Slow growth make countries more exposed to financing difficulties
According to a press release by Chatham House, which ‘Arabstoday’ received a copy of, existing financial system mechanisms are insufficient to deal with another event on the scale of the
2007-09 crisis, Despite the European Heads of State agreement in the early hours of Thursday, 27 October 2011, says a new briefing paper by Chatham House.
The potential scale of need for financing to protect countries fro m another global systemic crisis is huge, and already nearly half of the IMF’s total resources and one-third of the enhanced EFSF capacity have been committed. The European Summit has not clarified where the required additional capacity will come from.
According to Global Financial Safety Nets by Stephen Pickford, former managing director at HM Treasury and former executive director at the IMF, countries are generally now less able to withstand contagion pressures.
The crisis has weakened most countries’ fiscal and economic positions, leaving them more reliant on external borrowing, at the same time as global capital markets are more reluctant to lend to any but the highest-quality sovereign borrowers. The amount of money available to support these countries is still not sufficient, especially as the eurozone crisis worsens and takes up more of the available resources. < /font>
'Both the International Monetary Fund and regional financing arrangements, especially in Europe and Asia, have a big role to play in avoiding fears that existing mechanisms are inadequately resourced and too inflexible to deal with another systemic crisis,' says Stephen Pickford.
‘Ahead of the G20 Summit in November, consideration needs to be given to substantially expanding the IMF’s fire-power, including allowing it to borrow from the markets, improving cooperation between the IMF and regional arrangements, an d setting up a multilateral system of central bank swap arrangements.’
More flexible ways for countries to access the IMF’s new borrowing facilities could be achieved through automatic pre-qualification processes and making clear the scale of resources available. It will not be easy to get agreement to these reforms, but the cost of not having effective mechanisms in place to deal with systemic crises in future would be enormous.
The paper argues that countries are stil l counting the cost of the crisis. In many cases their fiscal positions are much more fragile than they were four years ago in terms of deficits and debt levels, and the loss of output and slow growth make them more vulnerable to financing difficulties.