Transcript

Transcript of the Background Briefing on the Short-term Liquidity Line

May 8, 2020

Moderator:

Maria Candia, Communications Department

Panelists:

IMF officials

MS. CANDIA: Thank you. Good morning, everybody. Thank you for waiting and joining today's IMF Background Briefing on the Short-term Liquidity Line, which has been approved by the Executive Board on April 15, to further strengthen the global financial safety net as part of the Fund's COVID-19 response.

Here with us today is IMF Official #1, to greet and answer your questions on the issue. With us also is IMF Official #2. As you have seen, we have posted relevant documents under embargo together with the First Deputy Managing Director's blog on the Short-Term Liquidity Line, these documents and the call are under embargo until 12:30 p.m. today. As a reminder of the background rules for this call, this discussion will be on background with comments attributable to IMF Official.

So, the IMF Official #1will give an introduction and then we will open it up to question. Thank you.

IMF Official #1: Great. Thank you. And good morning, good morning to all of you. Good Wednesday morning. Thank you for joining us on another busy day. We are pleased to have you all on the call, to brief a bit more deeply on our Short-Term Liquidity Line instrument which, as was mentioned was put in place by our Executive Board last week.

As you all know, the critical focus that the Fund has at the moment is trying to arrest liquidity problems as we see them arising globally. And so, we have a toolkit that is intended to help us do that for our members. We have been moving at a record pace, and with record (inaudible) a number of country programs through our pipeline over the past month.

But also we have found that we were in need of additional tools to serve different parts of the membership, and one of those was, we have the benefit of having a lot of great thought research -- thought leadership, and research, and debate on several years ago, what was then as short-term liquidity swap, when a month ago we decided to dust that off and make some incremental changes to it. But bring that through to our Board because we saw it serving a critical need, and thought that this would be of use, not only during the current crisis where I think it's useful, but also down the line as well.

Just to, kind of, give you a broad overview, there's an instrument that's designed to be liquidity backstop for our members that have very strong policy frameworks and fundamentals. So, again, these are countries that are, you know, doing things and have policies in place that are of high quality and are, you know, running a good monetary system, a good financial sector, sound fiscal policy.

But even these countries can face moderate, short-term liquidity needs because of external shocks. And these could come on suddenly and without much -- without much warning. And what this would do is allow them a liquidity line that they’ll be able to draw on, and it will be revolving. So, you'll be able to draw on it repeatedly, and then repay it as shocks were experienced, and the liquidity need presents itself, and then repay it when liquidity needs abate.

This is quite innovative in the sense that, you know, it's revolving in its nature, and again, embraces the kind of -- at least for countries that are approaching us -- because they need to have very high standards and quality, I think it's very high policy papers in place that's approaching us for this facility is actually -- and us being able to grant this -- is a very powerful signal we think to the country, and to financial markets who will see the IMF coming in and reviewing and then endorsing a country's current policy framework.

So, again, we would hope that countries that approach us for an SLL and receive one from the Fund, use it as part of a range of financing options that they're pursuing, and not just from the Fund as in the case of the SLL, but also from other capital markets. So that's a good thing to keep in mind as well.

Let me just say that there is a desire here to put this instrument in place now to try and catch countries while they still experience liquidity issues, and before their liquidity issues more for a slide into problems that are much bigger and require back-to-back approach to the Fund, desiring much larger financing facilities and arrangements.

To that end, this is a useful tool that allows those countries that (inaudible)earlier than they otherwise may have wanted to. And we're in discussions with several potential clients that they could be making use of this down the line.

Let me pause there. And, again, thank you all for joining us this morning. I'm joined on the line here by IMF Official #2, who is our expert on SLL, our long-time expert on SLL, and will also help me answer some of your questions.

MS. CANDIA: Thank you. Do you think we could open it up for questions?

QUESTIONER: Okay, very good. Thank you for organizing this call. IMF Official #1, I wanted to ask about the numbers in the blog post, it mentions demand of up to 50 billion. The Managing Director mentioned the -- mentioned the case of Indonesia, I think there's one in particular. I was wondering if, you know, given that we're on background, if you could share with us who any of the other major requests are at this point.

IMF Official #1: Thanks for your question. I think that our numbers are informed by our assessments of who will currently qualify, and obviously that's subject to, you know, there's criteria for access that governs, to a large extent, what they'd be eligible to access from the Fund through this facility. I don't think we are at the stage of commenting on where we are with any particular government or set of authorities.

What we are encouraged by is the openness that countries are having to dialogue with the Fund, and whether that results in financing or not, right, we're here to serve the membership in the way that we need to, to suit their needs. So, some of that I'll begin with the dialogue, with knowledge transfer and policy advice in many instances, but also lead to a financing arrangement.

We have an instrument here that is new. And so, helping countries understand what this instrument is and what it could do for them is part of the conversation we're having. And also, I think the conversation that we're having with countries is on how this complementary to what they're trying to execute on with us.

So, you know, these are countries that are trying to roll over in global capital markets, they're trying to obtain financing for a broad range of needs. And again, we would hope that countries approaching us to make use of this facility is used as a -- you can think of it as a good housekeeping seal of approval, right, on a country's policy framework that should be helpful and catalytic in helping them seek additional funds elsewhere.

MS. CANDIA: Thank you. Do we have any more questions?

QUESTIONER: Hello, everyone. Thank you for doing this. Actually, I have another question about the countries who have already applied, and how many people do you expect to apply? And in the blog a mentioned that the mechanism was discussed for several years, and then there was a consensus, in days. What was the problem, which countries used to oppose to this mechanism? And the reasons why, please?

IMF Official #1: Sure. Let me start, and then let me also invite IMF Official #2to come in behind me, and then discuss some of this as well.

Again, in terms of countries, you know, that's a conversation that, you know, we as management and the staff are having with various country authorities. I think some of those countries have made public their desire to seek Fund financing, whether it's through SLL or otherwise. But we would at least I think in this format avoid discussing particular country cases, that we respect the countries' case to approach us in confidence and have that discussion with us in confidence before, you know, things get further along down the line.

And to your second question of why this moved quickly over the past month: I think there's a lot I think that -- countries that considered, in terms of their own policies and responses to coronavirus that, you know, nobody had envisioned just a few months ago, and so see how different the circumstances that the virus presents.

You know, the circumstances that that creates provide an incentive to put in place policies and instruments in support that are unique to addressing this crisis. What we had in this scenario was a very robust debate and a lot of again great work that had gone into developing this instrument several years ago. But the membership didn’t quite -- you know, there wasn’t quite the consensus to move forward with it.

But a part of that was, it was novel, that there are features of this instrument that are new, that are different from the rest of the Fund's toolkit, and so I think members had questions about the merits of trying -- to try something new like this.

Now, there were questions about who would use it, and what the take-up would be. There were questions about how it would interact, or not, with swap lines and other instruments being offered by central banks. And where we are -- that was the debate a few years ago. The debate today I think our members are very heartened by our membership coming together and giving us a mandate, not just on the SLL, but in other areas, to adjust the problems as we see them coming through it and giving very robust support.

And so even members that were, you know, either a little bit skeptical of the merits of the prior proposal, I think do see the merits in deploying this instrument now. And so, we were happy to announce that dialogue and get with them. There was a very robust discussion among our Board, and with capitals of our membership, but in the end we were able to move this instrument from concept of two or three weeks ago, to being endorsed by, and put in place by our Executive Board in a matter of two weeks which -- just for comparison maybe, he IMF, we looked at new instruments employed very often. I think the last time we did this was 10 or so years ago, maybe even longer. And so, for us to -- for our membership to have seen the problem, for our staff to identify that problem would suggest another attempt at this instrument, and then put it in place in a matter of a couple of weeks is pretty extraordinary.

IMF Official #2, is there anything, any comments?

IMF Official #2: Actually, I don't have anything to add. Thank you.

IMF Official #1: Okay, great.

QUESTIONER: Hi. Thanks so much for doing the call. My question was; and I know you can't talk about the specific countries that are in the mix for this, but I wondered if you could give us some information about the type of countries? Would we generally expect the type of countries that qualify for this to be, you know, somewhat higher income than the countries that are available for professional financing, and we expect this to be a little bit more of the more developed emerging markets. But ones that are so developed that they have a relationship with the Federal Reserve. Is that kind of the group of countries that we would expect to make the most use of this? Thanks very much.

IMF Official #1: Thanks. This is what I’ll bring IMF Official #2) on. So, it's from a -- just to kind of begin this with -- you know, the qualification criteria mirror what is in the sort of all the facilities, specifically the Flexible Credit Line. So, to get to my point on countries that qualify are countries that already have very high -- or very good policy frameworks, and in place over a variety there.

But, IMF Official #2, would you like to comment a little bit on the universal countries that would qualify?

IMF Official #2: Yes. Thank you. On the question, just starting with the universe of countries that this instrument was designed for, this is really about countries that have established market access, so I think by definition the concessional, the countries that fall under our concessional lending would not be included here. We have also, in thinking about the instrument has excluded countries that have access; easy access to reserve issuing currencies. For instance, the countries in the Euro Area are not included here.

Now, more broadly, I would say the issue is not so much the income-level of these emerging -- mostly emerging markets, it's really the type of framework, the policies that they have, and then they have established over the past year. So, again, the intent of the instrument is just to provide a very strong signal of approval that these are countries that are "platinum quality" and hence, we are making this line available to them. Thank you.

QUESTIONER: Hi. Thanks so much for doing this. Let me just pile on with the questions that are trying to understand too. IMF Official #2, how many countries, broadly, fit the category that you’ve -- or the criteria that you've now outlined for us? So, not the Euro Area, not concessional lending, how many countries are left that, at least, theoretically would fit that bill? If it doesn’t, can you be more specific? I mean, I'm just doing the math in my head, and I'm thinking like, you know, 76 countries that are IDA-eligible, if you subtracted the Euro countries. So, who is left? And then I have another question for you, IMF Official #1, about the kind of behaviors which this tool has adopted. The U.S. administration has made it very clear that they don't want to go down the SDR route, but that would provide a huge shot of liquidity for all countries that need it, including many that, you know, wouldn't be covered by this instrument. What is your thinking about how quickly there could be that change in that policy? I mean, if you think that that is something that could be embraced later on by the administration.

IMF Official #1: IMF Official #2, do you want to start, and I can address the second issue?

IMF Official #2: Sure. So, if you can understand, we cannot be precise with the numbers in this, but in terms of order of magnitude, I would say your initial guess of about somewhere between 10 and 20 I think would be a good one. It's also important to keep in mind that this is, in a way, the number of countries that would qualify in something that is likely to change all the time, which is why we thought that having this instrument in our toolkit, even beyond the crisis, would be important as it is something that -- for countries to strive to have the good policies and frameworks which would make them qualified for it.

IMF Official #1 : And to your second point on -- yeah, I think as I tried to frame this from the beginning, the way I tried to thematically look at -- or the way I look at the issues that we face are largely thematic, so we have a problem today of liquidity challenges almost everywhere.

So when you look around countries, looking at, even at the United States, or others, or other developing countries, they have liquidity challenges globally in many areas, whether it's official sector, corporate sector, or households, and so the things that we're trying to -- we're trying to take every idea and tool to bear on that.

And your right, SDRs are a part of that, you know, the SLL was meant to be part of that for some countries, our emergency instruments are part of that for some countries, and SLL would also be a part of that for some countries. And I think as an institution, as the IMF, we'd still see merit in exploring what can be done in terms of SDRs.

Our membership has had a pretty robust debate about the merits of a new SDR allocation, as you know that there are a few countries, including the United States -- but actually not limited to the United States -- that remain a bit skeptical about this. That skepticism, while it puts an SDR allocation, not in the cards specifically (inaudible) today or for tomorrow, but it's healthy because it fosters a very good dialogue about what we can do), right?

And I think one thing that we do think we have to solve within the membership is to do what we can, and what I think is a lot more with the existing SDR stock in the system. You know, there is some precedence with countries lending their Special Drawing Rights to the IMF concessional finance facilities. In my view there's a lot more that could be done even beyond that.

And that's a conversation that we continually have internally with the staff to figure out how best to move out on additional options. Because, you know, the way I think about it, is that the problem hasn't abated, the problem of the liquidity challenge for the membership is not abated, and so we owe it to them to continue exploring and exhausting every option that we can consider.

So, some of those are related to SDRs, and some of them are the ones that we have -- have yet to fully flesh out. But we are working, people are working 24 hours a day, seven days a week, to try and make that reform.

QUESTIONER: Can I just follow up really quickly on that, the loaning of SDRs? Do you need to -- does the Institution need to establish a sort of a formal mechanism to be able to facilitate that exchange like the creation of a trust that's been discussed, that would house these SDRs? Or would you, you know, envision using the PRGT for that? I mean, has it been done in the past? And how quickly could you come up with a new mechanism that facilitates that exchange of the existing SDR?

IMF Official #1: Yes. Good question. So, all this in voluntary trading of SDRs outright is still an option, and those are facilitated that's more dated as we speak. So, countries that have existing SDRs that they want to exchange, the IMF continues the facilitate that. We’ve seen -- increased demands for those transfers at a time like this, so we are willing to do that.

But the issue really is for countries that don't have any more SDRs to trade -- you know, to exchange for countries that have a very large stockpile of SDRs that they don't find much use for. So, you think about developed economies who have the vast majority of the SDRs, if you find, we don't really have any practical use for them. We tried to explore with them, ways where we can mobilize these -- if I can think of the dormant SDRs that's in the system for the benefit of poorer countries.

The established mechanism for doing that, or the precedence for doing that is countries -- a few countries in the past have loaned their SDRs to the PRGT, which they can make, you know, concessional loans available to poor countries. There's clearly a need for us to do that, because the number of countries that have now approached us for emergency financing which are now, I believe exceeds a hundred

and the number of programs that we would expect in that pool to then roll into a full-fledged IMF (inaudible), that would need PRGT resources to help them be funded. The PRGT is therefore in need of additional resources. And we were quite fortunate last week to having put out the call for additional resources, that some are materializing quickly for the PRGT, so there's no -- there's no immediate, you know, danger of that, of that running out of funds.

But we are exploring every option to try and resource these instruments well, so that they can have the capacity to meet the demands that we would expect in the coming medium term, if you want to think of it that way. And one of those is getting more countries to loan their SDRs to the PRGT for that purpose.

But as I said, I don't think that has the -- that's kind of -- that's what we've done to date. I think what we're doing right now is trying to see if we can get more countries to do that. But I also think there may be other ways to get at this problem and, you know, I'm not in a position to share specifics on what we would be able to do beyond that.

But nonetheless, as I think I said before, the problem still exists, and so the team here isn't going to just sit idly by with the tools that we have, we're going to push and see what we can do with the membership to try and get what obviously we need to address the problem.

QUESTIONER: Good morning, everyone. Thank you for doing this. Kristalina Georgieva said that in those cases where the Fund might be unable to lend because the country's debt is unsustainable, you would look for solutions that can unlock critical financing. In this context what kind of help could Argentina receive? Are you planning on adding any new instruments to your toolkit? Thank you.

IMF Official #1: Thanks. I think as it relates to Argentina, I think we've had the pleasure of discussing just some other issues with the Argentine officials and I know, President Fernández and his government has been very proactive and decisive in trying to contain the health crisis in Argentina. They’ve also, while in the middle of this, having to continue to grapple with the very extraordinary economic shock, and that exposes, right, the vulnerable populations in certain sectors, the SMEs, and the rest, to pretty extraordinary pain.

I mean, we're continuing to track the ongoing discussions that Argentina is having with private creditors, you know, I think we're hopeful that at some point there's an agreement that can be reached there that would restore debt sustainability.

I think that the important thing here is to keep an eye on that as an objective. I know that's an objective of the Argentine Government as well, which is to restore debt sustainability, and thereby facilitate a solid footing for Argentina to build economic stability on top of. That's going to be needed within the crisis, and that's going to be needed beyond the crisis. So, we know that they're working very hard on that.

In terms of what we can do for countries that do face challenges like this, and there are countries that I mean, this isn't limited to Argentina, where the debt trajectory, or the debt creates a particular challenge. You know, I think we're trying to explore what we can to be of assistance to these countries. You know, the Fund has policies that -- you know, put in place by the membership to safeguard Fund resources, and so those need to be respected in all of the financial operations that we conduct. But, again, there's within those policies we're trying to explore every avenue to see what we can do to be of assistance.

And, you know, several countries we've already -- you know, as I've said, you know, extraordinary pipeline of countries that are lined up. I think we're going to work our way through almost half of those requests by the end of -- by the end of April, so just in the span of a month. And we'll be assessing and working on the rest of them simultaneously in the future.

QUESTIONER: Thank you. I just wanted to ask. So, if we're talking about a universe of, you know, let's say, ballpark 10 to 20 countries, currently with the Flexible Credit Line which is referenced in a couple of the documents, you know, as a comparison for the SLL, and I understand that Colombia and Mexico are the only recipients right now along with Morocco for the precautionary and liquidity line.

So, you're looking at the use of this, it sounds like or potential use of this that might be much more widespread than the FCL. Are you looking at transitioning countries who are on an FCL to this new tool? Are you looking at otherwise winding down use of the FCL? How should we think of the differences and distinctions between the SLL and the FCL?

IMF Official #1: I'm thinking of IMF Official #2 to come in here. But, you know, I think from a broad perspective, we view all of our tools as part of a toolkit. So, different tools are appropriate for different parts of the membership at different points. And there is, you know, certainly from -- there are countries that over time, could move from an FCL to an SLL.

There are countries that could move from a bilateral swap line or agency, central banks, to an SLL if the need persists beyond the period of when a central bank may be willing to keep a swap line open. So, in other words, I think we're looking at this as an entire toolkit and intervening with the tools as needed, depending on all the circumstances. But let me ask IMF Official #2 to come in here.

IMF Official #2: Thanks. So, we think of the FCL and the SLL as complements. The FCL is there for countries with the same qualifications for the SLL but countries that face very large potential or actual balance of payments shock. Whereas, the SLLs is really meant to address short-term, moderate-sized liquidity needs.

You can see how, in the current environment, there are countries that would have the very large needs, and then there would be a different set for which these liquidity pressures are moderate in nature. Now, going beyond the current crisis, I think we would expect, and we would hope that countries that are starting with -- that have FCLs, once those large risks and shocks abate, then the logic would be to move to an SLL where you have a cap on the access but it is -- would be available on a revolving basis, and on a renewed basis. And also, if it is not wrong, it is actually cheaper than the FCL.

But as IMF Official #1 said, it's also possible that the countries that start out with the SLL, thinking that what they face is moderate shocks, and then turns out that actually what they're really facing is a much larger shock, and as long as they qualify and, again, subject to the decision of our Board, then they could transition into an FCL.

So, again, bottom line, we really thought of these two things as being good complement to each other, and we hope that over time that countries will use them in that way.

QUESTIONER: Hi. Thanks very much. This is a follow up, and I apologize, I missed a small part of the briefing, so I hope I'm not repeating. But the FCL which, you know, as you said is a complement and had a lot of the same characteristics, was only taken up by a couple of countries. And it was sort of promoted also as a good housekeeping seal of approval for the countries that used it. But a lot of countries, you know, seem to feel it's more of a stigma.

So, I'm wondering if you have the same concerns about the SLL. Although obviously the crisis, the nature of the crisis is different, but is that one of the hurdles to getting countries to use this is the sort of stigma of having to go to the IMF for funding, given that really is -- as one of the other reporter said -- it was only about two countries with an FCL currently?

IMF Official #1: Let me invite IMF Official #2 to respond to that.

IMF Official #2: Thank you. So, I think in the current environment, as we pointed out, I think what we're finding is that the stigma is not the same as previously. But I think you have a fair question. And so, one of what people would consider the innovative features of this new facility, the SLL, we're targeting exactly to try to overcome that stigma. So, the new elements of it as, again, having this revolving nature, which in some ways is there to resemble what the central banks swap lines do, is one aspect of it.

The second one is that if you look at the details of the instrument, what you see is that we're now proposing to have an offer to the country. Of course, the country would still have to purchase -- to say that they're interested, but it should be interest of the mechanic, that's how the interaction with countries are done. I think there are changes here that we hope would address part of the stigma.

And also, the third element is that we make it clear that under certain conditions, this is an instrument that can be -- the agreement with the Fund could be signed by the Central Bank only. Again, we'll specify under which conditions that could be done. And again, just general logic of all of these elements was to try to reduce the stigma.

QUESTIONER: Yeah. Hi, It's (inaudible) actually. I have one quick question, because this call is going very long, and there's a lot of detailing here. I wonder if we could move the embargo time back to 1:00, just to give us a little more time to process what you said. And then the other questions that I had, has to do with the blogs that Managing Director put out, where she talks about lending may not always be the best solution for every country, and we need to come up with new approaches, and consider whether exceptional measures might be needed.

IMF Official #1 are you able to kind of characterize, or IMF Official #2, how you characterize these SLLs? Do you consider this already an exceptional measure? Or what would constitute an exceptional measure? And what are these, you know, new approaches that she's flagging in that blog?

MS. CANDIA: Just on the embargo time, we're going to keep it until 12:30. It's too late now to change the schedule. Sorry for that. Please go on.

IMF Official #1: Yes. Sorry. If it's any consolation this group will all be on the same call. So, I think it's going to be under the same time constraint; apologies for that.

But I think that -- what I think the Managing Director is getting at is whether -- you know, and I think her blog kind of goes to this thread, which is: This is a crisis that the world hasn’t seen for at least 100 years, and the economic fallout of this is unprecedented, in terms of -- at least in terms of this institution's history, and probably even beyond that. And so, the things we're having to consider doing as an institution are the things governments are having to consider doing, are totally unprecedented and exceptional in how we approach them.

That being said, our institution has a tool of resources that we can use to lend loans out to country, but I think what she was getting at is, there's one thing which we'll do a little less, is there's a lot we can offer that is not just lending. So, a lot of what we're trying to do is provide a lot of the technical and economic expertise that we have to use for the membership.

You see that happening, and how we're trying to serve, for example, the G20, and other bodies. But there's a policy tracker that just helps people understand what measures are taking place in various areas at some point. I would expect that's transitioned into some evaluation on which practices end up being the most useful, right, so that there's going to be -- we'll institutionalize globally the learning component of the actions that are being taken.

And yes, we do have -- we do have a pool of resources that we can lend out. There's a limit at which, you know, I think you know, why these loans can make sense in certain situations. I don't think we're there yet. We're not there yet. But I think that doesn’t mean -- again, going back to a kind of thematic approach in a way that I think -- we think about this, and I think the way the Managing Director thinks about this, the world still has a problem, and we still value that we can add to help countries deal with the solution.

And if a loan is not the optimal way to deal with that, either that's because you don't need the loan, or because of a debt issue, or what have you, that doesn’t obviate -- that doesn’t negate the value we could be able to provide them, and our willingness for what makes sense to provide. So, let me pause there.

MS. CANDIA: Thank you. We did have one more question, right; otherwise --

QUESTIONER: Thank you very much. I just want to address a quick follow-up on the questions about Argentina, and countries which have unsustainable debt. You said you were trying to explore ways that you can be assistance. I was hoping you could give us a little bit more details, on what are the options you are exploring. Thanks.

IMF Official #1: Thanks. And I totally understand the interest, but I think that just like we are trying to keep our conversations with other authorities in confidence, and others are probing about other countries mentioned on the call, I'm going to decline to discuss where exactly we -- our discussions are at with Argentine authorities. But, again, what I want to reinforce is where our conversation is with Argentina, and that's very productive, those conversations began a while back, they're not recent.

And that engagement continues, and we're willing to do whatever we can to help Argentina get its economy back on a solid footing. And we hope the ongoing negotiations are fruitful. But, again, I'm going to have to decline to discuss exactly where the countries stand at the moment, with Argentina specifically.

MS. CANDIA: Thank you. I think we can end the call here. Maybe just remind everybody that the documents and the calls are under embargo until 12:30 p.m. today. And as a reminder of the background rules of this call, this discussion ends on background with comments attributable to IMF Official. Thank you for joining us and have a good day.