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INDEX. The financial crisis and the emergence of BRICs: a new international economic environment The international policy response: The role of the G-20. Policy coordination Reform of the International Financial Architecture

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INDEX

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  1. INDEX • The financial crisis and the emergence of BRICs: a new international economic environment • The international policy response: The role of the G-20. • Policy coordination • Reform of the International Financial Architecture • The IMF response to the crisis: governance, lending and surveillance • The EU response to the crisis: economic governance and crisis resolution • Scope for IMF/EU coordination • Concluding comments

  2. THE INTERNATIONALENVIRONMENT: WHAT CRISIS? • A multifaceted crisis in a highly interconnected world: • At global level, the international financial crisis. In Aug 2007, financial turbulence in the US (subprime) quickly spreads to other advanced economies. It turns into global systemic liquidity shortage and sudden stop of capital flows in Sept 2008 (Lehman Bros.), affecting also EME • At domestic level, country-specific vulnerabilities led to specific adjustment processes. Financial sector, housing bubbles • At regional level, European sovereign debt crisis. The fiscal consequences of the recession and the initial strong policy support spark a sovereign debt crisis in Europe (in 2010) • This means that common shocks have resulted in different time profiles and characteristics of the crisis across countries and regions, leading to different policy responses

  3. THE INTERNATIONAL ENVIRONMENT: THE EMERGENCE OF BRIC The global financial crisis hit especially advanced economies. The persistent and strong growth differential between emerging countries –BRIC in particular, Brazil, Russia, India, China- and advanced economies has widened with the crisis.

  4. THE INTERNATIONAL ENVIRONMENT: THE EMERGENCE OF BRIC This has resulted in a growing weight of EME/ BRIC in the world economy and a substantial contribution to global growth. Thereby the need for their greater implication of EME in global governance

  5. THE INTERNATIONAL POLICY RESPONSE: LINES OF ACTION OF THE G20 The 2008 crisis accelerates the changes in global governance and the G20 takes the lead along three basic lines • Strengthening global policy coordination • Short term: conutercyclical policies and exit strategies • Medium/long term: Framework for stable, balanced and sustainable growth • Enhancing International Financial institutions (legitimacy and effectiveness) • Changes in governance (quota and representation) to fully reflect changing economic weigths in the world economy-in line with G-20 membership • Ensure sufficient resources for IFIs (capital increases; options to mobilize resources and liquidity); enhancement of their lending instruments • Financial regulation and surveillance to promote financial stability: • FSB mandate: elaboration of international financial and supervisory regulatory practices, peer review, standard-setting bodies coordination • Strengthening of capital and liquidity requirements (BCBS). Strongerregulation and supervisionforSIFIs/ G-SIFIs. • Identification of macro-prudentialrisksacrossthefinancialsystem and development of macro-prudentialtools. Strengthening of financialmarkets

  6. THE INTERNATIONAL POLICY RESPONSE: THE GLOBAL GOVERNANCE OF G-20

  7. THE INTERNATIONAL POLICY RESPONSE: STEPS IN THE POLICY COORDINATION PROCESS • STEPS TAKEN IN THE LEADER’S SUMMITS • Washington and London Summits (Nov 2008/ April 2009) • Consensus on the need for strongly countercyclical policies • Pittsburg Summit (September 2009) • Importance of designing exit strategies • Activation of the Framework for Strong, Balanced and Suatainable Growth and the Mutual Assessment Process (MAP) to address Global Imbalances • Toronto Summit (June 2010) • Commitment to fiscal adjustment (halve deficit by 2013 and reduction in debt/GDP ratios by 2016 • Seoul Summit (Nov 2011) • Seoul Action Plan • A reinforced MAP (indicative guidelines)

  8. IMF REFORM IN THE AFTERMATH OF THE CRISIS: GOVERNANCE AND FINANCIAL RESSOURCES • The IMF has been crucial in implementing G20 mandates and providing analytical support across different areas. To fulfill that role it has: • Improved its governance, by upgrading representation of emerging and developing countries through quota increases of underrepresented and low income countries. The 2010 governance reform: • 100% increase in total liquidity, 6% transfer of quota to emerging and developing countries; next quota review in 2014 • Increase EME/ LIC representation by 2 seats/ 24 in the Board of Directors; Europeans reduce their presence by 2  Contributions to extended NAB • Financialresources: • Tripling of resources (London 2009 Summit) • Increasethe NAB from 55 bn USD to 588 bn USD • 100% Increase in quotas 2010

  9. RESPONSE OF THE IMF TO THE CRISIS: LENDING  IMF lending ($bn) • Lendingpolicy: • Higheraccesslimits, more flexible conditionality • Accesibility:from 300% to 600% of quotaforSBAs • 2008-2010: $ 300 bn in new loans • New instrumentsfortheinsurancefunction (preacutionary): • FCL (createdMarch 2009; reformedAug 2010). Ex-ante conditionality. TheFundgivesitsapprovalto a country’seconomicpolicies and makes a credit line availabletothe country throughouttheduration of thearrangement. • PCL (createdAugoust 2010). Forcountrieswithsoundeconomicfundamentals and policies (butless so than FCL).

  10. RESPONSE OF THE IMF TO THE CRISIS: UPGRADED SURVEILLANCE • Pressureonthe IMF toimproveitssurveillance and eliminateitsshortfalls (IEO reporton IMF surveillance in therun-up tothe crisis highlightedseveralfailures) • New approachto multilateral surveillance: interconnectedness and cross-country spillovers • StrengtheningtheFinancial Sector AssessmentProgram; mandatory FSAP forCountrieswithsystemicallyimportantfinancialsectors. • New reportsoninternationaleconomic and financialissues: financiallinkages, cross-borderbanksresolution, fiscal monitor. Spilloverreports • IMF becomes a member of the FSB, fosteringcoorditationbetweenbothinstitutions, whichisallthe more relevantgiventhepotentialforoverlappingfunctionsbetweenbothinstitutions

  11. THE EU POLICY RESPONSE TO THE FINANCIAL CRISIS: COORDINATION WITH G20 • The financial systems of some euro area (EA) / EU countries were touched the turbulences following the subprime crisis in 2007 • Europeangovernmentsreactedwithstrongcountercyclicalpolicies and financialrescueplans

  12. THE EU POLICY RESPONSE TO THE FINANCIAL CRISIS: LENDING AND FINANCIAL REFORM • After the Lehman collapse, CEE countries were affected by the sudden stop of international capital flows. Some of them required combined external external programmes EU/ IMF • BoP facility provides mutual assisstance. The EU and country authorities negotiate an agreement and its conditionality: usually involving governance measures, fiscal consolidation and financial stabilisation • On-going BoP programs: Hungary, Latvia and Romania • PSI: Viena initiative Financialreform (Larrosière) • Macroprudentialsurveillance: EuropeanSystemicRisk Council • Microprudentialsurveillance • ThreeEuropeanSurveillanceAuthorities (banking, insurance and financialmarkets) • Committee of theEuropeanSurveillanceAuthorities • Surveillanceauthorities of MemberStateS

  13. THE IMPACT OF THE SOVEREIGN DEBT CRISIS ON EA COUNTRIES • Thesovereign crisis erupted in 2010 and brought forward verydeepproblemsrelatedtothegovernance and surveillancestructures of the EMU, and thelack of lendinginstrumentsdirectedto EA countries • It was centered in EA countries • Surveillancemechanismsprovedinadequate and failedtoeffectivelycomplement single monetarypolicy • Additionally, there was no mechanism for supporting EA countries with liquidity/ solvency problems ; • The response by the EU/ EMU has been the proposal of a widespread reform encompassing governance, fiscal and economic surveillance and a crisis resolution mechanism

  14. THE EU RESPONSE TO THE CRISIS: NEW GOVERNANCE AND SURVEILLANCE INITIATIVES • European Commission legislative proposal for reinforcing the EU economic governance and surveillance structures, along two dimensions: • Strengthening the Stability and Growth Pact: • Reinforcement of both the preventive and corrective parts of the SGP • The debt criterion will be considered on the same footing with the deficit criterion, in initiating an Excessive Deficit Procedure. • Financial sanctions will be imposed gradually, starting at an earlier (preventive) stage and with more automaticity. • Minimum requirements for the budgetary framework of the member states, to promote higher quality of national fiscal policy frameworks • Preventing and correcting macroeconomic imbalances within the EU and the euro area, including deteriorating competitive trends: • An alert mechanism and preventive surveillance based on country-specific in-depth reviews and discussions with member states considered “at risk” • The Excessive Imbalance Procedure, for Member States with severe imbalances or imbalances that put at risk the functioning of EMU. • .

  15. THE EU RESPONSE TO THE CRISIS: OTHER SURVEILLANCE INITIATIVES • The European semester - a new EU policy coordination mechanism • Starting from 2011, each January the European Commission issues an “Annual Growth Survey” which recommends priorities to Member States in the areas of economic and budgetary policy. • Based on these recommendations, the members states will coordinate ex ante their medium-term budgetary strategies and national reform programs. • An EMU Competitiveness Pact • The idea isto balance theneedforbiggerrescuepackage (ESM) withgreater fiscal, macroeocnomic and structural discipline onthepart of EMU memberstates: a comprehensivepackageoneconomicgovernanceforEurope • There is a Commission’s new proposal, after the initial German-French version has met with resistance • ProceduretoinvolvemonitoringbyHeads of State; tobeapprovedbyEuropean Council endMarch 2011

  16. CRISIS RESOLUTION: TEMPORARY FACILITY (EFSF) • Needforfundstomanagethesize of thechallengesfaced: EFSF and EFSM • The European Financial Stability Facility (EFSF) was created by the euro area member states following the May 9, 2010 Ecofin. • It is an example of inter-institutional coordination: the European Commission sets conditionality in liaison with the European Central Bank and International Monetary Fund and must be approved by the Eurogroup. • EFSF has been assigned the best possible credit rating: countries guarantee 120% of their share in the facility, to be used to cover amounts drawn for lending. This has reduced its effective lending capacity under the €440bn • The European Financial Stabilisation Mechanism (EFSM) raises funds (up to 60 billion euros) backed by EU budget (serves all EU members); has already placed a €5 billion issue to finance Ireland program

  17. CRISIS RESOLUTION: A PERMANENT ESM • Permanent crisis mechanism to be set up as of mid 2013: European Stability Mechanism (ESM) • Assistance will be conditional on the implementation of a strict economic and fiscal adjustment programme, in line with existing arrangements • Private sector involvement will be decided on a case-by-case basis, ‘in line with IMF usual practices’ • Distinction will be made between liquidity and solvency crises. This will be based on a debt sustainability analysis (DSA) conducted by the European Commission and the IMF, in liaison with the ECB. • Private creditors will be encouraged to maintain their exposure (liquidity). Need for a reestructuring plan with private creditors, in line with IMF practices, in case of insolvency • Collective Action Clauses (CACs) will be included in the terms and conditions of all new euro area sovereign bonds starting in June 2013

  18. CRISIS RESOLUTION: PENDING ISSUES • The European Council of March 2011 should come to a final agreement on the European Stability Mechanism (ESM) and the EFSF • Further issues under discussion around the ESM: • Interest rate to be applied • Effective size of the facility • Possibility to include precautionary financing • Possibility to buy bonds • Changes to the present EFSF will probably follow those agreed for the ESM • One particular issue concerns the term extension of present loan for GR • And the easing of terms of the loan for IE

  19. EU/ IMF COOPERATION IN PRACTICE

  20. SCOPE FOR IMF/EU COOPERATION • The case for cooperation: • Regional and global institutions both have specific know-how • Pooling resources may be necessary to temper large financing needs • Given the overlapping roles, lack of cooperation can lead to inefficiencies and confusion at times of crisis • The EU leaves that door open: conditionality from IMF explicit in BoP assistance • New instruments • IMF serves as liaison to negotiate MoU of the loan • It is envisaged that financial support to euro-area Member States shall be provided by EFSF in conjunction with the IMF • Further thoughts on IMF/ EU cooperation: • Cooperation should cover both lending and surveillance, while some believe regional arrangements could complement PCL and FCL • Rules and processes for cooperation with the Fund are better established ex ante, so as to guarantee a solid, predictable framework

  21. CONCLUDING COMMENTS • Thegovernance of theworldeconomy has experienced radical changes in theaftermath of theinternationalfinancial crisis • Relevantelements are therenewedemphasisonfinancialstability, speciallylinkedtointerconnectedness and macroprudentialaspects • Thereturnkeynesianpolicies and theturntolessorthodox and more practicalwaystodesignpolicies (capital flows) isalsoimportantto note • Butthemostimportantaspectistheneed of Policycoordination in theface of increasing global interconnectedness • The crisis has speeded up changes in thewaypolicycoordinationisachieved at the global level: • acrosstheworld • and acrosspolicies: • financialstability • macro policies • structuralpolicies • In Europe, and specifically inside the EMU, the need for policy coordination is much more pressing and the only way forward

  22. THE EU RESPONSE TO THE FINANCIAL CRISIS: IMPROVING REGULATION AND SURVEILLANCE • MACROPRUDENTIAL SURVEILLANCE • EuropeanSystemicRiskBoard (ESRB) Informationexchange/Treatment of systemicrisks • MICROPRUDENTIAL SURVEILLANCE • ThreeEuropeanSurveillanceAuthorities (ESA) (banks, insurance and markets(thedecision-makingbodyisthe ESRB composed of thechiefs of thenationalsupervisors) • MixedCommittee of theEuropeanSurveillanceAuthorities(forumformedbyinstitutionalrepresentatives of the new authorities in whichthethreeauthoritiescooperateregularlytoguaranteeintersectoralconsistency) • SurveillanceAuthorities of MemberStates

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