–Need Bigger Role for SDR in Reserves, Borrowing
–IMF Has Not Advocated Rise in Inflation Target
By Steven K. Beckner
JACKSON HOLE, Wyo. (MNI) – A top International Monetary Fund
official suggested Saturday that the IMF needs to play an increasing
role as a provider of liquidity in crisis situations.
John Lipsky, first deputy managing director of the IMF, also
suggested an increased role for Special Drawing Rights, the Fund’s
basket-currency unit as he addressed the Kansas City Federal Reserve
Bank’s annual symposium.
Lamenting large global financial imbalances and the shortage of
dollar liquidity during the mortgage crisis and the more recent
sovereign debt crisis, Lipsky said “it may be appropriate to have a
standing IMF liquidity facility with well known access rules.”
He said a “systemic crisis prevention mechanism may be appropriate”
as well.
An IMF liquidity facility would make credit readily available to
all IMF members, rather than loans having to be arranged on an
emergency, ad hoc basis, he said.
Lipsky maintained that “the ongoing rapid growth of international
reserves to some extent reflects the failure of international monetary
system to resolve” liquidity needs.
But if countries are going to accumulate massive reserves, Lipsky
recommended an “increase in the role of the SDR” — a basket currency
unit created by the IMF.
“An evolutionary process toward increased SDR use could be feasible
and worthwhile,” said Lipsky, adding that it would “expand the pool of
assets” available in a crisis.
Lipsky also suggested that the IMF should “create more SDRs.”
The SDR, created by the IMF in 1969 to supplement its member
countries’ official reserves, is based on a basket of four key
international currencies and can be exchanged for freely usable
currencies.
Following a general SDR allocation on Aug. 28, 2009 and a special
allocation on Sept. 9, 2009, the amount of SDRs increased from SDR 21.4
billion to SDR 204.1 billion (equivalent to about $321 billion).
Lipsky’s proposals got some support at the Jackson Hole symposium
from University of California-Berkely professor Maurice Obstfeld.
Obstfeld called the build-up of reserves, most notably by China, a
form of “self-insurance” against liquidity crunches. But he called that
a “bad” approach. He said hoarding liquid reserves “has a number of
disadvantages”:
1. “Official asset flows may have interest-rate effects, while
shifts between currencies or other assets can have price effects.
Witness the market-moving power of recent Chinese signals concerning
European sovereign debt.
2. “In a crisis, reserve withdrawals may have adverse effects in
other markets.
3. “Large reserve holdings can be costly.
4. “Costs of sterilization may be significant.
5. “Governments may be reluctant to use reserves in crises,
precisely because high reserves reassure investors… . Thus, even a
country with high reserves such as Korea drew on its Fed swap line (also
selling significant reserves) during the crisis.”
6. “Some of the contribution of higher reserves to financial
stability may be illusory. It may well be that the very event that
swells reserves raises, in equal measure, the fragility of the financial
system.”
Obstfeld acknowledged that currency swap lines were arranged among
the Fed and other central banks to handle liquidity pressures during the
mortgage crisis and again during the European sovereign debt crisis. But
he argued for a more permanent, systematic arrangement.
“Given the shortcomings of self-insurance through reserves, some
regularized system of credit lines in different national currencies
would be more efficient, and it would be natural to embody it in an
international lender of last resort,” he said.
He said “the natural candidate to fulfill this role is the IMF,
which has the limited capacity to create outside money in many
currencies, and presumably has some degree of fiscal backing from member
countries should its capital ever be impaired.”
Obstfeld argued that the IMF’s resources, which were expanded to
$500 billion during the financial crisis, are still insufficient. “IMF
resources, even as augmented recently as a result of the global crisis,
are clearly inadequate for the challenges posed by the rapid growth of
gross positions in international financial markets.”
If Lipsky and the IMF get their way, that alleged inadequacy would
be remedied.
In addition to enhancing the IMF’s resources and last resort
lending role — essentially making it more of a global central bank —
Lipsky said the IMF is seeking to play a greater role in coordinating
and exercising surveillance over member countries macroeconomic
policies, as mandated by the Group of 20.
“The IMF’s economic and policy surveillance needs to be more
rigorous” and include financial market surveillance, he said, adding
that the IMF “should assist effective multilateral coordination.”
Lipsky said the IMF is “working to enhance bilateral and
multilateral surveillance” and is paying “increased attention to
financial issues in regular country surveillance.”
The IMF will “highlight key vulnerabilities for senior
policymakers,” he said.
Former IMF chief economist Michael Mussa, now a senior fellow at
the Peterson Institute of International Finance, pronounced himself
“skeptical” that current international monetary arrangements were
fundamentally flawed and led to the recent financial crisis.
“With the policy adjustments that were made the international
monetary and financial system was not playing an integral role in the
crisis itself,” said Mussa, adding that while the U.S. had a large
current account deficit, “it was not problems in financing that deficit
that caused the crisis.”
“If leading central banks had failed to recognize their role as
lender of last resort in their own currency then we might well have had
a disruption of the international payment system, but policy responses
avoided that outcome,” he said.
“Exchange rates moved, sometimes substantially, but it’s very
difficult to make the case that on balance adjustments in exchange rates
were more destabilizing than stabilizing,” said Mussa.
The crisis was “not primarily a problem with the functioning of the
international monetary system,” he said. “The problems lie elsewhere.”
** Market News International **
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