Tag: IMF

Precautionary facilities: stitches for a fragmented financial safety net

Daniel Christen and Nicola Shadbolt

Geoeconomic fragmentation is one of the greatest risks to the international monetary and financial system at present, particularly since Russia’s war of aggression against Ukraine. Fragmentation is likely to have wide-ranging implications for the global economy, including increasing the volatility of capital flows and exposing gaps in the global financial safety net (GFSN). In this post, we argue that increased take up of the IMF’s ‘precautionary facilities’ would reinforce the GFSN and help prepare it for these challenges. The IMF’s upcoming review of precautionary facilities is an opportune moment to find ways to reduce stigma and increase uptake.

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Stitching together the global financial safety net

Edd Denbee, Carsten Jung and Francesco Paternò.

The global financial safety net (GFSN) is a set of instruments and institutions which act as countries’ insurance for when capital flows suddenly stop or foreign currency markets suddenly freeze.  These resources were extremely important during the 2007-08 crisis when investors ran for the exits, threatening the external positions of many advanced and emerging economies.  Since then, the GFSN has expanded in size and nature, but was recently described by IMF Managing Director Christine Lagarde as “fragmented and asymmetric”.  We agree on the asymmetry – our recent paper finds that some countries have insufficient access to the GFSN.  However, we also find that the GFSN is sufficiently resourced for a severe set of shocks, provided the IMF’s current lending capacity is maintained.

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