Crisis Prevention: The International Agenda

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Crisis Prevention The International Agenda

• Jonathan T. Fried
• Executive Director
• Canada, Ireland and the Caribbean
• International Monetary Fund

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Outline

• The Diagnosis Underlying Causes of Crisis
• 2. The International Response
• Surveillance
• Asset and liability management
• Bond market development
• IMF facilities
• Debt Relief
• 3. Conclusion

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The Diagnosis Underlying Causes of Crisis

• Policy imbalances leading to financial
  vulnerabilities
• Weak, poorly-regulated financial systems that
  concentrate risk
• Institutional weakness in legal and accounting
  frameworks
• Information asymmetries that contribute to
  uncertainty and invite panic responses to bad
  news

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The International Response (I) Surveillance

• Key service provided by the IMF
• Aids in crisis prevention by
• Assessing fundamental risks, both external and
  domestic, with a focus on macro-critical issues
• Identifying weakness in prudential and regulatory
  frameworks
• Promoting best practice through the use of
  Standards and Codes

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Surveillance, continued

• Experience shows surveillance could be improved
  by
• Working to increase its candor and effectiveness
• Increasing the focus on financial sector
• More focus on macro-financial linkages
• Greater focus on FSAPs and integrating financial
  sector analyses
• Taking a more holistic look at exchange rates
• Developing new models
• Looking at them in from a multilateral
  perspective
• Increasing disclosure of findings

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The International Response (II) Asset -
Liability Management

• Identifying and reducing asset-liability
  mismatches
• Debt Management
• Debt Sustainability Analyses (DSAs) Designed to
  identify vulnerabilities in public sector balance
  sheets resulting from fiscal and macroeconomic
  developments and shocks
• Technical assistance

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Asset - Liability Management, continued

• Asset Management
• Technical assistance in the design and management
  of wealth funds and reserve pooling arrangements
• Advice on management of central bank reserves

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The International Response (III) Developing
Local Financial Markets

• Bond Markets
• Original sin prevents sovereigns from borrowing
  long-term in their own currency and exposes them
  to risks
• Deeper, more resilient domestic bond markets can
  reduce these risks
• and can foster the development of deeper, more
  liquid domestic capital markets

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Developing Local Financial Markets, continued

• Area of major focus at present, requiring efforts
  along many dimensions
• Rule of law
• Stable macroeconomic environment
• Technical expertise
• Sound regulatory framework
• Clearing and settlement systems
• Sectoral regulations
• Broadening investor base (e.g. facilitating
  investments by pension funds)
• Transparency and international investor relations

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The International Response (IV) The IMFs
Facilities

• IMF as a lender of last resort
• Its facilities SBA and SRF can help in
  liquidity crises, thereby having a deterrent
  effect on speculative attacks
• In practice, it is difficult to distinguish
  liquidity from solvency crises
• Precautionary SBAs and PSIs are currently the
  only pure crisis prevention facilities
• Both are ill-suited for crisis prevention

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The IMFs Facilities, continued

• IMF currently working on a purely preventative
  facility to plug the gap
• Considering a Reserve Augmentation Line that
  would provide large sums unconditionally to
  qualifying countries
• Several important issues
• Lender and borrower moral hazard
• Entry/exit problem
• Rate of charge

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The International Response (V) Debt Relief

• HIPC and MDRI can be viewed as forms of crisis
  prevention
• Reducing the debt service burden creates space
  for growth enhancing expenditures
• Better economic outcomes reduce the likelihood of
  crisis
• There is a debate free-riders and
  non-concessional lending

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Conclusion (I) Effective Surveillance is
Fundamental

• Importance of surveillance hard to overstate
• Ensures that countries are aware of flaws and
  vulnerabilities in their policy frameworks, and
  the likely source of shocks
• Also ensures that markets have reliable
  information and analysis on the countries they
  invest in

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Conclusion (II) Debt Management is Key

• Published DSAs provide countries and markets with
  good frameworks for analyzing a countrys risk
  profile
• Can lead countries to take corrective measures
  long before problems occur
• Can also reduce speculative attacks in cases
  where vulnerabilities are low