In search of better crisis prevention

Author:Bikas Joshi/Miguel Messmacher
Position:IMF Policy Development/Review Department and IMF Institute

More effective instruments sought for crisis prevention. Genesis of capital account crises. Macromanagement with open capital accounts. Reserves, self-insurance, and regional pooling. The IMF's proposed new instrument.


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Are there lessons to glean from the past and new mechanisms that might help emerging market countries avoid crises or at least minimize their damage? A recent seminar in Singapore-sponsored by the IMF and the government of Singapore-explored the origins of capital account crises and examined instruments that might afford some protection. IMF Deputy Managing Director Takatoshi Kato (right) described a proposed new IMF facility that would offer a high-access credit line to countries with strong macroeconomic policies.

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More effective instruments sought for crisis prevention

Hoping to learn from the past and devise more effective tools for the future, a High-Level Seminar on Crisis Prevention in Emerging Markets in Singapore on July 10-11 focused on four key issues: the genesis of capital account crises; effective macroeconomic management in countries with open capital accounts; options for country self-insurance and regional reserve pooling; and the Fund's proposed contingent financing instrument. The seminar- jointly organized by the IMF Institute, the IMF's Policy Development and Review Department, and the Government of Singapore-drew officials from about 40 emerging market countries as well as participants from the private sector.

Genesis of capital account crises

Countries become vulnerable to capital account crises when they have mismatches on their private or public sector balance sheets-for example, between assets and liabilities in terms of their maturities or currencies of denomination. A crisis, however, usually also requires a specific trigger, either external-contagion, a terms of trade shock, a deterioration in market conditions-or domestic, such as macroeconomic policies that damage investor confidence.

Emerging market countries should seek to minimize balance sheet vulnerabilities and avoid conditions that might trigger a crisis. To minimize balance sheet vulnerabilities, countries should ensure adequate prudential regulation and supervision of the financial system and take precautions to avoid the kind of "one-way" bets on fixed exchange rates that can cause private balance sheet exposures. Countries should also fortify themselves against crises by pursuing sound...

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