core sector communique

Reforming International Financial Safety Nets

At the Asian Development Bank 45th Annual Meeting, Manila, Philippines

Opening Remarks by Naoyuki Shinohara

IMF Deputy Managing Director

May 5, 2012

As prepared for delivery

Good afternoon. I am very pleased that we have come together today for the second in the series of annual seminars organized jointly by the Asian Development Bank and the International Monetary Fund. This year, we are also fortunate to be partnering with the Bangko Sentral ng Philipinas—the Central Bank of the Philippines.

Today’s topic—Reforming International Financial Safety Nets—may seem obscure to some of you. But I assure you it is highly relevant for all of us. As we heard during the ADB meetings these past few days, positive economic news continues to come out from Asia and emerging markets in other parts of the world. Indeed, at our own Spring Meetings two weeks ago in Washington, many of the IMF’s 188 member countries confirmed that growth prospects appear considerably brighter than they did only a few months back.

Nonetheless, the global recovery is expected to be tepid and bumpy, with risks remaining high for renewed financial turbulence in Europe or geopolitical uncertainties affecting the oil market. Here in Asia, following the marked slowdown last year, activity has regained momentum on resilient domestic demand. Reflecting the region’s better growth prospects, capital inflows have also rebounded, helping to fuel credit growth.

But in today’s highly interconnected world, Asia remains exposed to external shocks, most notably a further weakening of demand in Europe that would depress Asia’s exports, and capital flow reversals triggered by unpredictable shifts in risk sentiment. It is in the context of these global fragilities—from which no region is immune—that today’s discussion is especially timely.

Let me introduce today’s topic. A financial safety net is any form of monetary support available to a country that cannot meet its external obligations. Such assistance runs the gamut from self-insurance—where a country accumulates its own “rainy-day” fund of international reserves—to bilateral agreements—such as a swap line between two central banks, one with a strong currency and the other whose currency is under selling pressure—to regional lending facilities—including those in Asia, Europe and Latin America—and finally, to multilateral arrangements, with the IMF at the epicenter. These diverse arrangements coexistto form the system of international financial safety nets.

This network of financing arrangements remains a work in progress. Change is often borne of crisis and painful events. And so it is with reform of financial safety nets in order to fill the gaps, and plug the holes, of systems that did not function as intended. This was evident during the Asian financial crisis and, more recently, the global financial crisis. However, the challenge is to find a solution that provides needed support to countries without igniting moral hazard—that is, the tendency for policies to be less cautious in the presence of a reliable safety net, thereby placing lenders’ assets at greater risk. Here, regional financial arrangements have a distinct advantage because of the close economic and other ties that connect borrowers and lenders. The IMF too has sought to contain moral hazard by designing lending facilities specifically targeted to countries with a track record of very strong policies or sound policies[, and with only limited ex post conditionality in the latter case].

As with any type of emergency, prudence suggests preparing for the storm before the clouds gather on the horizon. Then, if a crisis does erupt, one is ready to quickly spring into action. A laudable example of such foresightedness is the recent doubling of swap lines available to ASEAN+3 members under the Chiang Mai Initiative Multilaterilatization to US$240 billion, while also broadening its use to cover crisis prevention. These welcome steps will reinforce the safety net for ASEAN+3 and, through its coordination with the IMF, also strengthen the global safety net.

Another welcome example of preemptive action—in this case, at the global level—is the agreement by the G-20 and the broader membership of the IMF two weeks ago to boost the Fund’s lending capacity by US$430 billion. These additional resources will reinforce the IMF’s firewall and help contain any further crises.

Today’s discussion provides an opportunity to take stock of the current international system of safety nets, and to assess the effectiveness of recent innovations. An especially notable development is the tendency for greater coordination and co-financing among the various tiers of the global safety net.

What benefits does this approach bring, and how can potential synergies be used to their best advantage? And, finally, how does safety net reform fit with broader initiatives at the level of the IMF, G20 and others to help secure financial stability across the global economy?

I look forward this afternoon to a lively exchange of views among the panelists; and I would also encourage you—the audience—to actively participate with your own questions and comments.

Thank you for your attention.