Following are edited excerpts of an address prepared for presentation by IMF First Deputy Managing Director Stanley Fischer at the Seventy-Fifth Anniversary Conference of the Banco de México in Mexico City, November 14–15. The full text is available on the IMF’s website (www.imf.org).
Today I want to talk about a new element in the international financial system, the IMF’s Contingent Credit Lines (CCL) Facility. This, I believe, is a potentially extremely significant innovation that will deploy the IMF’s financial resources more effectively to help prevent financial crises, rather than to help pick up the pieces after the damage has been done. The basic idea is straightforward: the IMF offers a precautionary line of credit to countries that have demonstrably sound policies but that nonetheless believe they may be vulnerable to contagion from crises elsewhere.
The expansion of private international capital flows from $40 billion in 1990 to $290 billion in 1997 (after which they declined to $170 billion in 1999) has been one of the most spectacular manifestations of globalization in recent years. These flows have brought economic benefits to borrowers and lenders alike, but—as we have seen too often over the last six years—there is an important downside. Countries have been exposed to periodic crises of confidence when inflows of capital were suddenly reversed.
As international capital flows have increased relative to the size of national economies, so has the potential disruption threatened by their reversal. The need to maintain investor and creditor confidence generally serves as a useful discipline. It magnifies the rewards for good policies and the penalties for bad ones. But the capital account crises of recent years drive home the possibility that volatility and contagion can on occasion become excessive.
As a crisis spreads initially, most of those involved— particularly the affected countries—tend to blame excess volatility and contagion; in other words, they claim that they were innocent bystanders. This is in part a natural human reaction, in part a rational response to events. Eventually, the policymakers in the affected countries get down to solving their problems, and there is less talk about contagion and more talk about the weaknesses in the economy.
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