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The Role of the IMF in the Global Financial Crisis The Role of the IMF in the Global Financial Crisis Miranda Xafa Hellenic Bank Association June 2009 1 I.I. EconomicEconomic andand financialfinancial developmentsdevelopments GlobalGlobal economyeconomy facesfaces itsits mostmost severesevere recessionrecession 2 sincesince WWIIWWII Real GDP Growth (Annual percent change) 10 Emerging and Developing economies 8 World 6 4 2 Advanced economies 0 -2 -4 1970 80 90 2000 10 3 Global outlook deteriorated sharply since October 08; modest turnaround expected with policy stimulus WEO Real GDP Growth Projections (In percent change from a year earlier) U.S. Euro Japan China India World 2009 (Apr. 09) -2.8 -4.2 -6.2 6.5 4.5 -1.3 2009 (Oct. 08) -0.7 -0.5 -0.2 8.5 6.3 2.2 Change -2.1 -1.5 -6.0 -2.0 -1.8 -3.5 2010 (Apr. 09) 0.0 -0.4 0.5 7.5 5.6 1.9 2010 (Oct. 08) 1.5 0.9 1.1 9.5 6.8 3.8 Change -1.5 -1.5 -0.6 -2.0 -1.2 -1.9 Source: IMF, World Economic Outlook, April 2009 Update. 4 Heightened uncertainty a defining feature of the crisis VIX and Standard Deviation of Forecasts (in percent) 1.2 70 VIX Index 60 1.0 (RHS) 50 0.8 U.S. Consensus Forecasts (STDEV; following 40 year; LHS) 0.6 30 0.4 20 0.2 10 Gulf Asian Crisis LTCM 9/11 War I Apr. 09 0.0 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 TentativeTentative signssigns ofof stabilizationstabilization emergedemerged 5 inin AprilApril--MayMay 2009...2009... Retail Sales Manufacturing PMIs (Annualized percent change of 3mma over (Values greater than 50 indicate expansion) previous 3mma) 20 65 Emerging economies 60 15 55 10 50 5 45 0 Advanced economies World 40 -5 Euro area 35 Unit e d St a t e s -10 Emerging economies 30 -15 2000 02 04 06 May 2000 02 04 06 Apr. 09 09 ...as equity markets and 6 consumer confidence recovered Equities Consumer Confidence (1/1/2007=100; FTSE) (Jan. 2005=100) 120 180 Lehman 110 Brothers 160 140 100 120 90 100 80 U.S. 80 70 Japan 60 U.S. Euro area 60 Japan 40 U.K. Euro area 50 20 U.K. 40 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 7 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 8 Causes of output collapse – emerging markets Declining external demand and exports External financing constraints Lower commodity prices 9 Recovery prospects and risks Recovery prospects based on: Slow improvement of financial system Housing price stabilization Fiscal stimulus Risks: Real and financial feedback loop Deflation risks Fiscal concerns/debt dynamics Negative feedback from emerging economies U.S. housing – Signs of stabilization 10 Real House Prices Housing Inventories (index, 1995 = 100) (new homes) 600 14 250 FHFA Thousands Case-Schiller of units 12 (LHS) 500 NAR (median prices) 200 FHFA trend 10 CS trend 400 8 NA R t r e n d 150 6 300 4 100 200 Months of supply 2 (RHS, SA) 100 0 50 70 75 80 85 90 95 00 05 70 75 80 85 90 95 00 05 Systemic risks remain elevated despite government interventions CDS Spreads for High-Grade Financials (basis points) Banks begin issuing govt. 250 guaranteed debt 600 Bear Stearns Lehman Bros. 200 collapse Bankruptcy 500 Europe 400 150 US (rhs) 300 100 200 50 100 Bleak Economic Releases Globally 0 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Source: Bloomberg 2 Rising concerns over fiscal sustainability... 6.5 6.0 5.5 5.0 GREECE 10 Year Government Bond Yield 4.5 4.0 GERMANY 3.5 3.0 ITALY 2.5 PORTUGAL Jan-07 Feb-07 Mar-07 Apr-07 SPAIN May-07 Jun-07 Jul-07 IRELAND Aug-07 Sep-07 12 Oct-07 FRANCE Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 350 ...are reflected in wider spreads 300 250 Spreads From the 10-Year German Bond Yield GREECE 200 ITALY over Bunds 150 PORTUGAL 100 50 SPAIN 0 IRELAND Jan-07 Feb-07 Mar-07 Apr-07 FRANCE May-07 Jun-07 Jul-07 Aug-07 Sep-07 13 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 CorporateCorporate bondbond spreadsspreads alsoalso remainremain wide;wide; 14 CreditCredit isis sharplysharply curtailedcurtailed asas banksbanks deleverdelever Advanced Economies: US and EU: Corporate Bond Spreads Credit Growth in Private Sectors (basis points) (q/q changes; in billions of local currency) 2400 200 2500 High Yield 2000 160 2000 High Grade 1600 120 1500 1200 80 1000 800 40 500 400 0 0 0 United States (RHS) Euro area (LHS) -400 -40 -500 2002 04 06 Apr. 2002 04 06 08: 2009 Q4 TheThe globalglobal bankingbanking systemsystem 15 remainsremains underunder stressstress Interbank Markets Bank CDS Spreads (3-month LIBOR minus T-bill rate; in percent) (High-grade; in basis points) 5 600 United United States 500 4 States Euro area 400 3 300 Euro 2 area 200 Japan 1 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 0 2007 08 May 2006 2007 2008 2009 09 Cross-border bank flows have dropped sharply BIS Cross-Border Bank Liabilities (Exch. Rate adjusted changes, in billions of U.S. dollars) 1400 1000 600 200 -200 -600 Related offices Interbank -1000 Nonbanks Monetary authorities -1400 Total -1800 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Source: BIS Deterioration in emerging markets may, in turn, be 17 transmitted back to mature markets’ banks Banking Systems Exposures to Emerging Markets ( as % of Mature Market’s GDP ) US UK Asia EMEA Switzerland Latin America Sweden Spain Netherlands Italy Germany France Greece Austria 0 102030405060708090100 Source: BIS 18 II.II. PolicyPolicy InitiativesInitiatives 19 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) FiscalFiscal stimulusstimulus andand automaticautomatic stabilizersstabilizers areare 20 expectedexpected toto boostboost activityactivity General Government Fiscal Balances (Percent of GDP) 2 Emerging and Developing economies 0 -2 Advanced economies -4 -6 -8 -10 2000 02 04 06 08 10 MonetaryMonetary andand creditcredit policiespolicies havehave beenbeen 21 easedeased massivelymassively Policy Rates Central Banks Total Assets (Percent) (Index; 1/5/2007 = 100) 14 400 Euro area United Kingdom 12 350 United States Japan 10 300 Emerging markets 8 250 6 200 United States 4 150 100 2 Euro area Japan 50 0 2007 08 Apr. 01 02 03 04 05 06 07 08 09 09 22 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 comprehensive and internationally coordinated Credit deterioration is feeding back to higher expected writedowns 23 across all sectors Estimates of Potential Writedowns, 2007-2010 (billions of US dollars) Origin of Estimated Writedowns Debt Outstanding October 2008 GFSR April 2009 GFSR Banks United States Loans 13,507 425 1,068 601 Securities 13,047 980 1,644 1,002 Loans and Securities 26,554 1,405 2,712 1,604 Europe Loans 20,759 … 888 551 Securities 3,048 … 305 186 Loans and Securities 23,807 … 1,193 737 Japan 7,358 … 149 129 Emerging markets … … … 340 Total all Loans and Securities 57,719 … 4,054 2,810 4 24 Global Policy Initiatives G-20 Leaders’ Summit in Washington on Nov 15, 2008 agreed on 5 objectives: Common understanding of the root causes of the global crisis Review of countries' actions addressing the crisis Agreement on common principles for reforming financial markets Action plan to implement those principles and to develop further recommendations for later review Reaffirmation of commitment to free market principles Working groups set up to make specific proposals at next G-20 Leaders’ Summit in London on April 2, 2009 25 GlobalGlobal PolicyPolicy initiativesinitiatives G-20 Leaders’ Summit in London on April 2 agreed to: Restore confidence, growth and jobs Repair the financial system to restore lending Strengthen financial regulation to rebuild trust Fund and reform IFIs to overcome this crisis and prevent future ones Promote global trade and investment, reject protectionism Build an inclusive, green, and sustainable recovery 26 GG--20:20: RestoringRestoring growthgrowth andand jobsjobs Unprecedented fiscal expansion of $5 trillion by end- 2010 Comprehensive support to banking systems through liquidity, capital, dealing with impaired assets to restore normal flow of credit IMF to “assess regularly the actions taken and the global action required” 27 GG--20:20: StrengtheningStrengthening financialfinancial supervisionsupervision andand regulationregulation Recognition that major failures in financial regulation and supervision were key causes of crisis; implement Action Plan to address shortcomings Establish new Financial Stability Board (FSB); FSB to collaborate with IMF to provide “early warning system” of macro-financial risks Extend perimeter of regulation to all systemically important financial institutions Prevent excessive leverage; improve valuation standards; end bank secrecy IMF, FSB to monitor progress, report to G-20 Ministers in November 28 GG--20:20: StrengtheningStrengthening IFIsIFIs Significantly increase IMF resources to $750 bl Support a $250 bl SDR allocation to increase global liquidity Support $100 bl of new lending by MDBs Welcome IMF’s new Flexible Credit Line (FCL) which provides large, upfront access to financing without conditionality to countries with solid policy frameworks; Mexico was “first mover” in requesting an FCL Commit to complete IMF quota and voice reform by January 2011 29 WhyWhy expandexpand IMFIMF Resources?Resources? Without adequate IMF support, countries may be forced to contract or let their currencies weaken sharply, triggering corporate and financial insolvencies.
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