THE INTERNATONAL POLICY RESPONSE TO THE FINANCIAL
CRISIS: THE ROLE OF THE IMF AND EUROPEAN INSTITUTIONS
Pilar L’Hotellerie-Fallois
DGA de Asuntos Internacionales
Jean Monet Conference
Universidad Carlos III
Madrid, 8 de marzo de 2011
INDEX
1.
The financial crisis and the emergence of BRICs: a new
international economic environment
2.
The international policy response: The role of the G-20.
I.
Policy coordination
II. Reform of the International Financial Architecture
3.
The IMF response to the crisis: governance, lending and
surveillance
4.
The EU response to the crisis: economic governance and crisis
resolution
5.
Scope for IMF/EU coordination
6.
Concluding comments
INTERNATIONAL AFFAIRS
2
THE INTERNATIONAL ENVIRONMENT: WHAT CRISIS?
A multifaceted crisis in a highly interconnected world:

At global level, the international financial crisis. In Aug 2007, financial
turbulence in the US (subprime) quickly spreads to other advanced
economies. It turns into global systemic liquidity shortage and sudden stop of
capital flows in Sept 2008 (Lehman Bros.), affecting also EME

At domestic level, country-specific vulnerabilities led to specific
adjustment processes. Financial sector, housing bubbles

At regional level, European sovereign debt crisis. The fiscal
consequences of the recession and the initial strong policy support spark a
sovereign debt crisis in Europe (in 2010)
This means that common shocks have resulted in different time profiles
and characteristics of the crisis across countries and regions, leading to
different policy responses
INTERNATIONAL AFFAIRS
3
THE INTERNATIONAL ENVIRONMENT: THE
EMERGENCE OF BRIC
The global financial crisis hit especially advanced economies. The persistent and
strong growth differential between emerging countries –BRIC in particular, Brazil,
Russia, India, China- and advanced economies has widened with the crisis.
INVESTMENT
GDP Share
GDP
Annual Growth rate
BRIC
INDUSTRIALIZED ECONOMIES (a)
BRIC (b)
REST EMEs
ADVANCED ECONOMIES
WORLD
12
28
10
27
8
26
6
25
4
24
2
23
0
22
21
-2
20
-4
1980 1984 1988 1992 1996 2000 2004 2008 2012
19
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
INTERNATIONAL AFFAIRS
4
THE INTERNATIONAL ENVIRONMENT: THE
EMERGENCE OF BRIC
This has resulted in a growing weight of EME/ BRIC in the world economy and
a substantial contribution to global growth.
Thereby the need for their greater implication of EME in global governance
SHARE OF WORLD GDP
CONTRIBUTIONS TO GROWTH
Percentage Points
ADVANCED ECONOMIES
OTHER EMERGING
BRIC
100%
90%
80%
OTHER EMERGING
BRIC
WORLD GROWTH
5
12.7
22.1
14.5
20.3
70%
16.4
24.5
29.1
4
20.7
22.7
60%
2.2
23.1
3
50%
40%
30%
ADVANCED ECONOMIES
2
69.4
69.4
63.0
52.9
20%
0.6
1.6
0.6
1.0
47.9
1
1.9
10%
0%
1.1
1.1
1.2
2000 -2010
2011- 2015
0
1980
1990
2000
2010
2015
1980- 1999
INTERNATIONAL AFFAIRS
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THE INTERNATIONAL POLICY RESPONSE: LINES
OF ACTION OF THE G20
The 2008 crisis accelerates the changes in global governance and the G20 takes
the lead along three basic lines

Strengthening global policy coordination
 Short term: conutercyclical policies and exit strategies
 Medium/long term: Framework for stable, balanced and sustainable growth

Enhancing International Financial institutions (legitimacy and effectiveness)
 Changes in governance (quota and representation) to fully reflect changing
economic weigths in the world economy-in line with G-20 membership
 Ensure sufficient resources for IFIs (capital increases; options to mobilize
resources and liquidity); enhancement of their lending instruments

Financial regulation and surveillance to promote financial stability:
 FSB mandate: elaboration of international financial and supervisory
regulatory practices, peer review, standard-setting bodies coordination
 Strengthening of capital and liquidity requirements (BCBS). Stronger
regulation and supervision for SIFIs/ G-SIFIs.
 Identification of macro-prudential risks across the financial system and
development of macro-prudential tools. Strengthening of financial markets
INTERNATIONAL AFFAIRS
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THE INTERNATIONAL POLICY RESPONSE: THE
GLOBAL GOVERNANCE OF G-20
G-20 MEMBERS
Europe
European Union
France
Germany
Italy
Russia
Turkey
United Kingdom
America
Argentina
Brazil
Canada
Mexico
U.S.America
Asia
China
India
Indonesia
Japan
Rep.of Korea
G-20
(replaces G-7)
Informal structure:
Meetings: Summits, M inisters and Governors,
Sherpas, Deputies
Ad hoc Working Groups
Others
Australia
Saudi Arabia
South Africa
Financial regulation and
supervision
Financial Stability
Board, FSB
(BCBS/BIS)
(New IEO pillar)
Economic stability
Growth and
development
[Seoul Consensus]
Commercial policy
International Monetary
Fund
World Bank
World Trade
Organization
(Reform of the three multilateral pillars from Bretton Woods)
INTERNATIONAL AFFAIRS
THE INTERNATIONAL POLICY RESPONSE: STEPS IN
THE POLICY COORDINATION PROCESS
STEPS TAKEN IN THE LEADER’S SUMMITS
Washington and London Summits (Nov 2008/ April 2009)
 Consensus on the need for strongly countercyclical policies
Pittsburg Summit (September 2009)
 Importance of designing exit strategies
 Activation of the Framework for Strong, Balanced and Suatainable Growth
and the Mutual Assessment Process (MAP) to address Global Imbalances
Toronto Summit (June 2010)
 Commitment to fiscal adjustment (halve deficit by 2013 and reduction in
debt/GDP ratios by 2016
Seoul Summit (Nov 2011)
 Seoul Action Plan
 A reinforced MAP (indicative guidelines)
INTERNATIONAL AFFAIRS
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IMF REFORM IN THE AFTERMATH OF THE CRISIS:
GOVERNANCE AND FINANCIAL RESSOURCES
The IMF has been crucial in implementing G20 mandates and providing
analytical support across different areas. To fulfill that role it has:
 Improved its governance, by upgrading representation of emerging and
developing countries through quota increases of underrepresented and low
income countries. The 2010 governance reform:
 100% increase in total liquidity, 6% transfer of quota to emerging and
developing countries; next quota review in 2014
 Increase EME/ LIC representation by 2 seats/ 24 in the Board of Directors;
Europeans reduce their presence by 2
Contributions to extended NAB
 Financial resources:
Unión Europea (167 mil
millones USD)
 Tripling of resources (London 2009
Summit)
 Increase the NAB from 55 bn USD
to 588 bn USD
 100% Increase in quotas 2010
USA (100 mil millones)
Japon (100 mil millones)
BRIC (92 mil millones)
Otros (74 mil millones)
INTERNATIONAL AFFAIRS
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RESPONSE OF THE IMF TO THE CRISIS: LENDING
Lending policy:
IMF lending ($bn)
 Higher access limits, more flexible
conditionality
 Accesibility: from 300% to 600%
of quota for SBAs
 2008-2010: $ 300 bn in new loans
200
180
160
140
 New instruments for the insurance
function (preacutionary):
 FCL (created March 2009; reformed
Aug 2010). Ex-ante conditionality.
The Fund gives its approval to a
country’s economic policies and
makes a credit line available to the
country throughout the duration of
the arrangement.
120
100
80
60
40
20
0
FCL
Loans
 PCL (created Augoust 2010). For countries with sound economic fundamentals and
policies (but less so than FCL).
INTERNATIONAL AFFAIRS
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RESPONSE OF THE IMF TO THE CRISIS: UPGRADED
SURVEILLANCE
 Pressure on the IMF to improve its surveillance and eliminate its shortfalls
(IEO report on IMF surveillance in the run-up to the crisis highlighted several
failures)
 New approach to multilateral surveillance: interconnectedness and crosscountry spillovers
 Strengthening the Financial Sector Assessment Program; mandatory FSAP
for Countries with systemically important financial sectors.
 New reports on international economic and financial issues: financial
linkages, cross-border banks resolution, fiscal monitor. Spillover reports
 IMF becomes a member of the FSB, fostering coorditation between both
institutions, which is all the more relevant given the potential for overlapping
functions between both institutions
INTERNATIONAL AFFAIRS
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THE EU POLICY RESPONSE TO THE FINANCIAL
CRISIS: COORDINATION WITH G20
 The financial systems of some euro area (EA) / EU countries were touched the
turbulences following the subprime crisis in 2007
 European governments reacted with strong countercyclical policies and financial
rescue plans
INTERNATIONAL AFFAIRS
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THE EU POLICY RESPONSE TO THE FINANCIAL
CRISIS: LENDING AND FINANCIAL REFORM
 After the Lehman collapse, CEE countries were affected by the sudden stop of
international capital flows. Some of them required combined external external
programmes EU/ IMF
 BoP facility provides mutual assisstance. The EU and country authorities
negotiate an agreement and its conditionality: usually involving governance
measures, fiscal consolidation and financial stabilisation
 On-going BoP programs: Hungary, Latvia and Romania
 PSI: Viena initiative
Financial reform (Larrosière)
 Macroprudential surveillance: European Systemic Risk Council
 Microprudential surveillance
•
Three European Surveillance Authorities (banking, insurance and financial
markets)
•
Committee of the European Surveillance Authorities
•
Surveillance authorities of Member StateS
INTERNATIONAL AFFAIRS
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THE IMPACT OF THE SOVEREIGN DEBT CRISIS ON
EA COUNTRIES
 The sovereign crisis erupted in 2010 and brought forward very deep problems
related to the governance and surveillance structures of the EMU, and the lack
of lending instruments directed to EA countries
 It was centered in EA countries
 Surveillance mechanisms proved inadequate and failed to effectively
complement single monetary policy
 Additionally, there was no
mechanism for supporting EA
countries with liquidity/ solvency
problems ;
 The response by the EU/ EMU has
been the proposal of a widespread
reform encompassing governance,
fiscal and economic surveillance
and a crisis resolution mechanism
INTERNATIONAL AFFAIRS
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THE EU RESPONSE TO THE CRISIS: NEW
GOVERNANCE AND SURVEILLANCE INITIATIVES
 European Commission legislative proposal for reinforcing the EU economic
governance and surveillance structures, along two dimensions:
 Strengthening the Stability and Growth Pact:
 Reinforcement of both the preventive and corrective parts of the SGP
 The debt criterion will be considered on the same footing with the
deficit criterion, in initiating an Excessive Deficit Procedure.
 Financial sanctions will be imposed gradually, starting at an earlier
(preventive) stage and with more automaticity.
 Minimum requirements for the budgetary framework of the member
states, to promote higher quality of national fiscal policy frameworks
 Preventing and correcting macroeconomic imbalances within the EU
and the euro area, including deteriorating competitive trends:
 An alert mechanism and preventive surveillance based on countryspecific in-depth reviews and discussions with member states
considered “at risk”
 The Excessive Imbalance Procedure, for Member States with
severe imbalances or imbalances that put at risk the functioning of
EMU.
INTERNATIONAL AFFAIRS
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THE EU RESPONSE TO THE CRISIS: OTHER
SURVEILLANCE INITIATIVES
 The European semester - a new EU policy coordination mechanism
 Starting from 2011, each January the European Commission issues an
“Annual Growth Survey” which recommends priorities to Member States in
the areas of economic and budgetary policy.
 Based on these recommendations, the members states will coordinate ex
ante their medium-term budgetary strategies and national reform
programs.
 An EMU Competitiveness Pact
 The idea is to balance the need for bigger rescue package (ESM) with
greater fiscal, macroeocnomic and structural discipline on the part of
EMU member states: a comprehensive package on economic
governance for Europe
 There is a Commission’s new proposal, after the initial German-French
version has met with resistance
 Procedure to involve monitoring byHeads of State; to be approved by
European Council end March 2011
INTERNATIONAL AFFAIRS
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CRISIS RESOLUTION: TEMPORARY FACILITY
(EFSF)
 Need for funds to manage the size of the challenges faced: EFSF and EFSM
Instrument / Institution
EFSF (European Financial Stability Facility)
EFSM (European Financial Stabilisation Mechanism)
IMF
TOTAL
Amount
(€ bn)
440
Amount
($ bn)
570.9
60
77.58
250
324.375
750
973.125
 The European Financial Stability Facility (EFSF) was created by the euro
area member states following the May 9, 2010 Ecofin.
 It is an example of inter-institutional coordination: the European Commission
sets conditionality in liaison with the European Central Bank and International
Monetary Fund and must be approved by the Eurogroup.
 EFSF has been assigned the best possible credit rating: countries guarantee
120% of their share in the facility, to be used to cover amounts drawn for
lending. This has reduced its effective lending capacity under the €440bn
 The European Financial Stabilisation Mechanism (EFSM) raises funds (up to
60 billion euros) backed by EU budget (serves all EU members); has already
placed a €5 billion issue to finance Ireland program
INTERNATIONAL AFFAIRS
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CRISIS RESOLUTION: A PERMANENT ESM
 Permanent crisis mechanism to be set up as of mid 2013: European Stability
Mechanism (ESM)
 Assistance will be conditional on the implementation of a strict economic and
fiscal adjustment programme, in line with existing arrangements
 Private sector involvement will be decided on a case-by-case basis, ‘in line
with IMF usual practices’
 Distinction will be made between liquidity and solvency crises. This will be based
on a debt sustainability analysis (DSA) conducted by the European Commission
and the IMF, in liaison with the ECB.
 Private creditors will be encouraged to maintain their exposure (liquidity). Need
for a reestructuring plan with private creditors, in line with IMF practices, in case
of insolvency
 Collective Action Clauses (CACs) will be included in the terms and conditions of
all new euro area sovereign bonds starting in June 2013
INTERNATIONAL AFFAIRS
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CRISIS RESOLUTION: PENDING ISSUES
 The European Council of March 2011 should come to a final agreement on the
European Stability Mechanism (ESM) and the EFSF
 Further issues under discussion around the ESM:
 Interest rate to be applied
 Effective size of the facility
 Possibility to include precautionary financing
 Possibility to buy bonds
 Changes to the present EFSF will probably follow those agreed for the ESM
 One particular issue concerns the term extension of present loan for GR
 And the easing of terms of the loan for IE
INTERNATIONAL AFFAIRS
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EU/ IMF COOPERATION IN PRACTICE
IM F/EU lending in practice
Country
UE Arrangements
Total
assistance *
of which
(in € bn)
EU
IM F
Ireland
ESFS
85
62.5
22.5
Greece
bilateral loans
110
80
30
7.5
3.1
1.7
20
5
12.95
21.9
-
21.9
Latvia
UE: BoP Facility
Romania
Poland
-
* in some cases, other IFIs/countries contribute to the package
INTERNATIONAL AFFAIRS
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SCOPE FOR IMF/EU COOPERATION
 The case for cooperation:
 Regional and global institutions both have specific know-how
 Pooling resources may be necessary to temper large financing needs
 Given the overlapping roles, lack of cooperation can lead to inefficiencies
and confusion at times of crisis
 The EU leaves that door open: conditionality from IMF explicit in BoP
assistance
 New instruments
 IMF serves as liaison to negotiate MoU of the loan
 It is envisaged that financial support to euro-area Member States shall be
provided by EFSF in conjunction with the IMF
 Further thoughts on IMF/ EU cooperation:
 Cooperation should cover both lending and surveillance, while some
believe regional arrangements could complement PCL and FCL
 Rules and processes for cooperation with the Fund are better established
ex ante, so as to guarantee a solid, predictable framework
INTERNATIONAL AFFAIRS
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CONCLUDING COMMENTS
 The governance of the world economy has experienced radical changes in
the aftermath of the international financial crisis
 Relevant elements are the renewed emphasis on financial stability, specially
linked to interconnectedness and macroprudential aspects
 The return keynesian policies and the turn to less orthodox and more
practical ways to design policies (capital flows) is also important to note
 But the most important aspect is the need of Policy coordination in the face
of increasing global interconnectedness
 The crisis has speeded up changes in the way policy coordination is
achieved at the global level:
 across the world
 and across policies:
 financial stability
 macro policies
 structural policies
 In Europe, and specifically inside the EMU, the need for policy coordination is
much more pressing and the only way forward
INTERNATIONAL AFFAIRS
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THANK YOU FOR YOUR ATTENTION
Pilar L´Hotelerie-Fallois
Associate Director General
DGA INTERNATIONAL AFFAIRS
THE EU RESPONSE TO THE FINANCIAL CRISIS:
IMPROVING REGULATION AND SURVEILLANCE
MACROPRUDENTIAL SURVEILLANCE
• European Systemic Risk Board (ESRB)
Information exchange/Treatment of
systemic risks
MICROPRUDENTIAL SURVEILLANCE
• Three European Surveillance Authorities (ESA) (banks, insurance and
markets (the decision-making body is the ESRB composed of the chiefs of the national
supervisors)
• Mixed Committee of the European Surveillance Authorities (forum formed
by institutional representatives of the new authorities in which the three authorities cooperate
regularly to guarantee intersectoral consistency)
• Surveillance Authorities of Member States
INTERNATIONAL AFFAIRS
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