keep liquid assets with rel. short maturities, and liquid assets with rel. short maturities, and securitize longersecuritize longer--term, less liquid assets; these term, less liquid assets; these should be held by unleveraged, realshould be held by unleveraged, real--money money investors.investors.Regulators should encourage revival of O&D Regulators should encourage revival of O&D model with appropriate safeguards, incl. model with appropriate safeguards, incl. monitoring of offmonitoring of off--balance sheet exposures to balance sheet exposures to ensure risks are widely spread.ensure risks are widely spread.
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3. Addressing market discipline3. Addressing market discipline
Disclosure practices must be strengthened for Disclosure practices must be strengthened for systemicallysystemically--important institutions, incl. both important institutions, incl. both banks and nonbanks and non--banks.banks.
Revamped set of financial indicators is needed, Revamped set of financial indicators is needed, including offincluding off--balance sheet derivatives that balance sheet derivatives that turned out to be so important in this crisis.turned out to be so important in this crisis.
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4. Cross4. Cross--border regulationborder regulation
Rules must be strengthened before problems Rules must be strengthened before problems actually occuractually occurNeed to define rules for burdenNeed to define rules for burden--sharing across sharing across jurisdictionsjurisdictionsIFI Joint Action Plan, announced in Feb 09, to IFI Joint Action Plan, announced in Feb 09, to provide funding to EU banks with subsidiaries in provide funding to EU banks with subsidiaries in CEE countries.CEE countries.Supervisory colleges for all large crossSupervisory colleges for all large cross--border border financial institutions is a major step.financial institutions is a major step.
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5. Strengthening systemic liquidity management
Establishing a clearing facility for the CDS Establishing a clearing facility for the CDS market would help reduce counterparty risk market would help reduce counterparty risk (now: OTC market).(now: OTC market).
Improved mechanisms for crossImproved mechanisms for cross--border liquidity border liquidity provision are vital (ECB repos vs. swaps).provision are vital (ECB repos vs. swaps).
Nevertheless: regulation, not monetary policy, is Nevertheless: regulation, not monetary policy, is the right tool to deal with asset bubbles.the right tool to deal with asset bubbles.
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Thank you!Thank you!
