Blog Post

A global financial safety net

What’s at stake: South Korean President Lee Myung-bak, whose country is chairing the G20 this year, proposed building a "global financial safety net" to insure against risky capital flows and help mitigate global imbalances in trade and development. Lee used the special address to hundreds of top policy makers, business leaders and civil society representatives at […]

By: Date: February 9, 2010 Topic: Global economy and trade

What’s at stake: South Korean President Lee Myung-bak, whose country is chairing the G20 this year, proposed building a "global financial safety net" to insure against risky capital flows and help mitigate global imbalances in trade and development. Lee used the special address to hundreds of top policy makers, business leaders and civil society representatives at the World Economic Forum in Davos to outline Korea’s plan for the G20 summit to be held in Seoul in November. As a key theme of the G20 summit, he proposed the establishment of a global financial safety net to address sudden reversals of international capital flows on emerging and developing economies. A total of ten G-20 meetings will be held this year the first planned for February 27th and 28th in Incheon west of Seoul with vice finance ministers and deputy governors of central banks in attendance. G20 deputies will informally discuss the Korean proposals and other policy options to mitigate risks in the international financial system at a conference on the eve of the meeting.

Reza Moghadam, director of the IMF’s Strategy, Policy, and Review Department, argues that the Fund has been modernizing its lending and conditionality framework to deploy its resources more effectively. While the IMF tripled its lending resources from $250 billion to $750 at the G20 London Summit in April 2009, some academics have called for the Fund’s resources to be expanded even more, arguing that the availability of large resources would forestall the actual need for the IMF to intervene, and also prevent sudden stops in capital flows. For example, Simon Johnson has suggested that at least $1 trillion is needed, while Guillermo Calvo has underscored the important lender-of-last-resort role played by the IMF.

Ricardo Caballero advocated in the past an insurance arrangement for emerging markets where they would pay a premium during normal times in exchange for an insurance transfer during the times of external financial turmoil that typically trigger sudden stops in these economies. To prevent a host of incentive problems, this insurance would not be a function of country-specific variables. According to him, the IMF should play a dual role of monitor (a sort of public rating agency) and as a facilitator of the insurance mechanism. The reason that such mechanism is superior to a standard reserves-accumulation strategy is that this is an insurance problem. The reserves-accumulation strategy amounts to self-insurance, and as such, it generates too much redundancy and too large a waste of scarce resources.  This is even more so when a critical factor behind these crises is investors’ panic, for in that case there is really no need to hoard or inject resources at all, as long as there is a credible insurance in place.

Eswar Prasad proposes that each country pays an entry fee of between $10 –25bn dependent on economic size and an annual premium for coverage. Premiums would depend on the level of insurance a country desired and on the countries economic policies. Countries would face higher premiums if they run large budget deficits/accumulate large debts and adopt policies that drive up global risks (accumulate reserves for self-protection). The premiums would be invested in a portfolio of US, euro area and Japanese government bonds. These central banks would be obliged to top up the pools credit lines in the event of a global crisis.

Ricardo Caballero also argued a few years ago for the creation of hedging instruments contingent on factors that are (largely) not controlled by the individual country. Chile, for example, could swap its entire public and private external debt for bonds with embedded options on the price of copper (Chile’s influence on this price is not enough to hamper insurance contracts) — that is, for debt that automatically transfers resources back to the country when the price of copper falls below critical levels. These markets need to be developed. There are currently too many free-rider problems for them to emerge without a concerted effort.

John Williamson makes the case for regular SDR issues. Special Drawing Rights holdings are part of IMF members’ reserve assets a SDRs are a means for members to obtain freely usable currencies from other members. Williamson argues that the world would be a better place if a substantial portion of the demand for holding additional international liquidity were to be met by creation of more SDRs instead of exclusively by expanding reserve currency holdings, as in the recent past. By a "substantial portion" he mean perhaps half, which – to judge by the additions to reserves in the period 2002–06 – would imply SDR allocations of over $400 million per year. For Williamson, this offers the surest way of reducing the inconsistency in payments objectives that currently looks to be the biggest obstacle to a strong recovery in the global economy in the post-Lehman world.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Blog Post

It’s hard to live in the city: Berlin’s rent freeze and the economics of rent control

A proposal in Berlin to ban increases in rent for the next five years sparked intense debate in Germany. Similar policies to the Mietendeckel are currently being discussed in London and NYC. All three proposals reflect and raise similar concerns – the increase in per-capita incomes is not keeping pace with increases in rents, but will a cap do more harm than good? We review recent views on the matter.

By: Inês Goncalves Raposo Topic: Macroeconomic policy Date: July 8, 2019
Read article More on this topic
 

Blog Post

The breakdown of the covered interest rate parity condition

A textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.

By: Konstantinos Efstathiou and Bruegel Topic: Banking and capital markets Date: July 1, 2019
Read article More on this topic
 

Blog Post

The June Eurogroup meeting: Reflections on BICC

The Eurogroup met on June 13th to discuss the deepening of the economic and monetary union (EMU) and prepare the discussions for the Euro Summit. From the meeting came two main deliverables: an agreement over a budgetary instrument for competitiveness and convergence and the reform of the European Stability Mechanism (ESM) treaty texts. We review economists’ first impressions.

By: Bruegel and Inês Goncalves Raposo Topic: Macroeconomic policy Date: June 24, 2019
Read article More on this topic
 

Blog Post

The campaign against ‘nonsense’ output gaps

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

By: Konstantinos Efstathiou and Bruegel Topic: Macroeconomic policy Date: June 17, 2019
Read article More on this topic
 

Blog Post

The inverted yield curve

Longer-term yields falling below shorter-term yields have historically preceded recessions. Last week, the US 10-year yield was 21 basis points below the 3-month yield, a feat last seen during the summer of 2007. Is the current yield curve a trustworthy barometer for future growth?

By: Inês Goncalves Raposo and Bruegel Topic: Global economy and trade Date: June 11, 2019
Read article More on this topic
 

Blog Post

The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo and Bruegel Topic: Global economy and trade Date: June 3, 2019
Read article More on this topic
 

Blog Post

The next ECB president

On May 28th, EU heads of state and government will start the nomination process for the next ECB president. Leaving names of possible candidates aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

By: Bruegel and Konstantinos Efstathiou Topic: Macroeconomic policy Date: May 27, 2019
Read article More on this topic More by this author
 

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2019 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: Macroeconomic policy Date: May 20, 2019
Read article More by this author
 

Blog Post

Is an electric car a cleaner car?

An article published by the Ifo Institute in Germany compares the carbon footprint of a battery-electric car to that of a diesel car, and argues a higher share of electric cars will not contribute to reducing German carbon dioxide emissions. Respondents rejected the authors’ calculations as unrealistic and biased, and pointed to a series of studies that conclude the opposite. We summarise the article and responses to it.

By: Michael Baltensperger Topic: Digital economy and innovation, Green economy Date: May 13, 2019
Read article More on this topic More by this author
 

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global economy and trade Date: May 6, 2019
Read article More on this topic More by this author
 

Blog Post

Is this blog post legal (under new EU copyright law)?

How new EU rules on using snippets from news publishers and on copyright infringement liability might affect circulation of information, revenue distribution, market power and EU business competitiveness.

By: Catarina Midões Topic: Macroeconomic policy Date: April 8, 2019
Read article More on this topic
 

Blog Post

Secular stagnation and the future of economic stabilisation

Larry Summers’ and Łukasz Rachel’s most recent study documents a secular fall in neutral real rates in advanced economies. According to the authors, this fall would be even more marked in the absence of offsetting fiscal policies. Policymaking in a world of permanently low interest rates may be hard to navigate, especially in troubled waters. We review economists’ views on the matter

By: Inês Goncalves Raposo and Bruegel Topic: Macroeconomic policy Date: April 1, 2019
Load more posts