..



.

Business News

The world’s economic crisis-fighting mechanisms are dangerously inadequate

  • Written by Adam Triggs, Research fellow, Australian National University

It was only in January that the International Monetary Fund (IMF) was celebrating the strength of the global economy, heralding[1] “the broadest synchronised global growth upsurge since 2010”.

How quickly things have changed.

Argentina has since sought a bailout[2] from the IMF, Turkey is facing a potential currency crisis, Indonesia is seeing investors flee, alarm bells are sounding for Italy and Spain, China’s debt remains a serious concern, and the only thing more uncertain than the fallout from Brexit is the outcome of Donald Trump’s trade war.

It’s time to review the world’s capacity to respond to crises.

Read more: Vital Signs: Italy is broke, and the markets have lost all faith in its elected politicians[3]

The “global financial safety net” refers to the mishmash of global, regional and bilateral institutions and mechanisms designed to help countries facing economic and financial crises and to prevent these problems from spreading.

The most well-known institution is the IMF, which has around US$1 trillion in crisis-fighting resources. The World Bank, with around US$263 billion, has provided assistance in previous crises.

There is also a range of regional mechanisms, such as Asia’s Chiang Mai Initiative Multilateralisation[4] agreement (with US$240 billion) and the European Stability Mechanism[5] (with US$600 billion). Bilateral currency swap arrangements, under which one country’s central bank can exchange its currency for that of another, are also an important part of the safety net.

Make no mistake, the safety net is big. In total it has about US$4.6 trillion in crisis-fighting firepower, seven times what it was in 1980. But this large number can be misleading and, as I argue in a recent working paper at Brookings[6], is both inadequate and causing a dangerous sense of complacency.

First, not all of this money is immediately available. Some of it is tied up in existing programs (such as in Greece) and central bank governors interviewed for my research (including former US Federal Reserve chairs Janet Yellen and Ben Bernanke, and current Reserve Bank of Australia governor Philip Lowe) warned that many currency swap lines would not be made available during a crisis. This shrinks the safety net to US$2.5 trillion.

Second, not all resources are available to all countries. The European Stability Mechanism won’t help you if you live in Latin America. And if your country wasn’t offered a swap line with a major central bank, well, that’s tough luck.

The size of the safety net depends entirely on the country. It is twice as large for some G20 countries as for others, or four times as large if you include foreign exchange reserves (which are more accurately described as domestic resources rather than part of the global safety net).

This fragmentation has made the safety net patchier, slower and less consistent, making crises costlier. Many countries have fallen between the cracks, particularly emerging economies such as Turkey and Argentina, which don’t have strong institutions or resilient capital markets like the ones operating in the United States, Canada or Australia.

Read more: The G20’s economic leadership deficit[7]

Recent research[8] has sought to assess the safety net’s adequacy by exploring what crises might occur in the future. But instead of trying to predict these things, I pose a simple question: can the safety net provide at least the same level of support today that has been required of it in the past?

To find out, I war-gamed three regional crises – the Asian financial crisis, the European debt crisis and the Latin American debt crisis – and six country-specific crises in Argentina, Turkey, Ecuador, Russia, Mexico and Chile. While financial systems are more resilient today than they were back then, my analysis produced some alarming results.

While the safety net works well for country-specific crises, it struggles to cope with widespread shocks. Providing the same level of support today that was provided during the Asian financial crisis would exhaust all currency swap lines, all regional mechanisms, all regional development banks and the entire World Bank, and would require exceptional access to the IMF’s resources. If the European debt crisis occurred today, the entire global financial safety net would be exhausted.

Second, most crises now require access to multiple components of the safety net. The IMF is no longer capable of providing assistance alone. Countries increasingly rely on regional mechanisms which, in Asia, have never been tested and, in Latin America, are small.

Third, despite the growth in non-global resources, countries often still have to go to the IMF. This means there must be seamless co-ordination of multiple institutions during a crisis, something the IMF warns (and recent history shows) is a “very strong assumption”.

Finally, most of these results hold even when foreign exchange reserves are included. There are also many alarming developments on the horizon. Foreign exchange reserves are declining, particularly in China, and the IMF’s resources will halve by 2022[9] unless the US Congress approves extra funding and countries like China agree to reloan the IMF money, despite getting no additional voting power. The 63 policymakers I interviewed suggest that neither is likely.

Read more: Vital Signs: how likely is another financial crisis? It comes down to what we believe[10]

In the short term, countries must to bolster the IMF’s temporary resources and strengthen co-operation between safety-net institutions. Central banks must clarify whether swap lines are available in a crisis and, where possible, extend them to cover more economies.

In the long term, the IMF’s centrality in the safety net must be reaffirmed. It needs larger, permanent funding and more flexible lending arrangements.

The lead-up to the 2008 crisis was characterised by a dangerous sense of complacency. That complacency should not be allowed to take hold again.

Authors: Adam Triggs, Research fellow, Australian National University

Read more http://theconversation.com/the-worlds-economic-crisis-fighting-mechanisms-are-dangerously-inadequate-97608

Business Daily Media Business Development

Bahrain Property Show 2018: How does it reflect the real estate market development in Bahrain

It is no secret that the Arabian Peninsula and the Gulf Cooperation Council (GCC) countries are currently going through a lot of pivotal changes. Such changes do not include economic or po...

News Company - avatar News Company

Di Jones real estate recognises high achievers

Di Jones celebrated its outstanding performers on Saturday (24 February 2018) evening at the Di Jones Real Estate Annual Awards.                               The black-tie Gala Dinner s...

Helen Hull - avatar Helen Hull

Five Reasons Melbourne Rules

If you are traveling in Australia and have left Melbourne off your destination list, then you are going to want to reconsider. Many people consider Melbourne to the best city in the world...

News Feature Team - avatar News Feature Team

Making Friends During Your Campsite Stay

Part of the excitement of vacation is meeting people who you would never otherwise encounter. Staying at a campsite isn’t just about taking in nature. It’s also about sharing the beauty of n...

News Feature Team - avatar News Feature Team

Have More Fun On Your Business Trips

Whether you are a traveling salesman or someone who finds themselves on the road more than in their office you probably are grateful for any tips you can get especially if they involve havin...

News Feature Team - avatar News Feature Team

Traditions of Rural Bali at Villa Sabana

A Privileged Insight into the Traditions of Rural Bali at Villa Sabana  Situated in the traditional village of Pererenan near Canggu, Villa Sabana is peacefully secluded in a semi-rural...

Linda Lim - avatar Linda Lim

Business Daily Media Business Reports

Di Jones real estate recognises high achievers

Di Jones celebrated its outstanding performers on Saturday (24 February 2018) evening at the Di Jones Real Estate Annual Awards.                               The bla...

Helen Hull - avatar Helen Hull

Eclipse Travel Expands Operations to New Zealand

Eclipse Travel, specialists in key adventure destinations such as Antarctica, the Arctic, Africa and Latin America, have announced today their expansion of operations to ...

Yvonne Kong - avatar Yvonne Kong

How medical professionals can benefit from an overall wealth management solution

As a health care professional, you have made it your life's work to focus on the care and health of the general public. While this kind of work can be extremely rewarding...

News Feature Team - avatar News Feature Team

Why Pinterest Should Be Part of Your Marketing Strategy

Pinterest is a growing social media platform that can deliver significant traffic to your website and new followers to your brand. With it’s steady growth and outrageous ...

Greg Nunan - avatar Greg Nunan

The top reasons why gyms fail

Steve Grant is a Business Coach and Founder of GymHub.com.au   Every month thousands of new trainers walk out of their 6-month course with the qualifications needed ...

Steve Grant - avatar Steve Grant

WHITE LABEL NOBA’s Winter 2016 season: Earth + Country

Taking cues from the warm winter colours of tobacco and caramel, and combining them with the strength of navy and the embracing lightness of whites and creams; and then...

Kath Rose - avatar Kath Rose

Former Etihad boss brings substantial event insight to PMY Group Board

Paul Sergeant PMY Group, the architects of the digital insurgency occurring at major venues across Australia and New Zealand, are delighted to welcome 35 year even...

Annie Konieczny - avatar Annie Konieczny

More training for coffee making than property sales: REINSW

Sydney 9 May 2016. An overhaul of education and training standards for the real estate profession must take place to help prevent illegal activities, according to the Rea...

Helen Hull - avatar Helen Hull