** Sudden stops in EMs and USD shortage
@ojblanchard1 says next stage of the crisis are sudden stops in EM countries
@elinaribakova has been saying it for a week, and she is worth following on the EM dimension of crisis:
[1/10]
@ojblanchard1 says next stage of the crisis are sudden stops in EM countries
@elinaribakova has been saying it for a week, and she is worth following on the EM dimension of crisis:
[1/10]
So far, the @federalreserve has established swap lines with Australia, Brazil Mexico, Denmark, Korea, Norway, New Zealand, Singapore, Sweden. The demand for USD is large and clear in market signals.
[2/10]
[2/10]
The @IMFNews also announced "it stands ready to mobilize its $1 trillion lending capacity to help our membership".
blogs.imf.org/2020/03/16/pol…
[3/10]
blogs.imf.org/2020/03/16/pol…
[3/10]
But, how do the two policies--CB swap lines and IMF loans--compare? Are they complements or substitutes?
I spoke about this 11 months ago at the @WorldBank and @imfnews Spring meetings. Video of short talk is here:
meetings.imf.org/en/2019/Spring…
[4/10]
I spoke about this 11 months ago at the @WorldBank and @imfnews Spring meetings. Video of short talk is here:
meetings.imf.org/en/2019/Spring…
[4/10]
CB swaps are for banks, about short-term liquidity. CBs can create money quickly, assess the solvency of banks, and judge the quality of collateral.
IMF loans are for governments, capital flows, have conditionality, they address fiscal solvency
[5/10]
IMF loans are for governments, capital flows, have conditionality, they address fiscal solvency
[5/10]
However, CB swap lines and IMF loans are interlinked:
(i) Because capital flows are often intermediated by banks, a run on a country often starts with a run on its banks.
(ii) CB lending is for liquidity, but if problems persist into insolvency, it becomes fiscal
[6/10]
(i) Because capital flows are often intermediated by banks, a run on a country often starts with a run on its banks.
(ii) CB lending is for liquidity, but if problems persist into insolvency, it becomes fiscal
[6/10]
EMs need dollars for their banks just as advanced economies do.
But Fed swap lines are limited because Fed cannot take on credit (fiscal) risk in lending them. Moreover, foreign currency held as collateral can have very volatile exchnage rate.
[7/10]
But Fed swap lines are limited because Fed cannot take on credit (fiscal) risk in lending them. Moreover, foreign currency held as collateral can have very volatile exchnage rate.
[7/10]
The IMF knows how to: assess credit risk, choose margin to apply to current exchange rate, underwrite swap line contracts. If the EM CB doesnt pay, the IMF can control how much domestic currency enters circulation, how much IMF lending, how much IMF capital is put at risk
[8/10]
[8/10]
So IMF loans and CB swap lines can be made complements if the IMF takes a proactive role in stepping in as a facilitator and as an intermediary in USD swap lines to EMs.
I made this proposal in an essay published ten months ago in F&D magazine
imf.org/external/pubs/…
[9/10]
I made this proposal in an essay published ten months ago in F&D magazine
imf.org/external/pubs/…
[9/10]
Also worth reading is a different proposal by @eduardoyeyati already a decade ago:
And @bradsetser discusses many facets of the dollar shortage around the world and quickly touches on many alternatives to fix it
[10/10]
And @bradsetser discusses many facets of the dollar shortage around the world and quickly touches on many alternatives to fix it
[10/10]
