Tuesday, November 22, 2016

East Asia Forum Article - Calls for IMF Reforms to Give More Power to the IMF

Jim Rickards has predicted that in the next major global crisis, the world will turn to the IMF (and the SDR) to deal with the crisis. We watch for any signs that may indicate movement in that direction (even if it is gradual movement). In this article in the East Asia Forum, there is a call to give the IMF increased power to deal with a crisis and to expand the use of the SDR in doing so. Below are some excerpts and then some added comments.


. . . .

"While the dollar remains the system’s principal reserve asset, US authorities are displaying little interest in mitigating capital flow volatility, short of an extreme systemic crisis. The Federal Reserve’s unwillingness to countenance credit or legal risk has stalled promising ideas to expand the global liquidity safety net for emerging economies. These include an International Monetary Fund (IMF) centred multilateralisation of currency swaps, US Federal Reserve-central bank bilateral swap arrangements and cross-border collateralised lending arrangements. The Federal Reserve won’t engage in such operations for lack of guarantees that potential losses on swap transactions will be indemnified. Besides, its mandate is domestic. The US Treasury, meanwhile, will not allow such financial resources to flow to or be provided by the IMF."

. . . .

"Going forward, the BRICS should press the IMF to introduce a ‘Very Short-Term Liquidity Line’ that can disburse the entire amount of approved access upfront to pre-qualified countries and with no ex post policy conditionality attached. The BRICS countries should concurrently convert, and enlarge, their Contingent Reserve Arrangement into an Emerging Market Crisis Prevention Fund that is large enough to lean against during sharp swings — and self-fulfilling market panics — in an emerging market index of targeted bond prices such as EMBI+ (Emerging Market Bond Index Plus)."

. . . .

"Over the medium-term, the BRICS should aim to institute a broadening of existing Special Drawing Rights (SDR) arrangements within the monetary system, making their issuance automatic and regular. They should also establish modalities to enable the IMF to guarantee SDR allocations to central banks on short notice, or to borrow from capital markets to fund liquidity provision operations during periods of heightened market stress. IMF-provided guarantees of new sovereign debt issuance and automatic purchase of secondary market bonds of pre-qualified countries should also be put on the table."

. . . . 

"In the long-term, the BRICS countries must aim to return the IMF’s machinery for collaboration on global monetary problems to its formative Bretton Woods design as a non-politicised, technocratic — not shareholder-run — institution. Its crisis prevention operations should tilt in the direction of automaticity rather than discretion and conditionality. The IMF’s single greatest intellectual failing at the time of its founding — the inability to factor the role played by private capital movements — must also be remedied by amending its Articles of Agreement to grant the IMF explicit jurisdiction over members’ capital accounts, including over source country flows.
The promotion of international financial stability, like infrastructure development, is a global public good."
. . . .
My added comments: A couple of points to make here. 
1- The article appears to call for some more significant reforms at the IMF that would give the IMF more power to deal with crisis situations. (see this related article)
2- The article calls out the US for blocking these kinds of changes and urges the BRICS nations to step up pressure for the changes since the US will not.
This is very much in line with Jim Rickards forecast that increase authority to deal with a crisis would be given to the IMF. Also, it is very much in line with input I have gotten from a variety of credible sources that the US is not enthusiastic about these kinds of changes at the IMF at this time. See Harald Malmgren here for example.

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