A Step Closer to a Stronger Global Financial Safety Net

IMF responds to G-20 call for strengthening global financial safety net

New crisis-prevention credit line joins enhanced Flexible Credit Line

Discussions to continue on framework to address systemic events

A new Precautionary Credit Line for members with sound economic policies will now operate alongside an improved Flexible Credit Line—the insurance option for the IMF’s strongest performing members.

These improvements are a step toward the vision of the Group of Twenty (G-20) industrialized and emerging market economies for a strengthened “global financial safety net,” a network of insurance and loan instruments—from multilateral institutions like the IMF, regional financing arrangements, and individual countries—that countries could draw on if confronted with a crisis, to cope with volatility and contagion (see Chart 1).

IMF Managing Director Dominique Strauss-Kahn said these decisions “mark an important step in our ongoing work with our membership to strengthen the global financial safety net.” He added that “the availability of these credit lines to a broader spectrum of countries will contribute to a more stable international monetary system.”

Expanding the Fund’s Safety Net

Improvements in the IMF’s lending toolkit in March 2009—together with action following the London G-20 summit to boost the Fund’s resources—helped calm financial markets, which saw global bond spreads ease from their elevated crisis levels. Yet demand for the IMF’s existing country insurance instruments remained limited. According to a recent review of crisis programs, most affected countries turned to the IMF only once they had already been hit by the crisis, and large policy adjustments were needed to stabilize the markets and avoid worse outcomes (see Chart 2).

The reforms approved draw on these lessons, and will enable the IMF to act pre-emptively when future crises threaten. Strong policies, that increase countries’ resilience to shocks, will continue to be the first line of defense in any crisis. The new crisis prevention tools will enable the IMF to better tailor its lending to the different strengths and circumstances of its members.

Refining the Flexible Credit Line

The Flexible Credit Line provides upfront access to IMF resources to countries with very strong policies without tying disbursements to traditional policy conditionality. Countries that have made use of the credit line have pointed to the important role it played in helping...