Group 14: International Monetary Fund: responsibilities and intervention in Europe

Role of IMF:

The International Monetary Fund is a global organisation founded in 1944. It aims was to help stabilise exchange rates and provide loans to countries in need. Nearly all members of the United Nations are members of the IMF with a few exceptions such as Cuba, Lichtenstein and Andorra.

  • The IMF is independent of the World Bank although both are United Nations agencies and both are aiming to increase living standards. The World Bank concentrates on long term loans to developing countries.

Functions of IMF

  1. International Monetary Cooperation

  2. Promote exchange Rate stability

  3. To help deal with Balance of Payments adjustment

  4. Help Deal With Economic Crisis by providing international coordination

What The IMF does

  1. Economic Surveillance. IMF produces reports on member countries economies and suggest areas of weakness / possible danger. The idea is to work on crisis prevention by highlighting areas of economic imbalance. A list of IMF reports on member countries are available at: IMF Countries

  2. Loans to Country’s with financial crisis. The IMF has $300 billion of loanable funds. This comes from member countries who deposit a certain amount on joining. In times of financial / economic crisis, the IMF may be willing to make available loans as part of a financial readjustment.

  • the IMF has arranged more than $180 billion in bailout packages since 1997.
  1. Technical assistance and economic training. The IMF produce many reports and publications. They can also offer support for local economies. More on technical assistance.

 

The IMF and Europe

 

The IMF is actively engaged in Europe as a provider of policy advice, financing, and technical assistance. We work independently and, in European Union (EU) countries, in cooperation with European institutions, such as the European Commission (EC) and the European Central Bank (ECB). The IMF’s work in Europe has intensified since the start of the global financial crisis in 2008, and has been further stepped up since mid-2010 as a result of the euro area crisis.

Assessing individual countries and the euro area

The IMF provides economic analysis and policy advice as part of its standard surveillance process for individual advanced and emerging European economies that culminates in regular (usually annual) consultations with individual member countries and, if relevant, EU institutions such as the ECB and EC. The bilateral surveillance staff reports for these consultations include assessments of the economic outlook, and economic and financial stability.

In addition to its policy discussions with the 19 individual members of the euro area, IMF staff also holds consultations annually for the euro area as a whole, similar to those held for other currency unions. Here, IMF staff exchange views with counterparts from the ECB, the EC and other European institutions in a number of areas, including monetary and exchange rate policies and regional fiscal policies, financial sector supervision and stability, trade and cross-border capital flows, as well as structural policies. The final staff report includes an overall assessment of the economic outlook, external and fiscal position, and financial stability of the euro area as a whole. As part of the euro area consultation, the IMF’s views on the economic outlook and policies of the euro area are presented to the Eurogroup, comprising the 19 finance ministers of the euro area.

Global and regional analysis, spillovers and cross-cutting themes

The outlook and risks, spillovers, and policy recommendations for individual European countries and the euro area are assessed in a global context in the World Economic Outlook, the Global Financial Stability Report, Fiscal Monitorand the External Sector Report—the IMF’s flagship publications published twice a year. These assessments are integral to the IMF’s surveillance of its member countries.

The IMF also undertakes cross-country analysis to draw policy lessons for common challenges facing member countries. Since 2013, it has examined cross-cutting issues via a new approach—analyzing clusters of economies with strong interlinkages or common concerns—as a complement to the Fund’s bilateral surveillance, e.g., the Nordic Regional Report, the German-Central European Supply Chain Report, the Baltic Cluster Report, the Housing Cluster Report and the New Member States Policy Forum Cluster Report. The Fund has also published analyses to address several issues of broad policy concern in Europe: achieving external and internal balance; high youth unemployment; large non-performing loans in the banking system; inflation; the refugee surge and the impact of emigration 1 ; minimum wages 2, female labor force participation and the impact of the U.K. referendum to leave the EU. 3

For Central, Eastern and Southeastern Europe (CESEE), the IMF publishes CESEE Regional Economic Issues; a semi-annual publication that discusses analytical issues of broader interest to the region. Recent issues have looked at the challenges to post-crisis potential growth, growth-friendliness of fiscal consolidation, credit cycle and external funding patterns in the region.

Euro area integration

The IMF pays considerable attention to progress in fostering integration within the euro area to ensure the effective operation of the monetary union. The first-ever EU wide Financial Sector Assessment Program (FSAP), in March 2013, argued for a Single Supervisory Mechanism (SSM). In addition, the IMF published papers making the case for a Banking Union to strengthen the EU financial oversight and sever bank-sovereign linkages; a Fiscal Union to address gaps in the euro area’s architecture; and a more effective Economic Governance framework to betterincentivize structural reforms.

Providing financing

Since the start of the global financial crisis, a number of emerging and advanced European countries have requested financial support from the IMF to help them overcome their fiscal and external imbalances. Access to IMF resources for Europe was provided through Stand-By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility (EFF).

Most of the first wave of IMF-supported programs in 2008-09 was for countries in emerging Europe. The IMF also provided financing to Iceland when its banking system collapsed in late 2008. Starting in 2010, credit was also provided to euro area members – Greece, Ireland, Portugal and Cyprus. Credit outstanding to these members peaked in July 2014 at SDR 66.3 billion, but has declined to about SDR 29.7 billion as of September 16, 2016, due in part to early repayments by Portugal and Ireland. Ireland’s and Portugal’s EFFs concluded in December 2013 and June 2014, respectively, and they then entered into Post-Program Monitoring (PPM). The arrangement with Greece was cancelled in January 2016. Cyprus’s EFF was cancelled in March 2016—shortly before its expiration—and it has entered PPM.

As of September 16, 2016, the IMF had active arrangements with 6 emerging market countries in Europe (see table) with commitments totaling about EUR 33.9 billion or $38 billion. Total credit outstanding to European members was around EUR 49.4 billion or around US$ 55.4 billion.

In most EU countries—including in Hungary, Latvia, and Romania—Fund financing was provided in conjunction with the EU, while Poland has a FCL arrangement with the Fund. The experience developed with the joint programs in Central and Eastern Europe proved useful when euro area countries requested IMF support. At that stage, the collaboration was further extended to include another partner—the ECB. Cooperation between the three institutions is aimed at ensuring maximum coherence and efficiency in staff-level program discussions with governments on the policies that are needed to put their economies back on the path of sustainable economic growth. While the IMF coordinates closely with the other two institutions, Fund decisions on financing and policy advice are ultimately taken by the IMF’s 24-member Executive Board.

Where the money comes from

Most of the IMF resources allocated to credit activities are provided by member countries, primarily through their payment of quotas. In addition, starting in early 2009, the IMF signed a number of bilateral loan and note purchase agreements to bolster its capacity to support member countries during the global economic crisis. In early 2011, the amended and expanded New Arrangements to Borrow (NAB) became effective and were activated. At that point, the bilateral agreements of NAB participants were folded into the NAB.

In December 2011, euro area countries committed to providing additional resources to the IMF of up to 150 billion euro (about $200 billion). Following the request of our membership and general support by the G-20 leaders at the Cannes Summit, the IMF Executive Board discussed the adequacy of the Fund’s resources in January and March 2012. Subsequently, in mid-2012, numerous member countries pledged additional bilateral commitments to further augment the IMF’s resources, of which about $390 billion is currently effective. In early 2016, the general conditions for the effectiveness of the 14th Review quota increases–which would double quotas from SDR 238 billion to SDR 477 billion–were met and most members have paid their quota increases. As agreed by the Executive Board in 2010, the payments of quota increases triggered a rollback of the NAB from SDR 370 to SDR 182 billion. The Fund’s current overall lending capacity is about SDR 690 billion.

IMF-Supported Programs in Europe

As of September 16, 2016, the IMF had arrangements with 6 countries in Europe, totaling about € 33.9 billion or $ 38 billion.

Amount Agreed (billions) Undrawn Balance (billions)
Member Effective Date Expiration Date Euros

(billions1)

Dollars

(billions1)

As percent

of Quota2

Euros

(billions1)

Dollars

(billions1)

Stand-By Arrangements
Kosovo 7/29/15 5/28/17 0.18 0.21 179 0.11 0.13
Serbia 2/23/15 2/22/18 1.17 1.31 143 1.17 1.31
Extended Fund Facility
Albania 2/28/14 2/27/17 0.37 0.41 212 0.07 0.08
Bosnia and Herzegovina 9/7/16 9/6/19 0.55 0.62 167 0.47 0.53
Ukraine 3/11/15 3/10/19 15.40 17.29 614 8.61 9.66
Flexible Credit Line
Poland 1/14/15 1/13/17 16.21 18.20 317 16.21 18.20
Total 33.9 38.0 26.6 29.9
Source: IMF Staff calculations.
1 Calculated using the prevailing exchange rate on September 16, 2016.
2 At the time of approval.

The European Bank Coordination Initiative

The Vienna Initiative was launched at the height of the financial crisis in 2008/09 to help avoid a rush-to-the-exit of Western European cross-border banking groups whose subsidiaries dominate the banking systems of CESEE. Banks entered into explicit exposure maintenance agreements in the case of five program countries. This Initiative brings together key International Financial Institutions (EBRD, WB, and IMF), the European Commission and relevant EU institutions, the main cross-border banking groups, and home and host country authorities.

The initiative was re-launched as Vienna 2 in January 2012 in response to a second wave of deleveraging and supervisory ring-fencing. The focus is on improving cooperation between home and host authorities, while monitoring the pace of deleveraging with a view to keeping it orderly and following credit developments. It publishes quarterly CESEE Deleveraging and Credit Monitor, makes recommendations to relevant European institutions for improvements in supervisory coordination and cross-border bank resolution, and organizes “Host Country Cross-Border Banking Forums.” These forums provide an opportunity for dialogue between the banks that are systemically important in a country and major interlocutors of those banks: the monetary authority and regulator, the parent international banking groups, and the latter’s regulators. So far, these forums have been held in Albania, Bosnia, Croatia, Hungary, Serbia, Slovenia, Montenegro, and Ukraine.

Providing technical expertise

The IMF’s technical assistance helps countries improve the capacity of their institutions and the effectiveness of their policymaking. As such, it contributes to the overall effectiveness of the Fund’s surveillance and lending programs.

Emerging market economies in Europe—such as Albania, Bosnia and Herzegovina, Belarus, Romania, Serbia and Ukraine—are the main recipients of such assistance in a broad range of areas. However, in the wake of the global financial crisis, there have also been demands for IMF technical assistance in advanced economies. For instance, the IMF provided assistance to monitor progress on Spain’s financial sector reforms, as well as on tax policy and revenue administration issues to Denmark, Finland, Italy, Portugal, Greece, Estonia, and Slovakia.

The IMF delivers technical assistance in various ways. Support is often provided through staff missions of limited duration sent from headquarters, or the placement of experts and/or resident advisors for periods ranging from a few weeks to a few years. Assistance might also be provided in the form of technical and diagnostic studies, training courses, seminars, workshops, and “on-line” advice and support.

The IMF has increasingly adopted a regional approach to the delivery of technical assistance and training. The IMF Institute organizes courses for officials from new EU member countries and other economies in transition in Europe and Asia at the Joint Vienna Institute in Austria.

 

The Crisis Management Role

The IMF is often referred to as the world’s « financial crisis firefighter, » called upon by member countries to help fight crippling sovereign debt and prevent contagion from spreading through the global financial system. Historically, much of the Fund’s work has been done in developing countries. However, the 2008 global financial meltdown has required major interventions in advanced European economies such as Iceland, Ireland, Greece, and Portugal.

 

What are the advantages and disadvantages of the International Monetary Fund?

 

IMF advantages

The IMF assists member nations in several different capacities. If a country has a balance of payments deficit, the IMF can step in to fill the gap. It serves as a council and adviser to countries attempting a new economic policy. It also publishes papers on new economic topics.

Its most important function is its ability to provide loans to member nations in need of a bailout. The IMF can attach conditions to these loans, including prescribed economic policies with which borrowing governments must comply.

 

IMF disadvantages

Despite its lofty status and commendable objectives, the IMF is attempting to pull off a nearly impossible economic feat: perfectly timing and sizing economic intervention on an international scale.

The IMF has been criticized for not doing much and for overreaching. It has been criticized for being too slow or too eager to assist failing national policies. Since the United States, Japan and Great Britain feature prominently in IMF policies, it has been accused of being a tool for free-market countries only. Simultaneously, free-market supporters roundly criticize the IMF for being too interventionist.

Some member nations, such as Italy and Greece, have been accused of pursuing unsustainable budgets because they believed the world community, led by the IMF, would come to their rescue. This is no different than the moral hazard created by government bailouts of major banks.

 

 

source:

http://www.investopedia.com/ask/answers/061115/what-are-advantages-and-disadvantages-international-monetary-fund.asp

http://www.economicshelp.org/blog/glossary/imf/

http://www.imf.org/external/np/exr/facts/europe.htm

http://www.imf.org/en/About/Factsheets/Europe-and-the-IMF

http://www.cfr.org/europe/international-monetary-fund/p25303

 

Group 14 – “Analysis of the FED’s federal discount rates over the last 10 years. »

“For nearly six years, the Federal Reserve has held short-term interest rates at essentially zero to support the economy after the 2008 financial crisis. The severity of the Great Recession, and the Fed’s inability to lower interest rates below zero, led policy makers to use unconventional tools to stimulate the economy, such as quantitative easing (i.e., large scale asset purchases) and forward guidance. With strong employment gains and an improving economy, the Fed is now preparing the market for an eventual rate increase, perhaps as early as June 2015.

Considering the timing and potential magnitude of the Fed’s next tightening cycle, we thought it instructive to look at how financial markets have behaved in past cycles for clues as to what might happen when the rate cycle does eventually turn.”

 

Past fed rate hike cycles

“An exploration of past Fed tightening cycles starts with a review of how monetary policy adjustments work. One of the main tools Fed officials use to adjust policy is the federal funds rate. Whenever policy makers want to slow the growth rate of the economy and restrain inflation, they may raise interest rates, which is known as “tight”, “restrictive” or “contractionary” monetary policy. Conversely, whenever policy makers desire to spur the growth rate of the economy and increase the supply of money and credit, they lower interest rates, known as “easy”, “expansionary” or “accommodative” monetary policy.

Over the last 30 years, five different tightening cycles have taken place. As seen in the following chart, interest rates have steadily declined during this period, where the interest rate in the current tightening cycle has peaked at a rate lower than in the prior tightening cycle. This is largely attributable to the Fed’s success in maintaining a low inflationary environment since the late 1980’s.

The chart below lists the Fed’s five most recent tightening cycles, detailing the timing and magnitude of rate increases once policy turned more restrictive. A quick calculation shows the federal funds rate rose by an average of 2.7% in the past tightening cycles and lasted for approximately one year. The only exception was the 2004 tightening cycle.

While each tightening cycle has been driven by different factors, past history may provide guidance on what to expect when rates eventually do head higher. As the old adage goes, history doesn’t repeat itself, but it often rhymes.”

 

United States Fed Funds Rate

The Federal Reserve likes to keep the fed funds rate between 2-5 percent. It’s the sweet spot that maintains a healthy economy. Price increases remain below the Fed’s inflation target of 2 percent for the core inflation rate.

The fed funds rate reached a high of 20 points in 1979 and 1980. That was to combat double-digit inflation.

In 1973, inflation tripled, from 3.9 percent to 9.6 percent. The Fed only doubled interest rates from 5.75 to a high of 11 points. Inflation continued to remain in the double-digits through all of 1974, lasting until April 1975. The Fed kept raising the fed funds rate to 13 in July 1974, and then dramatically lowered the rate, reaching 7 1/2 by January 1975.

The all-time low was 0.25 percent. That’s effectively zero.

The Fed lowered it to this level on December 17, 2008, the 10th rate cut in a little over a year. It didn’t raise rates until December 2015.

Before this, the lowest fed funds rate was 1.0 percent in 2003, to combat the 2001 recession. At the time, there were fears that the economy was drifting towards deflation.

 

The Federal Reserve kept the target range for its federal funds steady at 0.5 percent to 0.75 percent during its February 2017 meeting, in line with market expectations and following a 25bps hike in December. Policymakers noted the improvement in business and consumer confidence and the rise in consumer prices and said near-term risks to the economic outlook appear roughly balanced. Interest Rate in the United States averaged 5.81 percent from 1971 until 2017, reaching an all time high of 20 percent in March of 1980 and a record low of 0.25 percent in December of 2008.

 

In October, the most recent month for which data is available, the annual U.S. inflation rate was 1.6 per cent, and it hasn’t been above the two per cent threshold that the Fed like to see since 2014. So its hiking its rate in an attempt to nudge inflation higher.

« In the most expected policy decision in recent memory, the only real surprise was the move up in the FOMC members’ expectations for future policy, » TD bank economist James Marple said.

« The move up is a signal that the Fed has become more confident in the economic outlook and that inflation will increasingly track closer to the two per cent target. »

Wednesday’s news marks the first time the U.S. central bank has raised its benchmark lending rate in almost a year. It’s also the first time the U.S. central bank has had a higher rate than Canada’s since 2007.

Last week, the Bank of Canada opted to keep its benchmark lending rate steady for the 11th consecutive time, at 0.5 per cent.

Fed May Raise Rates Soon

The US economy is expected to continue to expand at a moderate pace and wait too long to raise rates would be unwise, Fed Chair Yellen said in prepared remarks to the Congress. However, the economic outlook and fiscal policy face uncertainty and monetary policy is not on a preset course thus any changes will depend on incoming data, Fed Chair added.

References

  

United States Fed Funds Rate | 1971-2017 | Data | Chart | Calendar. (n.d.). Retrieved February 28, 2017, from http://www.tradingeconomics.com/united-states/interest-rate

http://cammackretirement.com/knowledge-center/insights/lessons-learned-from-past-federal-reserve-tightening-cycles

https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135  

http://www.cbc.ca/news/business/federal-reserve-interest-rate-1.3896402 

 

Group 14 – the strategy of Prudential and HSBC after the Brexit announcement

the strategy of Prudential and HSBC after the Brexit announcement

After the announcement of an hypothesis Brexit and after the confirmation of what would happen, company took some guidelines to follow. Among those companies, two banks explain about what is the future for their employees, and structure in England. Those international banks are HSBC & Prudential. 

“Well, Wells is actually a giant retail bank that doesn’t do all that much business in Europe. The big investment banks that do, and that fuel the City of London, have taken a rather different view to it.HSBC warned that it could shift jobs to Paris in the event of an “out” vote before the EU referendum. Its US peers have been saying much the same thing in its aftermath. At the start of the month Goldman Sachs warned that it may have to “restructure” its UK operations which currently employ about 6,000 people. JP Morgan’s chief executive Jamie Dimon earlier said that his bank might have to move thousands of employees to other European centres. Similar noises have been rumoured at Morgan Stanley.”

“HSBC, for one, thinks that abandoning the 2020 target could give him room to hike borrowing by £50bn in the next financial year. The aim would be to spend the money on infrastructure, thus pepping up a stalling economy. It might even work. But it might not.”

“The result sets the U.K. up for years of bitter divorce talks with the first salvos likely to be fired at an EU leaders’ summit next week. The U.K. must now count the economic and financial cost of an exit that Cameron warned would spark a recession. JPMorgan Chase & Co. and HSBC Holdings Plc have said a so-called Brexit would lead them to move thousands of jobs out of London.”

“HSBC, which earlier this year opted to keep its headquarters in London, plunged 3.7 percent in London trading. The selloff was compounded by the fact that markets had rallied over the past week on optimism that the U.K. would vote to stay.”

“The answer to the question is absolutely not – it does not change our business strategy just because the UK voted to leave Europe. It will, of course, change the way that our commercial, retail and private bank customers may need our support, particularly in the next few years.

The UK will continue to be a key part of our global network. It is one of our two home markets – the other being Hong Kong. It is also the home to our global headquarters and that will not change – we remain headquartered in London.

The relocation of HSBC UK’s head office will begin at the end of 2017 and will bring 1,200 jobs to Birmingham.

« We see Birmingham as the centre of a £110bn regional economy, » Hinshelwood added. « It has the largest concentration of businesses outside of London, home to 37,000 companies and it really gives us an opportunity to contribute to regional growth. »

HSBC UK will be based at a 210,000 sq ft office at Two Arena Central (pictured). At the time, the agreement of a 250-year lease with Arena Central Developments was the largest property deal in the city since 2002.”

 

On the other side, Prudential adopt also some guidelines for after the Brexit.

Prudential, the UK’s largest insurer by value, has said it is considering shifting funds from M&G, its assets management business, to Dublin or Luxembourg following UK’s vote to leave the EU.

 

A tenth of Prudential’s M&G’s £255.4 billion in assets under management are from EU clients.

Anne Richard, the chief executive of M&G, said the decision to move assets will depend on the outcome of UK’s negotiations with the EU.

« What we are trying to do as a business is give ourselves options so we are in a position to react and adapt to whatever negotiations come through over the next year or so regarding Brexit, » Richard said.

« We have, at the moment, business domiciled in both Dublin and Luxemburg so both of those would potentially be options for us if we felt that we should have additional funds domiciled in continental Europe, » she added.

British insurers were hit hard in the immediate aftermath of the Brexit vote, with share prices tumbling on expectations that the fallout in the broader economy would hurt the firms.

« On Brexit it is a challenge for the whole industry in that we don’t know exactly what form it will take. Will there be fund passporting from the UK to Europe, and vice versa, or not? »  Richard said.

The news that Prudential UK operations could be hit by Brexit came as the group released its first half results.

Prudential posted a 6 per cent increase in first-half profit as a jump in earnings at its Asia business helped it to beat analyst estimates and offset lower profits from M&G

M&G’s operating profit declined by 10 per cent to £225 million.

https://www.insidermedia.com/insider/midlands/hsbc-committed-to-birmingham-move-after-brexit

http://www.independent.co.uk/news/business/news/brexit-latest-news-eu-referendum-prudential-mg-insurance-fund-management-assets-a7183021.html

https://www.bloomberg.com/news/articles/2016-06-24/u-k-votes-for-brexit-in-rupture-with-european-order-bbc-says

http://www.independent.co.uk/news/business/comment/brexit-britain-what-s-happened-so-far-and-what-to-expect-if-article-50-is-triggered-a7205071.html