What G20 Leaders Must Do To Stabilise our Economy and Fix ... - Vox

VOXResearch-based policy analysis and commentary from leading economistsbe only one global monetary fund.The third and perhaps the most frequently raised argument for creating regionalfinancial arrangement is that they may be better adapted to managing a regional capitalaccount or liquidity crisis than the IMF. The IMF appears to have learned the lessonthat a capital account crisis requires emergency lending for resolution. The IMFis ready to lend, with a streamlined conditionality, "billions of dollars through ShorttermLiquidity Facility (SLF) to support nations with a good track record in economicmanagement hit by fallout from the global financial turmoil" (IMF 2008).Although the SLF will enhance the IMF's role as a crisis manager, it should be notedthat, when a crisis in a country originates in the capital account, policy coordinationand exchanges of information among neighbouring countries are essential in preventingcontagion. The IMF can monitor capital flows within and between regionsand also the behaviour of market participants but it is difficult to imagine that itcould establish close working relationships with individual member countries andcoordinate their policies. As a crisis lender the IMF may also have to maintain anarm's length relationship with its members.Can the SRPA play a role in the global structure?Despite its potential, however, questions have been raised as to whether the SRPA canbe a credible regional lender and hence viable building block for a new internationalfinancial architecture. In its current structure it is too small as a pool of reserves to betaken seriously by the market. The borrowing procedure is complicated and is tied toIMF policy conditionality if the borrowing amount exceeds a certain limit.Few of East Asia's emerging economies will be able to pull through the crisis withoutconsiderable loss of output and employment. Some countries such as South Koreahave suffered a large increase in capital outflows as foreign investors are shifting tohigh-quality assets such as US treasuries, liquidating their investments to deleverageand cover their losses back home. The flight to quality together with the gloomy economicoutlook has generated an expectation of depreciation of currencies, inducingfurther capital outflows. At present, the only recourse to short-term US dollar liquidityis borrowing from the overnight interbank market. A vicious circle seems to be settingin. Although it was designed to support dollar liquidity to its members, theBilateral Swap Arrangements do not offer any relief and the completion of the regionalpooling arrangement, SRPA, remains uncertain.How to make the SRPA work for East AsiaThis danger can be pre-empted if the ASEAN+3 nations (ASEAN nations plus Japan,China and Korea) together with the US and the EU collaborate to elevate the statusof the SRPA to a credible regional lender. For its part, AEAN+3 should consider enlargingthe size of the reserve pool to be taken seriously by the market. Given the largeamount of reserves held by the members of ASEAN+3, the size of the SRPA could bedoubled.Policy conditions to be attached to SRPA loans should be no more stringent thanthose of the IMF's SLF. Most of all, the disbursement process will have to be relativelystraightforward and expeditious.For their parts, the US and EU could consider including the SRPA in the reformagenda for constructing a new international financial architecture.50