12 February 2020

Currency.com: G20 task force loses confidence in IMF

In an advisory report for the International Monetary Fund (IMF), an expert G20 task force has observed that: “The risk of an unexpected and unplanned reversal of abundant global liquidity hangs over the world economy.”

The report by the Robert Triffin International forum published in December and first published by the Telegraph, doubted the IMF’s potential to battle such a crisis. It stated: “The IMF is not in a position to function as an international LOLR [lender-of-last-resort],” later adding: “Without granting the IMF sufficient resources or a capacity akin to the one of an international LOLR, the stability of the system will continue to be fragile.”

Whereas the IMF was able to act somewhat competently during the global financial crisis of 2008/09, a period of historically low interest rates coupled with vast levels of quantitative easing (QE) and a sharp rise in offshore dollar lending has made the IMF less effective.

The report also observed that “private liquidity is now considerably larger than official liquidity”. Whereas the IMF, the eurozone’s bailout fund (ESM) and the central bank swap lines total around $3trn (£2.3trn, €2.7trn), private liquidity, or foreign currency credit to non-banks, has ballooned to $12trn. Furthermore, while the IMF’s resources accounted for 4 per cent of global external liabilities 40 years ago, they now account for only 1 per cent.

With dollar funding of non-US banks rising to around $18trn, the scale of the Global Dollar system’s fragility will only become clear in the event of a worldwide liquidity crunch. Such an event “would force foreign banks to scramble for dollars” to pay back bonds and loans in a hurry.

The task force commented: “The need to address the risk of a new dollar liquidity crunch is urgent,” observing later on that: “Banks outside the United States currently have dollar debts which exceed the total liabilities of banks operating within the United States. Their dollar funding is vulnerable to any dollar liquidity shock.”

Such a crunch would further haemorrhage an international financial system that is already suffering from a global economic slowdown. Chinese hopes for a post-trade war boom have been hampered by the coronavirus epidemic while the eurozone repeatedly reports subpar growth. [...]

Full article on Currency.com

Robert Triffin International report 

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