Recent Global Financial Crisis had a devastating affect on the entire Global Business. This Global Crisis crashes the key businesses, turn down the consumer wealth in the billions of Dollars, and a significant decline in economic movement. Experts have been pointed on so many reasons and they have been proposed so many causes. There are so many factors that directly and indirectly caused the ongoing financial crisis of 2007-2009. This started with the US subprime mortgage crisis. The housing industries of the entire world have collapsed.This happened because of the values of securities tied to housing prices to plummet in United States in 2005-2006. The complication and interdependence of many of the causes, as well as conflicting political, economic and organizational comforts, have resulted in a diversity of narratives recitation the crisis. All financial institutions have damaged. The credit availability in bank solvency declines investor assurance had a crash on world stock markets. And that is why the Global stock market has suffered large losses during 2007.
Economies have gone down throughout the world in late 2008 and early 2009. As a result international trade declines like anything. "The major financial crisis in East Asia soon followed. The currency crisis in Thailand was rapidly transmitted to Indonesia, Malaysia, the Philippines, and Korea, and its impact ramified throughout the global economy. Since then, the emerging markets have experienced a steady series of aftershocks: in 1998 and 1999 capital flow reversals induced currency devaluations in Russia (August 1998) and Brazil (January 1999), and most recently recession, devaluation, and default in Argentina (2002), as well as recessions and payments problems in Uruguay and Ecuador (2002). Though the region has since recovered, East Asia's crisis remains the most severe in its depth and regional breadth." (M. Kawai; R. Newfarmer and S. L. Schmukler, 2009). Governments and Central banks responded with extraordinary economic motivation, financial strategies development, and institutional bailouts. But Risk still remains for the Global Economy.
International Monetary Fund is an Organization that exceptionally placed to help its Members to take benefits of the prospects and helps to manage the challenges. IMF has global membership of 186 countries. The IMF supports its membership by providing:
But at the Global Crisis, IMF failed to anticipate the recent financial crisis in most of the cases. And they couldn't provide the proper support to the Member Countries.
This entire study will tell about the causes of the Financial Crisis. Ways to can solve this Global crisis. The brief overview of the International Monetary Fund and their key activities.A How IMF's response to the Global Crisis and how they have been criticise. Advantage and Disadvantages of the International Monetary fund. And at the later on we will try to find some solution and the recommendation to solve the Global Financial crisis.
"In recent years, standard academic literature has treated the twin crisis in a consistent way, regarding banking crises and currency crises as inherently separate but equally powerful occurrences. Although the forms and degrees of interaction between the two types of crisis vary among authors, they are always considered to be two very distinct and similarly determinant components of the twin crisis." (W. C. Marshall, 2009)
"The major flaw of such schemes, which this paper seeks to rectify, is the misplaced separation of the dual nature of the financial crisis between the banking and currency crises. Even though a currency crisis does not necessarily involve a banking crisis, as was the case of the Brazilian real's devaluation in 1998, banking crises in Latin America have invariably become currency crises. As such, when analyzing the twin crisis; the banking crisis must be the focal point of analysis. It is only at this junction, upon analyzing the banking crisis, that a bifurcation is needed. However, in all of cited articles, authors treat the banking crisis as a singular phenomenon that results from one core set of conditions." (W. C. Marshall, 2009)
Beside those crisis there are so many causes of crisis that experts has been raised and those have a significant effect on the Global Financial crisis. In some cases following causes has generously proportioned grounds for the Global Financial Crisis.
Between 1997 and 2006, the house prices of United States had increased by 124%. This housing bubble resulted in so many refinancing homes at very low interest rates and encourages consumers to take second mortgages. But no one realized that in the long run it might create a huge problem. As a result in September 2008, near about 20% United States housing prices had declined. As a result of the prices decline, the borrowers could not refinance and with the higher interest rate they started to be defaulter. In 2007, lenders start foreclosure actions on nearly 1.3 million properties, 79% was increased over 2006. This increased to 2.3 million in 2008, an 81% increase versus 2007. By August 2008, 9.2% of all U.S. mortgages exceptional were either aberrant or in foreclosure. By September 2009, this had risen to 14.4%.
Easy credit condition and lower interest rates persuade to have a loan. The Federal Reserve was lesser then federal funds from 2000 - 2003 and the rate target was from 6.5% to 1.0%. This was made to reduce the effects of the fall down of the dot-com bubble and of the September 2001 terrorist attacks. The Federal funds were raised again and the rates has changes drastically in between 200- 2006. This may have also some affect on the housing bubble, as asset prices normally shift the wrong way round and financial assets value declined radically.
Sub-prime means the credit history of the particular borrowers. People who have weaken credit history and a higher risk of loan default called and the Sub-prime. Though there was a high risks involved but still those financial organizations were giving loan to the Sub-primes. Basically this is called Sub-prime leading. In United states till 2004 Subprime mortgages was less than 10% of all mortgage originations. But in 2005-2006 it has gone up to 20%. Lot of experts pointed out that this is not the main reason to cause a crisis. In an article in Portfolio Magazine, Michael Lewis spoke with one trader who noted that "There weren't enough Americans with [bad] credit taking out [bad loans] to satisfy investors' appetite for the end product." Essentially, investment banks and hedge funds used financial innovation to synthesize more loans using derivatives. "They were creating [loans] out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans."
Predatory lending indicated the practice of corrupt lenders, to go through the "insecure" or "unstable" tenable loans for unsuitable purposes. These type of loans were written into lengthily comprehensive agreements, and exchange for additional high-priced loan goods on the day of concluding. There was increasing substantiation that such mortgage frauds would be reason for the crisis.
Global financial flows has been considered in current years by an untenable outline: some countries (China, Japan, and Germany) got huge surpluses every year, while others (like the U.S and U.K.) was in shortfall. The U.S. external shortage has been reflected by internal shortfall in the domestic and government areas. U.S. scrounge cannot go on forever; the resulting pressure trigger the current financial crisis.
The pricing of risk refers to the incremental compensation required by investors for taking on additional risk, which may be measured by interest rates or fees. For a variety of reasons, market participants did not accurately measure the risk inherent with financial innovation such as MBS and CDO's or understand its impact on the overall stability of the financial system.[8] For example, the pricing model for CDOs clearly did not reflect the level of risk they introduced into the system. The average recovery rate for "high quality" CDOs has been approximately 32 cents on the dollar, while the recovery rate for mezzanine CDO's has been approximately five cents for every dollar. These massive, practically unthinkable, losses have dramatically impacted the balance sheets of banks across the globe, leaving them with very little capital to continue operations.[81]
Another example relates to AIG, which insured obligations of various financial institutions through the usage of credit default swaps. The basic CDS transaction involved AIG receiving a premium in exchange for a promise to pay money to party A in the event party B defaulted. However, AIG did not have the financial strength to support its many CDS commitments as the crisis progressed and was taken over by the government in September 2008. U.S. taxpayers provided over $180 billion in government support to AIG during 2008 and early 2009, through which the money flowed to various counterparties to CDS transactions, including many large global financial institutions.[82][83]
The limitations of a widely-used financial model also were not properly understood.[84][85] This formula assumed that the price of CDS was correlated with and could predict the correct price of mortgage backed securities. Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies.[85] According to one wired.com article:[85] "Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008-when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril... Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees."
As financial assets became more and more complex, and harder and harder to value, investors were reassured by the fact that both the international bond rating agencies and bank regulators, who came to rely on them, accepted as valid some complex mathematical models which theoretically showed the risks were much smaller than they actually proved to be in practice.[86] George Soros commented that "The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility." [87]
In a June 2008 speech, President and CEO of the NY Federal Reserve Bank Timothy Geithner, who in 2009 became Secretary of the United States Treasury, placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls. Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities: "In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion." He stated that the "combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles."[15]
Paul Krugman, laureate of the Nobel Prize in Economics, described the run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible-and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect."[62]
A commodity price bubble was created following the collapse in the housing bubble. The price of oil nearly tripled from $50 to $140 from early 2007 to 2008, before plunging as the financial crisis began to take hold in late 2008.[88] Experts debate the causes, which include the flow of money from housing and other investments into commodities to speculation and monetary policy [89] or the increasing feeling of raw materials scarcity in a fast growing world economy and thus positions taken on those markets, such as Chinese increasing presence in Africa. An increase in oil prices tends to divert a larger share of consumer spending into gasoline, which creates downward pressure on economic growth in oil importing countries, as wealth flows to oil-producing states.[90]
Another analysis, different from the mainstream explanation, is that the financial crisis is merely a symptom of another, deeper crisis, which is a systemic crisis of capitalism itself. According to Samir Amin, an Egyptian economist, the constant decrease in GDP growth rates in Western countries since the early 1970s created a growing surplus of capital which did not have sufficient profitable investment outlets in the real economy. The alternative was to place this surplus into the financial market, which became more profitable than productive capital investment, especially with subsequent deregulation.[91] According to Samir Amin, this phenomenon has led to recurrent financial bubbles (such as the internet bubble) and is the deep cause of the financial crisis of 2007-2009.[92]
John Bellamy Foster, a political economy analyst and editor of the Monthly Review, believes that the decrease in GDP growth rates since the early 1970s is due to increasing market saturation.[93]
John C. Bogle wrote during 2005 that a series of unresolved challenges face capitalism that have contributed to past financial crises and have not been sufficiently addressed: "Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long...They failed to 'keep an eye on these geniuses' to whom they had entrusted the responsibility of the management of America's great corporations." He cites particular issues, including:[94][95]
Dirk Bezemer in his research [96] credits 12 economists with predicting (with supporting argument and estimates of timing) the crisis: Dean Baker (US), Wynne Godley (US), Fred Harrison (UK), Michael Hudson (US), Eric Janszen (US), Stephen Keen (Australia), Jakob Brøchner Madsen & Jens Kjaer Sørensen (Denmark), Kurt Richebächer (US), Nouriel Roubini(US), Peter Schiff (US), Robert Shiller(US).
A cover story in BusinessWeek Magazine claims that economists mostly failed to predict the worst international economic crisis since the Great Depression of 1930s.[97] The Wharton School of the University of Pennsylvania online business journal examines why economists failed to predict a major global financial crisis.[98] An article in the New York Times informs that economist Nouriel Roubini warned of such crisis as early as September 2006, and the article goes on to state that the profession of economics is bad at predicting recessions.[99]According to The Guardian, Roubini was ridiculed for predicting a collapse of the housing market and worldwide recession, while The New York Times labelled him "Dr. Doom".[100] However, there are examples of other experts who gave indications of a financial crisis.[101][102][103], with experts placing different weights upon particular causes. One category of causes created a vulnerable or fragile financial system, including complex financial securities, a dependence on short-term funding markets, and international trade imbalances. Other causes increased the stress on this fragile system, such as high corporate and consumer debt levels. Still others represent shocks to that system, such as the ongoing foreclosure crisis and the failures of key financial institutions. Regulatory and market-based controls did not effectively protect this system or measure the buildup of risk. Some causes relate to particular markets, such as the stock market or housing market, while others relate to the global economy more broadly.[1] In July 2009, the U.S. announced the members of the Financial Crisis Inquiry Commission to investigate the causes of the crisis. Its report is expected at the end of 2010.[c
Regulatory responses to the subprime crisis addresses various actions taken by governments around the world to address the effects of the subprime mortgage crisis.
Regulators and legislators are considering action regarding lending practices, bankruptcy protection, tax policies, affordable housing, credit counseling, education, and the licensing and qualifications of lenders.[1] Regulations or guidelines can also influence the nature, transparency and regulatory reporting required for the complex legal entities and securities involved in these transactions. Congress also is conducting hearings to help identify solutions and apply pressure to the various parties involved.[2]
U.S. President Barack Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others.[3][4][5]
U.S. Treasury Secretary Timothy Geithner testified before Congress on October 29, 2009. His testimony included five elements he stated as critical to effective reform: 1) Expand the FDIC bank resolution mechanism to include non-bank financial institutions; 2) Ensure that a firm is allowed to fail in an orderly way and not be "rescued"; 3) Ensure taxpayers are not on the hook for any losses, by applying losses first to the firm's investors and including the creation of a pool funded by the largest financial institutions; 4) Apply appropriate checks and balances to the FDIC and Federal Reserve in this resolution process; 5) Require stronger capital and liquidity positions for financial firms and related regulatory authority.
Solutions may be organized in these categories:
Various actions have been taken since the crisis became apparent in August 2007. Critics have argued that governments treated this crisis as one of financial liquidity rather than solvency, delaying the appropriate remedies.[1][2] Others have argued that this crisis represents a reset of economic activity, rather than a recession or cyclical downturn.
In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis. To date, various government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. For a summary of U.S. government financial commitments and investments related to the crisis, see CNN - Bailout Scorecard.
President Barack Obama and key advisors introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others.
U.S. Treasury Secretary Timothy Geithner testified before Congress on October 29, 2009. His testimony included five elements he stated as critical to effective reform: 1) Expand the FDIC bank resolution mechanism to include non-bank financial institutions; 2) Ensure that a firm is allowed to fail in an orderly way and not be "rescued"; 3) Ensure taxpayers are not on the hook for any losses, by applying losses to the firm's investors and creating a monetary pool funded by the largest financial institutions; 4) Apply appropriate checks and balances to the FDIC and Federal Reserve in this resolution process; 5) Require stronger capital and liquidity positions for financial firms and related regulatory authority.
International Monetary Fund was established near about 60 years back. The founders were intended to build a structure for economic collaboration. After that world has changed radically and enlivening billions out of poverty, particularly in Asia. The IMF's main reason to provide the global public good of financial steadiness. Basic reason behind the IMF to -
The IMF's way of operating has changed over the years and has undergone rapid change since the beginning of the 1990s as it has sought to adapt to the changing needs of its expanding membership in an globalized world economy. Most recently, the IMF's Managing Director, Dominique Strauss-Kahn, has launched an ambitious reform agenda, aimed at making sure the IMF continues to deliver the economic analysis and multilateral consultation that is at the core of its mission-ensuring the stability of the global monetary system.
With its near-global membership of 186 countries, the IMF is uniquely placed to help member governments take advantage of the opportunities-and manage the challenges-posed by globalization and economic development more generally. The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties.
The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.
Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries' policy choices in many areas, including labor, trade, and tax policies. Helping a country benefit from globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how interconnected countries have become in today's world economy.
The IMF's main goal is to ensure the stability of the international monetary and financial system. It helps resolve crises, and works with its member countries to promote growth and alleviate poverty. It has three main tools at its disposal to carry out its mandate: surveillance, technical assistance and training, and lending. These functions are underpinned by the IMF's research and statistics.
The IMF supports its membership by providing
The IMF was founded more than 60 years ago toward the end of World War II (see History). The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed.
Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF's main purpose-to provide the global public good of financial stability-is the same today as it was when the organization was established. More specifically, the IMF continues to
The IMF's way of operating has changed over the years and has undergone rapid change since the beginning of the 1990s as it has sought to adapt to the changing needs of its expanding membership in an globalized world economy. Most recently, the IMF's Managing Director, Dominique Strauss-Kahn, has launched an ambitious reform agenda, aimed at making sure the IMF continues to deliver the economic analysis and multilateral consultation that is at the core of its mission-ensuring the stability of the global monetary system.
Video (11:17) Dan Rather interviews IMF Managing Director, Dominique Strauss-Kahn
With cross-border financial flows increasing sharply in recent decades, the interdependence of countries has deepened (see slideshow on capital inflows). The turbulence in advanced economy credit markets in 2007-08 has demonstrated that domestic and international financial stability cannot be taken for granted, even in the world's wealthiest countries. The spike in food and fuel prices, which has hit import-dependent poor and middle-income countries particularly hard, is another aspect of the globalized economy we all are part of.
In response, the IMF has rethought its operations in several ways:
Criticism of the IMF
The IMF plays an important role in trying to alleviate and stabilise financial crisis. However, its role has come under intense scrutiny and it has been criticised for variety of reasons and from a range of different sources. These are some of the main criticisms of the IMF:
I have to say there are many more criticisms of the IMF than this. The IMF have been criticised for just about everything from supporting right wing dictatorships, facilitating corruption (e.g. Kenya in the 1980s) to encouraging the destruction of the environment and the culture of indigenous people.
IMF - Saint or Sinner?
The reality is something in between. At times they have appeared rather inflexible insisting on fiscal responsibility and privatisation at a time which might not be helpful for the economy. The criticism of exacerbating the Asian crisis has a strong argument.
But, at the same time, it must be remembered, people call on the IMF in times of crisis. When you have a balance of payments crisis, depreciating exchange rate, there is no easy painless fix. Whatever the IMF recommend people would use it as a convenient point of blame. It is hardly surprising governments do blame an external body like the IMF, it helps to deflect criticism from the government and why the economy ended up needing a bailout.
This does not mean that the IMF are blameless, far from it. They have made many mistakes and errors of policy. But, they have been criticised for both doing too much and also doing too little. They have accused of being free market ideologues but also have been accused of interfering too much with free market mechanisms.
The problem the IMF face at the moment, is that they simply don't have the necessary funds to bailout the amount of debt in emerging economies. The President of Pakistan has complained that the current response of the IMF has been tardy and too slow (link) It may require greater intervention from member states such as the US, gulf states and the European Union. If the intervention is carefully managed, then short term loans may mitigate some of the worst effects of the current financial crisis.
The International Monetary Fund is a global organisation founded in 1944. It aims was to help stabilise exchange rates and provide loans to countries in need. Nearly all members of the United Nations are members of the IMF with a few exceptions such as Cuba, Lichtenstein and Andorra.
Functions of IMF
What The IMF does
How is IMF Financed?
The IMF is financed by member countries who contribute funds on joining. They can also increase this throughout their membership. The IMF can also ask its member countries for more money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion last year, sourced from contributions from its 183 members.This initial amount depends on the size of the countries economy. E.g. the US deposited the largest amount with the IMF. The US currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The UK has 4% of IMF Voting rights. Loans are also available to developing countries to 'deal with poverty reduction.'
Special Drawing Rights SDR
The IMF use Special drawing rights to provide a unit for the amount of foreign currency member states can draw on. SDRs are defined in terms of a basket of major currencies including: Euro, Pound Sterling, Japanese yen and US Dollar.
Examples of IMF Intervention
IMF Reports
Criticisms of IMF
Criticism of IMF
Over time, the IMF has been subject to a range of criticisms, generally focused on the conditions of its loans. The IMF has also been criticised for its lack of accountability and willingness to lend to country's with bad human rights record.
Many Criticisms of IMF include:
Response to Criticism of IMF
Sometimes countries may want to undertake painful short term adjustment but there is a lack of political will. An IMF intervention enables the government to secure a loan and then pass the blame on to the IMF for the difficulties.
The IMF and World Bank respond to criticisms at the University of Iowa
Common criticisms of the IMF and Latin American Debt Crisis
With economies around the world on the verge of collapsing. Some are pointing to the IMF as a potential saviour of the world economy. They argue that the IMF can play a key role in avoiding financial crisis and restoring confidence to a battered international economy. Yet, at the same time many view the IMF with disdain, arguing that their intervention causes more problems than it solves. (see: Criticism of IMF)
Yet, despite the potential benefits of having a monetary fund which can provide an effective counter to financial crisis, the role of the IMF has proved very controversial.
It's critics argue the IMF is dominated by the perspective of the G8 industrialised nations. They argue the IMF insists on blanket policies of structural adjustment which may actually harm the economies they are intervening. See: Criticisms of IMF
Yet, whilst it is easy to criticise the doctor which prescribes a bitter pill, there is a consensus that, now more than ever, we need an effective international organisation which can deal with the many financial crisis that are occuring around the world.
Remarks by IMF Deputy Managing Director Takatoshi Kato
At the Eighth Annual Regional Conference on Central America, Panama, and the Dominican Republic
Antigua, Guatemala, June25,2009
Let me first begin by expressing my thanks to Governor Maria Antonieta de Bonilla and to the Central Bank of Guatemala for hosting the Eight Annual Regional Conference. Let me also thank all of you, presidents of central banks, ministers of finance, financial sector superintendents, heads of regional institutions, other senior officials, and representatives of international financial institutions, for your participation in this conference. It is a distinct pleasure to be here in this historic and magnificent place.
Today we are coming together to discuss a rather sober topic, namely, the effects of the unprecedented global financial and economic crisis of 2008 on the region. Over the next two days, we will take stock of the effects of the crisis on the countries of the region, assess the near-term outlook and risks, and exchange views on the appropriate macroeconomic and financial sector policies for the period ahead. We will also have an opportunity to review the lessons for financial sector regulations and policies that are being drawn in the aftermath of the global crisis, and discuss their possible implications for Central America, Panama, and the Dominican Republic.
These are challenging times for all of us. In the past weeks, we have seen the first signs of a moderation in the rate of decline in global output. While this is encouraging, the road to recovery is nonetheless likely to be a long one, and governments around the globe and the international financial community need to prepare accordingly.
The current crisis has affected the world and the region and, as a consequence, has had a profound impact on the work of the IMF. Since the onset of the crisis, the IMF has responded on many fronts to support its member countries, using its cross-country experience to advise advanced countries at the center of the crisis on policy solutions, modernizing its lending operations and, more generally, becoming more responsive to member countries' needs. Taking this opportunity, let me highlight some of the changes that have taken place at the IMF. In particular I would like to focus on (i) the strengthened global financial safety net; (ii) the added flexibility of IMF lending; (iii) enhanced surveillance; (iv) governance reform; and (v) increased emphasis on protecting the most vulnerable.
Strengthened global financial safety net. Last April, the G-20 governments supported broadening the global financial safety net through a trebling of the IMF's lending capacity (to US$750 billion). As of today, the IMF has received pledges from its members totaling US$340 billion [from Japan, European Union, Norway, Canada, Switzerland, Korea, Australia and the United States]. In addition, countries like China, Brazil, and Russia have announced their intention to purchase new IMF notes upon the Executive Board's approval of the note issuance framework for a total of US$70 billion. We are hopeful that other Fund members will join this effort and help with a sizable increase in the lending capacity of the IMF.
The global financial safety net also will be strengthened with the upcoming general allocation of SDRs (for a total of US$250 billion). This allocation will be distributed among all Fund members in proportion to their quota, and will help strengthen the external financial position of every member country. For example, the seven countries represented in this conference will receive a total allocation of SDRs equivalent to US$1.4 billion, which represents about 7percent of the current international reserves of this groups of countries. We hope that this allocation will become effective before the 2009 Annual Meetings.
More flexible IMF lending. As a result of a major overhaul, IMF lending has become more flexible, has fewer conditions than before, and can be better tailored to individual country circumstances. The high access precautionary Stand-by arrangements with El Salvador, Costa Rica and Guatemala approved in early 2009 are good examples of this increased flexibility. In addition to streamlining the conditions it attaches to its loans, the IMF has increased the size of its "normal" loans, has broadened the circumstances under which it can approve large loans, and has simplified the structural component of its lending arrangements. The IMF also has created a new facility for economies with sound policies that are well integrated to global financial markets and face contagion from external events outside their control (the Flexible Credit Line (FCL)). Once approved, the resources from the FCL are available for drawing in full at any point during the life of the credit, without having to undertake pre-agreed policy measures or meet policy targets. Mexico was the first country that took advantage of this new facility and, of course, Agustin Carstens is in a better position than me to comment on its usefulness. The other two countries that have requested this credit line are Colombia and Poland. These three countries combined have received about US$78 billion from the Fund from this new credit line in the last 3 months
Enhanced surveillance. The IMF is also providing more effective and independent surveillance over the global economy. Our economic and financial sector diagnosis and forecasts have been the central reference point for countries planning how to respond to the crisis, and we have been outspoken in pressing for a coordinated response to the crisis from the large economies. Going forward, the so-called Early Warning Exercise, aimed at assessing vulnerabilities to unexpected shocks and to draw connections to global and systemic risks, will be launched at the 2009 Annual Meeting in Istanbul. The Financial Sector Assessment Program will become more flexible, targeted and better integrated with macroeconomic surveillance. The Fund is also playing a role in the ongoing debate on the design of a new global system of financial regulation, including on legal and operational issues related to cross-border bank insolvencies.
Governance reform. Progress continues on reforms aimed at strengthening the IMF's legitimacy and effectiveness in the world economy. Reforms on quota and voice agreed in April of 2008 will raise quotas of 54 members, including Brazil, China, India, Korea, and Mexico, once they become effective. But this is just a first step. The next general review of the IMF quota, which will be completed by January 2011 (two years ahead of the schedule previously agreed), will assess the appropriate overall increase in quotas and strive to further realign members' quotas with their weight in the global economy. Other aspects of the governance structure of the IMF will also be reviewed, taking into account inputs from many stakeholders, including civil society.
Protection of the most vulnerable. In close coordination with the World Bank, regional development banks and donors, the IMF has stepped up efforts to minimize the effects of economic adjustments prompted by the global crisis on the most vulnerable. For example, in its new programs, the IMF is making sure that social spending is preserved or increased wherever possible, and that key structural measures are aimed at protecting the most vulnerable. The IMF is also committed to strengthening its concessional lending capacity. Last April, the G-20 supported using part of the prospective sales of IMF gold to increase the funding available for the poorest countries by about US$6 billion over the next 2 to 3 years. In addition, the Fund recently doubled the maximum size of the "normal" loans under the poverty reduction and growth facility (PRGF) and exogenous shocks facility (ESF), and will shortly adopt a more flexible and strengthened framework for concessional lending.
All in all, while these times are challenging, they also provide us with an opportunity to move the reform agendas forward. Let me assure you that the IMF will do its best to continue supporting its member countries in these efforts, including by continuing to provide financial resources when these are necessary. The current crisis has demonstrated once more that the world needs a collaborative approach to solving the global economic problems. I want to assure you that the IMF stands ready to be a partner in this endeavor. I am looking forward to a very productive conference. Thank you very much.
Global Business. (2017, Jun 26).
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