Crisis Prevention:
The International Agenda
Jonathan T. Fried
Executive Director
Canada, Ireland and the Caribbean
International Monetary Fund
Outline
1. The Diagnosis: Underlying Causes of Crisis
2. The International Response
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Surveillance
Asset and liability management
Bond market development
IMF facilities
Debt Relief
3. Conclusion
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
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
Surveillance, continued
Experience shows surveillance could be improved by:
• Working to increase its candor and effectiveness
• Increasing the focus on financial sector
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More focus on macro-financial linkages
Greater focus on FSAPs and integrating financial sector
analyses
• Taking a more holistic look at exchange rates
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Developing new models
Looking at them in from a multilateral perspective
• Increasing disclosure of findings
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
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
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
Developing Local Financial Markets,
continued
Area of major focus at present, requiring efforts
along many dimensions:
• Rule of law
• Stable macroeconomic environment
• Technical expertise:
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Sound regulatory framework
Clearing and settlement systems
Sectoral regulations
• Broadening investor base (e.g. facilitating investments by
pension funds)
• Transparency and international investor relations
The International Response (IV):
The IMF’s 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
The IMF’s 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
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
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
Conclusion (II):
Debt Management is Key
Published DSAs provide countries and markets
with good frameworks for analyzing a country’s
risk profile:
• Can lead countries to take corrective measures long
before problems occur
• Can also reduce speculative attacks in cases where
vulnerabilities are low