Chapter 10: Regional Financing Arrangements and the IMF
* Julie McKay, Ulrich Volz and Regine Wölfinger 10.1 INTRODUCTION Regional and bilateral liquidity arrangements have gained increasing prominence over the past decade, not least during the recent global financial crisis. This has important consequences for the role of the International Monetary Fund (IMF) as a crisis lender and raises questions regarding the relationship between these arrangements and Fund lending. The IMF has been widely criticized for its handling of various financial crises over the past decades. The Fund stands accused of providing unhelpful, even counterproductive advice; of being late to react; of providing insufficient finance to stabilize a situation and calm markets; of not identifying a looming crisis in time and above all of attaching excessive microeconomic requirements to its loans. This led, in some cases, to a sense of humiliation in some afflicted countries as leaders perceived themselves forced to swallow bitter IMF medicine. To address their dissatisfaction with the Fund’s crisis financing, attempts have been made to bolster first and second lines of defence – foreign exchange reserves and regional financing arrangements, respectively. Due to a combination of prudent economic management and a long period of benign global monetary conditions that lasted until summer 2007, many countries succeeded in building up large foreign exchange reserves, which offer a first line of defence in the event of a crisis. Others, such as East Asia, have gone further and developed regional financing arrangements (RFAs) that are becoming ever more sophisticated, in effect, strengthening a second line of defence. The attractiveness...
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