The Global Financial Crisis in Retrospect by Anthony Elson

Author:Anthony Elson
Language: eng
Format: epub
Publisher: Palgrave Macmillan US, New York

The International Lender of Last Resort (ILOLR) Mechanism

In this domain of the IFA, the IMF had a potentially important role to play as the rough counterpart at the international level of a central bank in its function as a lender of last resort at the national level. However, in practice, the IMF is strictly limited in the amount of financial resources that it can provide to its membership, and except in the case of natural disasters, these resources are extended on a phased basis, subject to the fulfillment of certain policy conditions agreed with the member country. Thus, the IMF cannot “lend freely at a penalty rate of interest on the basis of good collateral”, as a national central bank can. Nevertheless, during the 1980s and 1990s, the IMF was usually called upon by countries experiencing financial crises, simply because it was the institution best situated to provide financial assistance and macroeconomic policy advice on a relatively quick timetable. This arrangement has reflected a certain asymmetry in how the ILOLR mechanism has functioned for the advanced countries and other developing and emerging market economies. For the former group, ad hoc, unconditional swap lines of credit have been established outside the operation of the IMF, as and when the need arose, to deal with liquidity problems, with the Federal Reserve playing a key role in its provision of dollar liquidity. For most other countries, the IMF has been for all intents and purposes the ILOLR, but with limits and conditions on its financial assistance.

In the wake of the Asian financial crises of the late 1990s, it was agreed in 1999 to establish within the IMF a new Contingent Credit Line (CCL) to provide a more rapid disbursement facility for countries facing “sudden stops” in capital flows and speculative currency attacks. Under the CCL, a country would be pre-qualified for access on the basis of a favorable assessment resulting from the IMF’s annual Article IV consultation or macroeconomic assessment exercise and its subscription to the Fund’s standard for data dissemination. However, in view of the fact that no country sought access to the facility, it was terminated in 2003. Essentially, there were two problems with its operation. One was that the amount of financial assistance that could initially be drawn down at the time of activating a request was relatively limited, and further access was made subject to mutual agreement between the IMF and the country seeking assistance on a policy program to deal with the conditions motivating the request. This limitation created doubts among potential borrowers as to whether adequate financial assistance would be provided under the facility at the time of activating a request. The other concern with the CCL was that an announcement of eligibility to use the facility might be considered to be a signal of potential problems that financial market participants were not aware of.

More generally, in the wake of the emerging market financial crises of the 1990s, many of the middle-income countries participating in the international

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