July 01, 2010
IMF may adopt financial safety net proposal
Seoul has been pushing concept to be discussed at the G-20 Summit
The International Monetary Fund and Korea are in talks to create a new system to provide emergency loans to countries suffering from a liquidity crisis, a senior presidential adviser said yesterday.
The move represents progress on the development of a “financial safety net,” a Korean initiative, as the IMF may adopt the idea as its own program.
“Now the issue is being led by the IMF,” said Shin Hyun-song, an adviser to President Lee Myung-bak. “Korea has entrusted the IMF with studying the idea.”
President Lee proposed the idea of a financial safety net during an address at the Davos Forum in Switzerland in January. (see article below)
Though some countries opposed the idea, Korea has been pushing the concept to be included as an agenda item during the Group of 20 Summit that will be held in Seoul in November.
The financial safety net proposal would involve setting up currency swap arrangements to rescue countries suffering from a sudden capital outflow. Korea says such an arrangement would avoid forcing countries to build up large foreign reserves to protect themselves against a possible liquidity crisis.
The concept might provide an alternative means for the IMF in mounting financial rescues of troubled economies, particularly after it was criticized for dictating painful austerity measures during the 1997-98 Asian financial crisis.
The IMF has introduced “flexible credit lines” to provide emergency lending aid without requiring other tough measures, such as cutting budget deficits. But only three countries, Poland, Mexico and Colombia, used the system during the recent global financial crisis.
The new program being crafted by the IMF and Korea allow condition-free access to financial resources held by the IMF, at least in theory. The IMF also hopes that new program will do away with the stigma attached to countries receiving bailout funds.
The program would replace the currency swaps arranged by the U.S. Federal Reserve with other central banks, including Korea, in 2008. Unlike that arrangement, the IMF would be responsible for creating currency swaps between it and member countries, but details remain unfinished.
January 29, 2010 - Korean president calls for safeguards against risky capital flows
The global mechanism will build on and be complementary with regional arrangements between central banks against such global volatility, he said.
Seoul played a leading role in creating the Chiang Mai Initiative, a $120 billion regional reserve arrangement of Korea, China, Japan and 10 Southeast Asian countries. Korea proposed the program in 2006 and mediated contrasting interests of partners. It's scheduled to be launched in March.
"We believe that the establishment of such a financial safety net will contribute significantly toward balanced growth of the global economy," Lee said.
The safety mechanism will be a key tool to resolve the imbalance in global trade and development by relieving emerging market countries of the need to set aside huge foreign reserves as protection against volatile capital movement, Sakong Il, chief organizer of the G20 summit, said.
"To rebalance global trade, nations with trade surpluses need to reduce them. For this to happen, a global financial safety net should be enhanced. We will try to find a way to do so," Sakong told reporters.
Emerging and developing countries will be able to channel their income to economic development, infrastructure, education and welfare, instead of building up huge reserves.
As the G20 chair, Korea seeks to lead efforts to build a new financial safety net on the global level. But it has to bridge the United States and China, a more daunting challenge than it tackled in the Asian initiative.
In March 2009, China called for the creation of a global reserve currency which does not rely on the dollar. The United States rejected the proposal out of concern of the weakening of the currency.
In September 2009, a high-level U.N. commission by Nobel Prize-winning economist Joseph Stiglitz proposed the creation of a new reserve system to replace what it called the "relatively volatile, deflationary and unstable" dollar-based system. It also urged a new global credit facility to complement the International Monetary Fund.
The G20 agreed last year to the issuance of $250 billion of special drawing rights of the IMF as part of efforts for global financial stability.
Closing the development gap between advanced and developing countries should be another key mission for the G20, Lee said.
"In order to achieve balanced and sustainable growth, I believe more is necessary than just achieving balance in a narrowly macroeconomic sense. A broader notion of balance is appropriate, including closing the development gap between advanced and developing countries," he said.
Korea will consult G20 partners in placing development issues on the agenda for the summit, he added.
In that regard, Korea will try to share its experiences and expertise with other countries on strategies for development and on policies for successful recovery from financial crises.
Korea is the first country from outside the ranks of the G8 to chair the G20.
The global mechanism will build on and be complementary with regional arrangements between central banks against such global volatility, he said.
Seoul played a leading role in creating the Chiang Mai Initiative, a $120 billion regional reserve arrangement of Korea, China, Japan and 10 Southeast Asian countries. Korea proposed the program in 2006 and mediated contrasting interests of partners. It's scheduled to be launched in March.
"We believe that the establishment of such a financial safety net will contribute significantly toward balanced growth of the global economy," Lee said.
The safety mechanism will be a key tool to resolve the imbalance in global trade and development by relieving emerging market countries of the need to set aside huge foreign reserves as protection against volatile capital movement, Sakong Il, chief organizer of the G20 summit, said.
"To rebalance global trade, nations with trade surpluses need to reduce them. For this to happen, a global financial safety net should be enhanced. We will try to find a way to do so," Sakong told reporters.
Emerging and developing countries will be able to channel their income to economic development, infrastructure, education and welfare, instead of building up huge reserves.
As the G20 chair, Korea seeks to lead efforts to build a new financial safety net on the global level. But it has to bridge the United States and China, a more daunting challenge than it tackled in the Asian initiative.
In March 2009, China called for the creation of a global reserve currency which does not rely on the dollar. The United States rejected the proposal out of concern of the weakening of the currency.
In September 2009, a high-level U.N. commission by Nobel Prize-winning economist Joseph Stiglitz proposed the creation of a new reserve system to replace what it called the "relatively volatile, deflationary and unstable" dollar-based system. It also urged a new global credit facility to complement the International Monetary Fund.
The G20 agreed last year to the issuance of $250 billion of special drawing rights of the IMF as part of efforts for global financial stability.
Closing the development gap between advanced and developing countries should be another key mission for the G20, Lee said.
"In order to achieve balanced and sustainable growth, I believe more is necessary than just achieving balance in a narrowly macroeconomic sense. A broader notion of balance is appropriate, including closing the development gap between advanced and developing countries," he said.
Korea will consult G20 partners in placing development issues on the agenda for the summit, he added.
In that regard, Korea will try to share its experiences and expertise with other countries on strategies for development and on policies for successful recovery from financial crises.
Korea is the first country from outside the ranks of the G8 to chair the G20.
"I cannot emphasize enough the importance of ensuring that the fruits of the strong and sustainable growth are shared evenly among all countries, including the poorest," he said.
To this end, the G20 must redouble its efforts to look beyond its member countries and take on the responsibility of considering a larger constituency of nations, he said.
Korea will conduct extensive inclusion efforts through consultations with the United Nations, regional bodies and countries outside the G20.
He stressed the role of the private sector and pledged to ensure businesses' voices be heard in the forum.
"We will also devote our energies toward giving full scope for the impetus for recovery to come from the private sector business community, taking the baton from the government sector in leading the recovery effort," he said.
The nation plans to launch a business leaders' summit coinciding with G20 summit in November. link ~ November 11-12 ~ G-20 Summit, Korea will set ‘Seoul Initiative’
"The world economy has stabilized through the concerted action of governments and is showing signs of recovery. But private sector investment and job creation are still far from robust," he said stressing the need to promote investment, entrepreneurial spirit and corporate creativity.
The last G20 summit in Pittsburgh in November last year generated the Framework for Strong, Sustainable and Balanced Growth, which included reforming international financial institutions and addressing global imbalance.
Lee promised to devote the chair country's energies to achieving consensus for the successful implementation of the agreement. "An important task is to follow up on the initiatives taken at previous summits on reform of financial regulation toward a more resilient global financial system and the reform of international financial institutions such as the IMF and World Bank."
With regard to financial regulations, important issues include finding ways to counter the procyclical nature of the financial system, as well as the problem of institutions that are too-big-to-fail that has received added impetus recently, he said.
Efforts to strengthen the system of international crisis prevention and early warning led by the international financial institutions will also be a major theme.
"In order for the IMF and other IFIs to fulfill their goals, it is important that they command broad support" which can only be gained through the accountability and legitimacy that comes to an institution with a governance structure that is truly representative of its members, he said.
He also emphasized the need both to guard against emergent protectionism and to address concerns about the side-effects of globalization that feed the antipathy toward greater global integration.
"To this end, a strategy of inclusive growth that permits a role for a strong social safety net should be an important companion to globalization," he said.
http://www.asiaone.com/News/Latest+News/Asia/Story/A1Story20100129-195275.html
