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Thomas Laryea and Mr. Luc Laeven
This paper examines the estimated compliance with the macroeconomic convergence targets for 2008, based on estimates contained in the IMF’s Regional Economic Outlook: Sub-Saharan Africa (the REO). SADC’s regional economic integration agenda includes a macroeconomic convergence program, intended to achieve and maintain macroeconomic stability in the region, thereby contributing to faster economic growth and laying the basis for eventual monetary union. Targets for key macroeconomic variables have been set out for 2008, 2012, and 2018. Most SADC member states have recorded solid macroeconomic performance in recent years, in general coming close to, and in many cases surpassing, the convergence targets specified for 2008. A notable exception in this regard is Zimbabwe, which was in the grip of hyperinflation. The macroeconomic targets for 2012 are ambitious and, in some cases, warrant further evaluation, given that achieving the targets may be neither necessary nor sufficient to achieve good macroeconomic results.
Thomas Laryea
This paper starts from a discussion of the economic case for moderated government intervention in debt restructuring in the nonfinancial corporate sector. It then draws on lessons from past crises to explain three broad approaches that have been applied to corporate debt restructurings in the aftermath of a crisis. From there, it addresses challenges in designing and implementing a comprehensive debt restructuring strategy and draws together some key principles.
Augustin Landier and Mr. Kenichi Ueda
Based on a simple framework, this note clarifies the economics behind bank restructuring and evaluates various restructuring options for systemically important banks. The note assumes that the government aims to reduce the probability of a bank’s default and keep the burden on taxpayers at a minimum. The note also acknowledges that the design of any restructuring needs to take into consideration the payoffs and incentives for the various key stakeholders (i.e., shareholders, debt holders, and government).
Mr. Vladimir Klyuev, Phil De Imus, and Mr. Krishna Srinivasan
This paper examines the unconventional monetary policy actions undertaken by G-7 central banks and assesses their effectiveness in alleviating financial market pressures and facilitating credit flows to the real economy. Central banks acted nimbly, decisively, and creatively in their response to the deepening of the crisis. They embarked on a number of unconventional policies, some of which had been tried before, while others were new. The scale and scope of unconventional measures have differed substantially across major central banks. Massive asset purchases have boosted the size of the central bank balance sheets the most in the United States and the United Kingdom. However, the Bank of England has relied primarily on the purchases of government bonds, while the Fed has acquired a variety of assets, including commercial paper and mortgage-backed securities and providing financing for acquisition of other asset-backed securities. Central bank interventions, along with government actions, have been broadly successful in stabilizing financial conditions over time.
Mr. Carlo Cottarelli, Mr. Paolo Mauro, Lorenzo Forni, and Jan Gottschalk
This note summarizes the main arguments put forward by some market commentators who argue that default is inevitable, and presents a rebuttal for each argument in turn. Their main arguments focus on the size of the adjustment and continued market concerns reflected in government bond spreads. The essence of our reasoning is that the challenge stems mainly from the advanced economies’ large primary deficits. Thus, by lowering the interest bill while triggering the need to move to primary balance or a small primary surplus, default would not significantly reduce the need for major fiscal adjustment. In contrast, the emerging economies that defaulted in recent decades did so primarily as a result of high debt servicing costs, often in the context of major external shocks. We conclude that default would be ineffective and undesirable in today’s advanced economies.
Mr. Robert Rennhack
The Latin America and Caribbean (LAC) region has weathered the global financial crisis reasonably well so far, although tighter global financial conditions began to take their toll on trade, capital flows and economic growth in late 2008. This resilience reflects the reforms put in place by many countries over the past decade to strengthen financial supervision and adopt sound macroeconomic policies. Building on this progress, the region’s financial sector reform agenda now aims at further improvements, including steps aiming to improve compliance with the Basel Core Principles of Banking Supervision and to broaden and deepen domestic financial markets.
Mr. Ivan S Guerra, R. B. (Robert Barry) Johnston, Karim Youssef, and Mr. Andre O Santos
This paper reviews the impact of policies to address banking sector weaknesses through the first months of 2009. At the time of this assessment, central bank intervention had successfully addressed pressures on bank liquidity, but the underlying financial position of financial institutions, particularly the large complex financial institutions (LCFIs), remained precarious. Although Tier 1 ratios had been boosted through the capital injections, tangible common equity (TCE) remained at a critical level for most institutions. Asset quality was weakening, and credit spreads for LCFIs remained wide. Measures had not stemmed the market-driven deleveraging process, and lending surveys pointed to various levels of credit tightening in the United States, Europe, Switzerland, and the United Kingdom. The success of government support measures can be assessed by their impact on bank soundness indicators. Government support measures should have a positive effect on bank soundness by improving bank liquidity, profitability, capital adequacy, and asset quality.
Mr. Jonathan David Ostry, Mr. Atish R. Ghosh, Mr. Jun I Kim, and Miss Mahvash S Qureshi
In this note, the authors reexamine the issue of debt sustainability in a large group of advanced economies. Their hypothesis is that, when debt is in a moderate range, its dynamics are sustainable in the sense that increases in debt elicit sufficient increases in primary fiscal balances to stabilize the debt-to-GDP ratio. At high debt levels, however, the dynamics may turn unstable, and the debt ratio may not converge to a finite level. Such a framework allows the authors to define a “debt limit” that is consistent with a country’s historical track record of adjustment in the sense that, without an extraordinary fiscal effort, any debt increment beyond this limit would cause debt to increase without bound. This debt limit is not an absolute and immutable barrier, however, but rather defines a critical point above which a country’s normal fiscal response to rising debt becomes insufficient to maintain debt sustainability. Nor should this debt limit be interpreted as being in any sense the optimal level of public debt. Indeed, since this limit delineates the point at which fiscal solvency is called into question—and the analysis abstracts entirely from liquidity/rollover risk—prudence dictates that countries will typically want to be well below their debt limit. Given a country’s normal pattern of adjustment, “fiscal space” is then simply the difference between its debt limit and its current level of debt.