By Kyle Ferrier
This year’s G-20 summit in Antalya, Turkey may best remembered for the inclusion of non-economic issues in response to the terror attacks in Paris and the migrant crisis in Europe, but the final agreement also reflects the work of officials from participating governments since late last year. In a previous post I outlined how the rotating G-20 presidency permits countries to shape the agenda and discussed how South Korea’s inclusion of development during its 2010 presidency continues to be a significant contribution. In addition to development, South Korea added global financial safety nets to the agenda, but comparing progress on the two issues reveals stark contrasts. Whereas advancement on development issues can be monitored annually, advancements on global financial safety nets have proven to be more elusive, yet a breakthrough in the area is important to shore up global economic stability.
Addressing global financial safety nets in Seoul not only indicated global demand for reform, but reflected South Korea’s history with the IMF. After South Korean markets crashed in November 1998 the IMF offered $60 billion in loans to the Kim administration to immediately stabilize the domestic economy, which also included conditions to increase the economy’s competitiveness. These conditionalities, such as those on labor market flexibility, caused painful structural reforms and were so unpopular that the possibility of a new loan from the IMF continues to be politically untenable in South Korea. When the departure of nearly $50 billion from domestic markets during the Global Financial Crisis (GFC) of 2008 left the country on the verge of a liquidity crisis, the Bank of Korea undertook a $30 billion bilateral swap agreement (BSA) with the Fed rather than drawing from an IMF facility or the IMF-linked Chiang Mai Initiative (CMI). Although this agreement with the Fed expired on February 1, 2010, later that year South Korea attempted to elevate the role of these central bank agreements in Seoul.
Despite the inability of its most ambitious policy proposal to gain momentum, South Korea’s addition of financial safety nets to G-20 talks led to some initial successes. Wanting to make bilateral currency swaps more permanent and to decrease the involvement of the IMF in times of financial crisis, the Lee Myung-bak administration introduced a global swap regime, which it argued would reduce the need for reserve accumulation through a central bank swap regime similar to the lines of credit extended by the Fed during the GFC. The unclear management of moral hazard and the inevitable burden placed on the Fed as the issuer of the global reserve currency ultimately prevented the proposal from being adopted. However, the 2010 Seoul summit did lead to the enhancement of the IMF’s Flexible Credit Line (FCL), aimed for countries with strong fundamentals in a cash crunch, and the introduction of the Precautionary Credit Line (PCL), designed for countries with sound fundamentals but moderate vulnerabilities. The PCL would then be supplanted at the Cannes summit of 2011 by the Precautionary and Liquidity Line (PLL) to have a more flexible qualification process than its predecessor.
Since its approval by the IMF Board of Governors in December of 2010, implementation of the IMF Quota and Governance Reform has unequivocally been the most pressing agenda item pertaining to global financial safety nets. While it was approved in the IMF with overwhelming support, the reform package doubling IMF lending capacity and shifting the weighted-voting representation in the institution continues to be stalled in the U.S. Congress, with little prospect for ratification. The concluding communiqués of G-20 summits from 2011 to 2013 all broadly stated member country commitment to quota reform, but representatives did little to hide their exasperation at Brisbane in 2014, stating, “we are deeply disappointed” with the delay and made specific reference to the U.S. as the last remaining holdout. To put this in perspective, the only other time “deeply” is used in the document is in reference to concerns about the Ebola outbreak in East Africa. The year’s communiqué from the G-20 Finance Ministers and Central Bank Governors Meeting used the same language to express disappointment with the U.S. Because the demand for the ex-ante arrangements providing liquidity in times of financial crisis is not being met at the multilateral level, countries have increasingly looked to bilateral and regional agreements for emergency currency supply.
The G-20 has facilitated talks on the collaboration between Regional Financing Arrangements (RFAs) and the IMF, yet there has been little discussion regarding how to manage a rising number BSAs. Until the 2013 G-20 summit in St. Petersburg, RFA-IMF cooperation was a key component of the agenda on global financial safety nets, but in 2012 the development of the CMI into the CMI Multilateralization (CMIM) and the introduction of the European Stability Mechanism (ESM) as well as strengthened communication networks with the IMF for both institutions obviated the need for more substantive work on this issue in the G-20. Though this represents a significant achievement for the G-20, the rise of BSAs since the global financial crisis represents a potential challenge for the IMF and RFAs as BSAs inherently lack conditionality and in some cases can offer greater access to emergency liquidity.
Since 2008 China has signed the most of these such agreements with over thirty RMB-denominated BSAs, but unlike Fed swaps, which were a reaction to an emergency situation, these BSAs are part of a long-term policy to internationalize the RMB. Several of these agreements are with CMIM countries, including South Korea, Hong Kong, Malaysia, Singapore, Thailand, and Indonesia. The values of all of these agreements are significantly higher than the IMF de-linked funds accessible in the CMIM with the continued potential for their increase as was demonstrated last week with Indonesia. Though the swaps may not be in the more widely-used USD and are merely intended to facilitate trade, they can readily be converted into USD in emergency situations as demonstrated by the examples of both Argentina and Pakistan. Additional BSAs within CMIM membership include the USD-denominated ones by the Bank of Japan with Singapore, the Philippines, and Indonesia as well as a local currency agreement between the Bank of Korea and Indonesia. How to best incorporate BSAs within the existing financial stability regime at a time of stalled progress in the IMF should be of global concern, but of particular importance for South Korea and other CMIM members. Some experts have even begun to question the relevancy of the RFA in light of the BSAs.
Though pushing through IMF reforms is unlikely to be removed from the G-20 agenda, the Antalya G-20 summit may very well have been the final one in which the 2010 IMF Quota and Governance Reform was discussed. IMF rules state that there must be a General Review of Quotas by December 15, 2015 and there have already been new proposals to enhance IMF legitimacy and efficiency that are also aimed to be either more palatable for Congress or which could bypass Congress altogether.
Regardless of whether a completely revamped quota system is adopted or countries reaffirm their commitment to a system more or less similar to the one proposed in 2010, 2016 may mark a watershed year for global financial safety nets in both the G-20 and the IMF. Moreover, China’s presidency of the G-20 next year makes the prominence of global financial safety nets on the agenda all the more likely since it is the IMF member with the most to gain from an IMF quota adjustment. As BSAs continue to rise in importance as tools for financial stability, China’s presidency may also provide an ideal opportunity to address the relationship of these bilateral currency agreements to RFAs and the IMF. Despite the lack of progress on global financial safety nets, their persistence on the G-20 agenda is representative of their lasting importance. They may yet prove to be as fruitful a contribution from South Korea as was Korea’s championing of the development agenda.
Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone.
Photo from Fr Lawrence Lew, O.P.’s photostream on flickr Creative Commons.