IMF, Regional Financial Safety Nets to Create Stronger Links

First high-level meeting of regional financing bodies, IMF

Benefits seen from greater coordination on crisis financing

Ultimate objective is to strengthen global financial safety net

The IMF-hosted seminar on “Regional Financial Safety Nets” was a first. The October 8 meeting of member representatives from regional financing arrangements from Asia, Europe, Latin America, and the Middle East aimed to start a dialogue on greater synergies between such regional arrangements and the IMF (see map).

The ultimate goal is to strengthen surveillance and the effectiveness of cofinancing mechanisms for countries vulnerable to crises, responding to calls by the Group of Twenty industrialized and emerging market economies and the IMF’s governing body, the International Monetary and Financial Committee.

New approach

Participants from Asia and Latin America felt that first best policy solutions from the “old playbook”—such as fiscal discipline and monetary policy focused on controlling inflation—are no longer adequate.

Today’s two-speed global economy—characterized by volatile capital flows and financial interconnections between economies—calls for a broader range of policy tools, they said (see chart). These include macroprudential regulation, as well as stronger collaboration between national, regional, and global safety nets.

IMF Deputy Managing Director Naoyuki Shinohara echoed this point in his opening remarks, highlighting two key lessons from the recent financial crisis.

• The global nature of the crisis called for coordinated policy responses—specifically, measures taken in unison by the global community to overcome systemwide shocks.

• Successful collaboration between the European Union and IMF on financing and policy advice in response to the crisis—in Greece in particular but also in Hungary, Latvia, and Romania—demonstrated the value of international institutions and regional financing arrangements working together.

Participants agreed that regional arrangements should use this crisis to strengthen their regional safety nets as well as to work out a set of procedures, during peacetime, to work with the IMF.

Comparative advantage

Participants agreed that there are important complementarities between regional financing arrangements and the IMF given their relative strengths and roles. Speakers said regional arrangements can be most effective in dealing with localized shocks, while the IMF is best placed to provide support during...