Sunday, March 26, 2017

IMF - Strengthening the International Monetary System

IMF Deputy Managing Director Mitsuhiro Furusawa delivers this speech recently in Tokyo. He repeats calls for a number of actions to "strengthen the international monetary system" that the IMF has made for many years. Below are some excerpts from the speech.

 "In the time I have this morning, I would like to provide an overview to some of the key issues related to the International Monetary System (IMS) that we will examine. I will focus on three in particular—all of which are of central importance to Asian policymakers:
  • the reduction of
    global imbalances;
  • the strengthening of the global financial safety net; and
  • the internationalization of currencies.
Let’s begin with some basic facts. A well-functioning international monetary system is a public good that is essential for economic and financial stability. The IMS has helped support unprecedented economic growth and trade expansion over the past few decades. But the global economy is evolving rapidly, and the IMS needs to adapt to the new reality."

. . . . 

. . . . "Our world is becoming more and more multi polar. While greater interconnectedness allows economies to benefit from a globalized economy, it also presents new weaknesses. We face the risk of new sources of spillovers and spill backs, as we saw in 2015 with China’s financial market difficulties. All of this complicates macroeconomic management.

Global imbalances are an important part of this picture. We have witnessed sustained periods of imbalances. While they have narrowed since the crisis, they remain above desirable levels. In the absence of formal adjustment mechanisms, adjustment has largely achieved through demand compression in deficit countries.
The concentration of imbalances among a few large countries presents a risk to the global economy. It increases vulnerabilities—and even raises the risk of market disruptions."
. . . . . 
"The IMF has led the reform effort to strengthen the (global) safety net. Thanks to the support of our membership, our lending capacity was boosted to $1 trillion. We overhauled our lending framework to offer more insurance and financing instruments. We are now exploring the possibility of a new short-term liquidity facility and a non-financial policy instrument. These would provide monitoring and signaling of member countries’ policies."
. . . . .
"We are also exploring whether the SDR, in its various forms can play a greater systemic role in strengthening the IMS. This could include the official SDR, SDR-denominated assets, or the SDR as a unit of account. The IMF reached a milestone last year when the renminbi was included in the SDR basket. That enhanced the SDR as a reserve asset. Also, in the last year large SDR-denominated bonds were successfully placed in China."
. . . . 
My added comments: This is the first mention of the IMF study on potential broader adoption for the SDR I have seen since they announced the formation of an Advisory Group on the subject. As far as I know the Advisory Group has not issued any public statement or report so far.

Added unrelated note 3-27-17: It appears the US dollar index may once again be sitting right on a key support level at 99 (see this chart). The last time this happened the dollar index held and rallied so the next few days/weeks may be important to watch for this index. Note that the 99 level has acted as both a support level and resistance level in the past and that the index has already dropped below its 20 day and 50 day moving averages. It sits just above the 200 day average of 98.44. If support were to fail here, the index might see a sharper drop pick up steam. Just something to keep an eye on.

I will add that one high credibility source I hear from now and then tells me they think the US dollar will likely hold here for now, but then likely fall later this year around the June or July time frame. So, we need to monitor this for sure and see how the dollar index does. The movement of the US dollar impacts a lot of markets and can impact systemic stability if it becomes too volatile.

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