the severity of and olicy responses to systemic rises · 2020. 1. 25. · lorenzo giorgianni july,...

THE SEVERITY OF AND POLICYRESPONSES TO SYSTEMIC CRISES

Lorenzo Giorgianni July, 2011

OUTLINE

Increasing linkages

Anatomy of systemic crises

Policy Responses to Past Systemic Crises

Key Lessons

Analytics of Systemic Crises and the Role of Global Financial Safety Nets

Mapping Cross-Border Financial Linkages: A Supporting Case for Global Financial Safety Nets

Based on recent IMF work on financial linkages and systemic crises

Europe: Cross-Country Bank Liabilities (in percent of GDP of debtor country)

1999

2009

0,4

0,8

1,2

1,6

2

1980 1988 1996 2004

EM financial openness

600

700

800

900

1000

1999 2002 2005 2008

Number of cross-border links in the global banking network

Increasing linkages have created more complicated financial networks…

Increasing linkages

Capi

tal I

nflo

wep

isod

es (o

ne p

er li

ne)

2010200520001995Ongoing

Emerging

Advanced

1997-98 2001 2008

Capital flows surged at various points but tended to end in a synchronized manner…

50% of cases 50% of cases 80% of cases

Increasing linkages

-50

-30

-10

10

30

50

70

90

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fed fund rateCommodity price indexS&P 500VIXNet volatility received by EMs

Net Volatility Received by Emerging Markets(pairwise contributions)

Rece

ived

Tran

smitt

ed

…as linkages could shift quickly and create nonlinear impact during systemic crises…

Increasing linkages

Prob

abili

ty o

f ind

ivid

ual/s

yste

mic

failu

re

Interconnectedness

System

Individual country

…increasing the risk of systemic instability

Increasing linkages

OUTLINE

Increasing Linkages



Key Lessons

Systemic crisis

Severe stress Contagion

A systemic crisis is a severe stress event that spreads across countries with rapid virulence…


…and measured using a global financial stress indicator and an economic stress indicator

-5

-4

-3

-2

-1

0

1

2

3

4

5

-5

-4

-3

-2

-1

0

1

2

3

4

5

1/ World financial stress index is a simple average of each country's (normalized) financial stress index (advanced economies) or exchange market pressure index (emerging markets). World real GDP growth is a simple average each country’s (normalized) real GDP growth (yoy).

World Financial Stress Index

One standard deviation above mean

One standard deviation below mean

World Real GDP Growth

What makes a crisis “systemic”?

0

10

20

30

40

50

60

-3

-2

-1

0

1

2

3

4

5

6

1980

Q1

1980

Q4

1981

Q3

1982

Q2

1983

Q1

1983

Q4

1984

Q3

1985

Q2

1986

Q1

1986

Q4

1987

Q3

1988

Q2

1989

Q1

1989

Q4

1990

Q3

1991

Q2

1992

Q1

1992

Q4

1993

Q3

1994

Q2

1995

Q1

1995

Q4

1996

Q3

1997

Q2

1998

Q1

1998

Q4

1999

Q3

2000

Q2

2001

Q1

2001

Q4

2002

Q3

2003

Q2

2004

Q1

2004

Q4

2005

Q3

2006

Q2

2007

Q1

2007

Q4

2008

Q3

2009

Q2

2010

Q1

2010

Q4

Number of countries affectedEqual-weightedSystemic-weightedThreshold: one SD above mean

Source: WEO database and IMF staff calculations.1/ A country is considered "affected" if its country-level crisis indicator (a simple average of FSI/EMPI and real GDP growth, both normalized) is above one standard deviation from its mean. Global systemic crisis indicators are constructed as a simple average of normalized global real and financial stress indices, which aggregate country-level indicators using either "systemic importance" as weights (systemic-weighted) or equal weights. Both global crisis indicators are normalized for easy presentation and comparison.

Systemic-weighted and Equal-weighted Global Systemic

Four systemic crises were identified

Debt crisisNikkei crash, DBL bankruptcy, and Scandinavian banking crisis

ERM crisisAsian crisis

Russian default and LTCMcollapse

Global financial crisis


Underlying vulnerabilities varied with external factors playing a larger role in systemic events…


Underlying factor Debt ERM Asia Russia Global

Domestic factors

Balance sheet mismatches √ √ √ √Public debt sustainability √ √ √ √ √Unsustainable ER pegs √ √ √Asset price bubble √ √ √

External factors

Monetary policy in major AMs √ √Commodity prices √ √ √

0

5

10

15

20

1977Q1 1982Q1 1987Q1 1992Q1 1997Q1 2002Q1 2007Q1

Crisis period

US recession

SDR rate

Fed Fund rate

Sources: IFS and staff estimates.

G7 Policy Rates Across Systemic Crises

ERMcrisis

Asian/Russiancrisis

Globalcrisis

Debtcrisis

…of which, advanced countries’ monetary policy could carry systemic implications for others


0

5

10

15

20

25EM Crisis Bystanders During Systemic Crises 1/

1/ An emerging market (EM) is considered to have relative strong fundamentals if it had low or medium pre-crisis external vulnerability (overall vulnerability for the global crisis). An EM is considered affected during a systemic crisis if its systemic crisis index exceeded one standard deviation above its own mean or it had an IMF arrangement starting during

Debt crisis ERM crisis Asian/Russian/LTCM crisis Global crisis

Low vulnerabilityMedium vulnerabilityHigh vulnerability

Relatively strong fundamentals “Crisis bystanders”

Even EMs with relatively strong fundamentals (“crisis bystanders”) not spared …


Affected EMs: Median Net Inflows(peak-to-trough deviation in period T-3 to T+3

percent of GDP)

-16

-12

-8

-4

0

Debt crisis Asian/ Russian/ LTCM crisis

Global crisis

L/M L/ L/H H H

…as these EMs were neither immune to large net capital outflows nor to output collapse…


-10

-8

-6

-4

-2

0

2

4

6L/M H L/M H L/M H

Asian/Russia crisis Global

crisisDebt crisis

Affected EMs: Median output loss(peak-to-trough, percent)

OUTLINE

Increasing Linkages



Key Lessons

DOMESTIC RESPONSE

Global monetar

y response

IMF

RFA and

Bilateral

PSI

Policy responses to systemic crises

Policy responses have involved multiple institutions

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1980

M4

1980

M7

1980

M10

1981

M1

1981

M4

1981

M7

1981

M10

1982

M1

1982

M4

1982

M7

1982

M10

1983

M1

1983

M4

1983

M7

1983

M10

1984

M1

1984

M4

1984

M7

Debt crisisER

Reserve

Interest

Mexicodefault

-15%

-10%

-5%

0%

5%

10%

15%

1990

M4

1990

M7

1990

M10

1991

M1

1991

M4

1991

M7

1991

M10

1992

M1

1992

M4

1992

M7

1992

M10

1993

M1

1993

M4

1993

M7

1993

M10

1994

M1

1994

M4

1994

M7

ERM crisis

Danish referendum

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1996

M2

1996

M5

1996

M8

1996

M11

1997

M2

1997

M5

1997

M8

1997

M11

1998

M2

1998

M5

1998

M8

1998

M11

1999

M2

1999

M5

1999

M8

1999

M11

Asian crisis

Thai baht float

LTCMcollapse

Russia default

-15%

-10%

-5%

0%

5%

10%

15%

20%

2007

M2

2007

M5

2007

M8

2007

M11

2008

M2

2008

M5

2008

M8

2008

M11

2009

M2

2009

M5

2009

M8

2009

M11

2010

M2

2010

M5

2010

M8

2010

M11

Global Financial crisis

Lehmanbankruptcy


Domestic liquidity responses varied across crises, particularly interest rate response

Median 3M-moving average

Moreover, there were also diminishing returns to reserve accumulation

-30

-25

-20

-15

-10

-5

0

5

0 200 400 600 800

Pea

k to

Tro

ugh

Rea

l GD

P G

row

th

Emerging Markets: Foreign Reserves and Growth in the Recent Crisis

Reserves/(Short-term Debt at Remaining Maturity + Current Account Deficit), 2007

DOMESTIC RESPONSE

Global monetar

y response


Global responses activated during systemic crises centered on liquidity provision

-10

0

10

20

30

40

1977Q1 1982Q1 1987Q1 1992Q1 1997Q1 2002Q1 2007Q1

Crisis period US recession Liquidity injection Liquidity contraction

1/ Global liquidity is calculated as average quarterly narrow money (divided by country GDP) in the U.S., Euro Area, Japan, and the U.K. Figures for the Euro Area refer to M1.

Annual change in global liquidity 1/ (In percent of GDP)

Debtcrisis

ERM Asian/Russiancrisis

Globalcrisis


Liquidity injection by major CBs varied depending on whether AMs were directly affected…

Federal Reserve Bank of Japan

Reserve Bank of Australia

Bank of England

Swiss National Bank

Sveriges RiksbankNational Bank of Denmark

Reserve Bank of New Zealand

Central Bank of Brazil

Bank of Mexico

Bank of Korea

Monetary Authority of Singapore

National Bank of Poland

National Bank of Latvia

National Bank of Hungary

ECB

In the latest crisis, global liquidity response was unprecedented with swap lines by the Fed, paralleled by the ECB


0

100

200

300

400

500

600

700

800

900

0

100

200

300

400

500

600

700

Dec-07

Feb-08

Mar-08

Apr-08

Jun-08

Jul-08

Sep-08

Oct-08

Nov-08

Jan-09

Feb-09

Apr-09

May-09

Jun-09

Aug-09

Sep-09

Oct-09

Dec-09

Jan-10

Mar-10

Market Reaction to Fed Swaps(USD billion)

VIXCDS (BRA, KOR, MEX)

EMBIG


Instant but short-lived market reaction, until Fed announced asset purchases plus G-20 summit/IMF lending reforms…

Fed swap lines to BRA, MEX, KOR, SGP

CDS (AUS, DNK, NZL, SWE)

G-20 London Summit IMF lending reforms

DOMESTIC RESPONSE

Global monetar

y response

IMF


The third layer of global response is IMF financing…

Frontloading Precautionary

0

10

20

30

40

50

60

Asian/Russian Crisis

Global Crisis

(Access approved on a precautionary basis, in percent of total)

0

5

10

15

20

25

30

Asian/Russian Crisis

Global Crisis

(First disbursement as percent of total access)


…modalities changed in response to global crisis –more frontloaded and larger precautionary access

= 100 percent of

quota

THAUKRLVAPAK

YEMIDNKOR

PANEST

ARG

CPVPHL

BIHZWE

IDNUKR

BGR

BRAURY

JOR

PERMEXRUSZWEROMLVAKAZCOLTUR

0

50

100

150

200

250

300

Jun-96 Oct-97 Feb-99 Jul-00

= 100 percent of

quota

GEO

UKRHUN

SYC

ISLPAKLVA

BLRSRBSLVARM

MNG

CRIMEXGTMROMPOLCOL

BIH

LKA

DOMAGOMDVSYCMDAJAMIRQ

SLVMEX

COLGRC

100

200

300

400

500

600

700

800

900

Aug-08 Mar-09 Sep-09 Apr-10

EMBI spreads(bps)

Fed swap lines with 4 key EMs

IMF facilities reform (FCL)

LTCM bailout

Asian and Russian Crisis Global crisis

Money market rates (Jan -96=100)

RUS/BRA

As a result, market conditions improved quicker than in past crisis…

ASEAN 4 + KOR

Asian/Russian/LTCM Crisis Global Crisis

Peak-to-trough CA Deficit Adjustment by Crisis Episode(Fund arrangements, average, in percent of GDP)

(H vulnerability) (L/M vulnerability) (FCL arrangements)

Asian programs only

-14

-12

-10

-8

-6

-4

-2

0

1 2

Source: WEO and IMF staff calculations.

…and EMs with Fund arrangements weathered the global crisis with less CA adjustment than in the past

Wave 1 Program countries

FCLs (average)

-7

-6

-5

-4

-3

-2

-1

0

20 30 40 50 60 70 80

Fisc

al b

alan

ce

Public debt (medians, percent of GDP)

Past Crisis

Non Program countries

2008

20142014

2008

2014

2008

T

T+6

28…and large Fund financing also allowed more fiscal room than past crises

1/ Exclude Euro zone program countries.

1/

0

10

20

30

40

50

60

70

80

90

100

Debt crisis ERM crisis Asian/Russian/LTCM crisis Global crisis

Fund Arrangements to EM “Crisis Bystanders“(in percent of crisis bystanders)


However, the Fund succeeded in ring-fencing only over a third of the strong performers

DOMESTIC RESPONSE

Global monetar

y response

IMF

RFA and

Bilateral

PSI


The fourth and fifth layers include contributions from other official creditors and private sectors

OUTLINE

Increasing Linkages



Key Lessons

Despite improved coordination, policy responses during the global crisis remained piecemeal

CBs Swaps:

Swap lines ad hoc and

discretionary;

Domestically oriented mandate

Fund:Significant

financing but delayed/limited

liquidity support to

crisis bystanders

RFSNs:No focus on

crisis prevention and

catalytic finance

Reserves:Diminishing returns vis-à-vis large domestic

and global costs

Key lessons

Systemic crises relatively rare but virulent and costlyInstability from boom/bust AM monetary policiesStrong linkages widespread contagionSevere global output lossCrisis bystanders not immune to impact

Liquidity responses ad hoc and reactive

Multiple layers of liquidity provision helped, but only in a limited way

Crisis bystanders not fully ring-fenced

CB liquidity support uncertain going forward

Key lessons

Lessons

Key lessons

Where to from here? Lessons for the IMF

Better Surveillance requires more attention to Financial risks

Hidden linkages

Risks of systemic crisis

Need better global financial safety net Improve global coordination mechanism

Enhance RFAs

Improve liquidity provision to crisis bystanders to limit contagion

Background

Detecting future systemic crises is more art than science, requiring large dose of judgment

Looking ahead: Detecting a systemic crisis

-40

-30

-20

-10

0

10

20

30

40

50

-3

-1

1

3

5

7

9

Jan-

97

Sep-

97

May

-98

Jan-

99

Sep-

99

May

-00

Jan-

01

Sep-

01

May

-02

Jan-

03

Sep-

03

May

-04

Jan-

05

Sep-

05

May

-06

Jan-

07

Sep-

07

May

-08

Jan-

09

Sep-

09

May

-10

Jan-

11

Financial stress indicators

Interquartile range

Average of stress index stdCountries under stress (RHS)

Asian crisis

Russian default/LTCMcrisis

Global financial crisis

One SD threshold

Source: IMF staff calculations.1/ A simple average of (normalized) monthly FSI of both advanced economies and emerging markets is used for real-time detection of systemic crises. The final global financial stress indicator is normalized for easy presentation. All normalizations use past information only.

0

5

10

15

20

25

30

35

Latam CrisisARG, BRA, MEX

Asian CrisisIDN, KOR, THA

Global Crisis EU Programs

Burden Sharing between IMF, RFAs, and Other Official Creditors

(average financing package in percent of GDP)

Bilateral & other IFIs

Bilateral (second line of defence)

EU (BoP facility, EFSF, GRC bilateral loans)IMF


…which allowed burden sharing with the Fund on crisis resolution, but not on crisis prevention

0

25

50

75

100

BCI Program cases Other program cases Non-program cases

Rollover of Parent Banks' Exposures in CESE Countries

2008Q3-2009Q3

In p

erc

ent

Source: BIS.

the severity of and olicy responses to systemic rises · 2020. 1. 25. · lorenzo giorgianni july,...

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