Global financial safety net: a lifeline for an uncertain world – IMF blog
by Alina Iancu, Seunghwan Kim and Alexei Miksjuk
When economic crises arise, such as the one caused by the pandemic, countries have a number of financial resources, both internal and external, to draw on. The global financial safety net is a set of institutions and mechanisms that provide insurance against crises and funding to mitigate their impact.
This safety net has four main levels: the countries’ own international reserves; bilateral swap agreements whereby central banks exchange currencies to provide liquidity to financial markets; regional financial agreements by which countries pool their resources to mobilize funding in the event of a crisis; and the IMF.
As our chart of the week shows, this global financial safety net has broadened dramatically over the past decade and its sources have diversified.
The graph, taken from the recent IMF Special Series on COVID-19, shows that since the global financial crisis, the total stock of international reserves has more than doubled, reaching about $ 14 trillion at the end of 2020. The other layers of the safety net have increased tenfold, to about four Trillion dollars.
This increase reflects the expansion of bilateral trade agreements during the global financial crisis and the recent pandemic, as well as the establishment of new regional financial agreements, especially in Europe (e.g. the European Stability Mechanism) and in Europe. Southeast Asia (the Multilateralization of the May Initiative). The IMF also more than doubled the resources available in the aftermath of the global financial crisis.
This enhanced insurance effectively cushioned the shock during the first year of the COVID-19 crisis. The increase in bilateral swap agreements, mainly US Federal Reserve swaps, provided rapid liquidity support, helping to stabilize global financial markets and capital flows to emerging market economies.
Funding from regional funding arrangements has remained weak, with demand contained by favorable macroeconomic policies in advanced economies and timely funding from other global sources of financial safety net.
For its part, the IMF has remained the linchpin of the safety net, approve debt service relief and provide financial assistance to an unprecedented number of countries, including low-income economies and emerging market economies that have not benefited from bilateral or regional arrangements.
As countries continue to grapple with the fallout from the pandemic and face increased risks of tighter financial conditions, continued use of the global financial safety net will likely be necessary until the end of the crisis.