Global financial safety net fails many emerging markets: IMF paper

The financial safety net erected by central banks, exporters and the International Monetary Fund has grown in recent years, but has left many emerging market countries vulnerable to global economic shocks, the IMF said in a new research paper released on Monday.

The accumulation of foreign currency reserves has risen since the 2007-09 global financial crisis, and there are more bilateral swap arrangements between central banks, but these have mainly benefited advanced economies, it said. In times of crisis, some emerging market economies may still be left with financing gaps, the IMF said.

The paper by IMF staff was aimed at launching debate among the fund's 188 members over reforms to strengthen the global financial safety net. The first step in the process is to assess the adequacy of current system, which is too fragmented, untested and costly, the IMF paper said.

IMF Managing Director Christine Lagarde in February called for an expanded set of precautionary financing tools that can help emerging markets deal with shocks. During the last financial crisis, central banks in the United States, Canada the European Union, Japan, Britain and Switzerland enacted swap agreements that have helped advanced, reserve-currency-issuing economies to quell systemic risks.

But emerging markets do not have access to these swap lines, and have been forced to accumulate foreign currency reserves at considerable cost, the IMF staff said in the paper.

One of the few options available is to turn to the IMF's $1 trillion lending war chest, but that carries both a market and political stigma, and approval may be too slow in a financial crisis.

"The current configuration is too costly and creates the conditions for moral hazard," the IMF said. "Coverage is uneven across countries and worsens when the uncertain elements of the safety net are not available."

A reform option suggested by the paper would be to institute a prequalification process that would reduce the stigma associated with turning to the fund for liquidity support that would last for the duration of an economic shock.

Another option would be two strengthen cooperation among the central banks, governments and the regional lending structures that make up the financial safety net, the paper said. It suggested that the IMF could take a facilitating role with policy signals monitoring activities.

The paper will be discussed at a meeting of central bank governors and finance ministers from the Group of 20 leading economies scheduled for Thursday in Paris.

(Reuters)