imf takes action to stem crises

8/8/2019 IMF TAKES ACTION TO STEM CRISES

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PRESENTED BY:AAKANKSHA (B3-01)

ARVIND (B3-03)ASHWANI (B3-05)

DIVYA (B3-09)


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HISTORY OF IMFy IMF The International Monetary Fund Was created in 1944, at the Bretton Woods

conference to prevent the kinds of chain reaction in the economic system that causedworld currencies to collapse like in the Great Depression of the 1930s.

y IMF started to make service with IBRD (international bank of reconstruction anddevelopment) in 1947.

y The IMF was created to support orderly international currency exchanges and tohelp nations having balance of payment problems through short term loans of cash.

y IMF headquarters is in Washington D.C , U.S.A Five largest shareholders are

United States, Japan, Germany, France, United Kingdom. China, Russia, and SaudiArabia have their own seats on the Board. 16 other Executive Directors are electedfor two year terms by groups of countries, known as Constituencies.


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y Incorporation date: July,1944

y Head office: Washington DC

y Managing Director: Dominique Strauss-Kahny Members: 187 country


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Role of the IMFy Created to police monetary system by ensuring

maintenance of the fixed-exchange rate

y Promote intl monetary cooperation and facilitategrowth of intl trade

yA) Discipline

y Maintaining a fixed exchange rate imposes monetarydiscipline, curtails inflation

y Brake on competitive devaluations and stability to theworld trade environment


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Role of the IMFy B) Flexibility

yLending facility:y Lend foreign currencies to countries having

balance-of-payments problemsy Adjustable parities:

yAllow countries to devalue currencies more

than 10% if balance of payments was infundamental disequilibrium

y Persistent borrowings leads to IMF control of acountrys economic policy


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Principal dutiesy Surveillance of exchange rate policies (No longer fixed

rate exchange)

y Financial assistance (including credits and loans)y Technical assistance (expertise in fiscal/monetary

policy)


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y "The International Monetary Fund (IMF) has activated anemergency finance mechanism to help countries hit by thefinancial crisis.

y IMF was ready to assist any country in need of funding throughits emergency aid mechanism

y The Philippines, Thailand, Korea and Indonesia also drew on

the mechanism to access billions of dollars of loans after theeruption of the Asian financial crisis in 1997.

y The IMF has about $200 billion immediately available to lendto countries in need but can tap other sources.


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Sources of fundsy 187 nations pay into fund according

to the size of their economy

y Funds remain their propertyy Borrower repays loan in 1 to 5 years, with interest

y No nation has ever defaulted; some are givenextensions


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Membershipin the IMF

y Open to any country willing to

agree to its rules and regulations

y Must pay a deposit (quota)y Quota size reflects global

importance of a nations economy

y IMF quota formula takes into account each nationsGDP, foreign exchange reserves and current accountdata

y Quota determines voting powers


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TOPTEN $ US HOLDING

CO

UNT

RIES

RANK COUNTRY RESERVE INTERNATIONAL RESERVE (IN Million

of $ US)

1 CHINA $2,344,287

2 JAPAN $1,069,346

3 RUSSIA $439,850

4 TAIWAN $347,190

5 INDIA $283,720

6 SOUTH KOREA $273,868

7 HONKONG $255,860

8 BRAZIL $240,484

9 SINGAPUR $187,809

10 GERMANY $187,809


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Is it wonderful to become rich?


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Are we always telling the truth

about ourselves?


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Mexicancurrencycrisis of 1995y Peso pegged to U.S. dollar

y Mexican producer prices rise by 45% without

corresponding exchange rate adjustmenty Investments continued ($64Bn between 1990 -1994)

y Speculators began selling pesos and governmentlacked foreign currency reserves to defend it

y IMF stepped in


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The Rescue Packagey 1995: U.S. & IMF set up $50b line of credit to provide

loan guarantees to Mexicos govt.

yThis helped restore confidence in Mexico, reduced therisk premium.

yAfter a hard recession in 1995, Mexico began a strongrecovery from the crisis.


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The Asian Crisisy Factors leading to the Asian financial crisis of 1997

y The investment boom

y Excess capacityy The debt bomb

y Expanding imports


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The Asiancrisisy Mid 1997 several key Thai financial institutions

were on the verge of defaulty Result of speculative overbuilding

y Excess investment (dollar denominated debt)y Deteriorating balance-of payments position

y Thailand asks IMF for helpy $17.2 billion in loans, given with restrictive conditions

y Following devaluation of Thai baht speculation hit

other Asian currenciesy Malaysiay Singaporey Indonesiay Korea


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Data on the SEAsiancrisisexchange rate% change from 7/97to 1/98

stock market

% change from 7/97 to 1/98

nominal GDP

% change 1997-98

Indonesia -59.4% -32.6% 16.2%

Japan -12.0% -18.2% -4.3%

Malaysia -36.4% -43.8% -6.8%

Singapore -15.6% -36.0% -0.1%

S. Korea -47.5% -21.9% -7.3%

Taiwan -14.6% -19.7% n.a.

Thailand -48.3% -25.6% -1.2%

U.S. n.a. 2.7% 2.3%


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GREECEDEBT CRISESBAIL OUT PACKAGE

$ 61 bn


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ICELANDDEBT CRISISy Problems started when Icesave's parent company

Landbanski failed and 300,000 UK savers looked set tolose money because Iceland's economy wasn't up

providing compensation.y Under rules of the European Economic Area, Iceland was

liable to pay each saver up to 22,000 euros each, but itcouldn't stump up the cash because its economy was indire straits at the time.

y Over the past two years the governments of Britain andIceland have been in a diplomatic row regarding the 2.3billion that the UK stumped up at the height of thefinancial crisis.


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NETDEBTBYG7 COUNTRIESy United States ... US$7.387 trillion in net debt

yJapan ... $5.699 trillion

y

Italy ... $2.131 trilliony Germany ... $1.85 trillion

y France ... $1.503 trillion

y United Kingdom ... $793.3 billion

yCanada ... $266.2 billion.


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y The finance ministers of the world's seven richest nationswill work in unity.

y Reuters: Business is booming in the trade finance market

as exporters and importers return to a tried and testedform of credit amid the chaos of the financial crisis.

y Demand for trade finance.

y Volumes are up, so is the price, with deals currently offered

at 300 basis points over interbank refinancing rates.y Making it hard for developing countries to finance their

exports.

y High prices could eventually see new business dry up.


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CONCLUSIONy The IMF works to foster for economic stability & global

growth. It provides policy advice & financing to

member in economic difficulties & also work withdeveloping nations to help them achievemacroeconomic stability and reduce poverty.


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imf takes action to stem crises

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