Korea initiated the proposal for a global financial safety net, reasoning that without reliable financial nets, markets would continue to rely heavily on their foreign reserves to deal with economic crisis, which incurs high opportunity costs.
The credit squeeze in Greece and wider Europe this year has caused concerns such as these to flare up again, especially for countries with bitter memories of the International Monetary Fund’s harsh conditions for loans made during the 1997-98 Asian financial crisis.
The proposal was officially made by President Lee Myung-bak at the end of last year.
Most emerging markets have welcomed it, but some major countries, including China and Germany have been vocal on the downsides of the setup.
The two countries, with their high foreign currency reserves, remain opposed to the proposal, saying a larger global mechanism could encourage banks’ risk-taking behavior.
The G20, however, backed the recent reforms of insurance facilities at the International Monetary Fund in August.
“We welcomed the recent reform of the IMF lending facilities, including the enhancement of the Flexible Credit Line and the establishment of the Precautionary Credit Line to strengthen the global financial safety nets,” the Gyeongju communiqu stated.
“We call on the IMF to continue its work to further improve the global capacity to cope with shocks of a systemic nature,” it said.
The IMF Executive Board on Aug. 30 extended the insurance program to a broader set of countries with relatively sound fundamentals, and abolished credit limits under the loan program called Flexible Credit Line. For markets that do not qualify for such programs, a brand new contingent protection program called Precautionary Credit Line was launched to widen options for nations with moderate volatilities in their financial markets.
Three countries Mexico, Colombia and Poland have made use of the FCL so far. Officials from the three countries have all acknowledged the role played by the FCL in lubricating the market after they were put in place last year.
The G20 finance ministers’ meeting in June “agreed to explore policy options to improve global financial safety nets.” The Gyeongju meeting in October gave their support for the recent reform of the IMF lending facilities and promised for more.
Despite its significance, the issue failed to enjoy a spotlight in Gyeongju as the G20 officials were preoccupied by pressing issues such as the currency disputes and trade imbalances.
“The G20 should continue to further strengthen the safety net by introducing additional global arrangements and find ways for these to link up with various regional arrangements such as the Chiang Mai Initiative to supplement and complement the IMF as a part of a global financial safety net,” said SaKong Il, chairman of the Presidential Committee for the G20 summit.
One option mulled is to connect regional arrangements controlled by institutions such as the African Development Bank and the Asian Development Bank, without excluding any country or region as a possible borrower.
“One option would be to establish a Multi-country Swap Line (MSL) as a mechanism enabling the IMF to make a unilateral and simultaneous offer of short-term liquidity lines to a limited set of systemically important countries with strong policy track records,” Reza Moghadam, director of the IMF’s Strategy, Policy and Review Department said.
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