Cross-Cutting Themes in Major Article IV Consultations

This paper is part of a broader on-going effort to bring a more cross-country perspective to bilateral surveillance, taking advantage of a cluster of Article IV consultations with five systemically important economies concluded in July. With the five economies—the United States, the Euro area, China, Japan, and the United Kingdom—accounting for two-thirds of global output and three quarters of capital flows, the nature of linkages and consistency of policy responses across the systemic five (S5) has important implications for the world economy.


This paper is part of a broader on-going effort to bring a more cross-country perspective to bilateral surveillance, taking advantage of a cluster of Article IV consultations with five systemically important economies concluded in July. With the five economies—the United States, the Euro area, China, Japan, and the United Kingdom—accounting for two-thirds of global output and three quarters of capital flows, the nature of linkages and consistency of policy responses across the systemic five (S5) has important implications for the world economy.

I. Crisis Propagation

1. The divergent ways in which the U.S. financial shock metastasized to other systemic economies helps explain differing emphasis in the policy responses. Given that the S5 consultations were conducted during the deepest and most highly synchronized global recession in modern times, the staff reports on which this paper builds revolved around responses to the crisis—in particular, after its intensification and internationalization following the collapse of Lehman Brothers in September 2008 (Annex I provides a time line of the crisis). While the systemic economies faced relatively similar slowdowns in output, the sources of the shock differed in ways that help explain the relative importance attached in individual reports to bank support, macro economic stimulus, and structural reforms.


Real Growth Rate – (YoY, in percent)

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

2. That U.S. housing problems led to systemic banking concerns in Europe but not in Asia reflects differences in the degree of S5 financial integration (Figure 1). Three systemic economies—the Euro area, the United States, and the United Kingdom—account for over two-thirds of gross capital flows, with the U.K. contribution reflecting its large (500 percent of GDP) and highly internationalized banking sector. As a result of this close integration, systemic bank problems from the meltdown in “toxic” U.S. assets spread immediately to Europe, exacerbated in some countries (most notably the United Kingdom, Ireland, and Spain) by local housing busts. By contrast, the limited international financial integration of China and Japan, including small exposure to toxic assets, contained the direct impact on banks.

Figure 1.
Figure 1.

The S5 are Dominant in Global Financial Markets

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Sources: IFS data for broad monetary aggregates; BIS data for international financial claims; World Federation of Exchanges for stock market data; WEO for fiscal data; and Fund staff calculations.

3. The shock to major Asian economies mainly reflected trade links with the United States and Europe and, in Japan, falling values of bank equity (Figure 2). The slump in confidence in response to the intensification of U.S. and European banking woes after the Lehman collapse translated into a sudden stop in spending on highly-traded consumer durables and investment goods. The resulting collapse in global trade was hardest on the more export-oriented S5 countries (China, Japan, and parts of the Euro area). In Japan, banks were also temporarily stressed through losses coming from the fall in the value of their holdings of clients’ equities.

Figure 2.
Figure 2.

The S5 Economies: Key Players in the Global Economy

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Source: WEO; DOTS.

4. Rapid changes in exchange rates magnified the shock to activity in Japan while providing some buffer for the United Kingdom. Counter intuitively, a crisis that started in the United States led to appreciation in the dollar, as well as a rapid rise in the yen, offset by depreciations in the pound and, to a lesser extent, the Euro. As discussed below, these different responses reflected the interaction of a bank-led sudden stop in global capital flows, small changes in net borrowing or lending needs, and divergent levels of international capital market integration (Figures 3 and 4):

  • Bank delevering explains why the United Kingdom, with its highly internationalized banking system, had by far the largest swing in financial flows, with inflows and outflows falling by almost half of the U.K.’s annual GDP in the last quarter of 2008 alone. Sterling thus depreciated sharply, reflecting the need to attract balancing portfolio flows in the face of a sharp withdrawal of net bank claims as foreign banks reduced their overseas operations.

  • Unwinding carry trades led to a repatriation of capital to Japan, as greater exchange rate volatility and risk aversion discouraged use of cheap Japanese funding of overseas investment. The yen thus appreciated strongly, the impact amplified by the relatively low turnover in the Japanese foreign exchange market.

  • Safe-haven portfolio flows into the United States were boosted after the Lehman collapse as purchases of government paper more than offset outflows of private and agency debt tainted by the subprime meltdown. The net result was an effective dollar appreciation that more than offset earlier weakness when problems were still seen as a largely U.S. affair. The Euro followed the opposite trajectory, Euro area portfolio flows being a major counterpart to U.S. ones.

  • Administrative capital account measures limited the impact of the crisis on China’s external accounts and, in a volatile external environment, the authorities stabilized the renminbi against the U.S. dollar in mid-2008, leading to a modest nominal effective appreciation.

Figure 3.
Figure 3.

Private Cross-Border Capital Flows, Gross and Net

(In percent of GDP)

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Sources: IFS and Fund staff calculations.
Figure 4.
Figure 4.

Private Cross-Border Asset Purchases 1/

(In U.S.$ billion)

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Sources: IFS and Fund staff calculations.1/ The first series shows the net accumulation of foreign assets by residents; a positive value implies acquisition of foreign assets by residents. The second series shows the accumulation of domestic assets by nonresidents; a positive value implies acquisition of domestic assets by nonresidents.

Cross Border Capital Flows

Advanced Economies, 2007–08 1/

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Euro Area, Japan, United Kingdom, and United States.

Source: IFS and Fund staff calculations.

Bilateral Dollar vs. Nominal Effective Exchange Rates

(Jan 2006 =100)

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

The net impact was to move sterling and the yen closer to estimated equilibrium as unsustainable sources of inflows (bank borrowing) or outflows (carry trades) dwindled.

5 These experiences are reflected in the content of the policy discussion and staff reports. While all reports discussed the macroeconomic response in detail, in the United States and United Kingdom the combination of weakening household balance sheets and systemic banking strains resulted in a focus on bank support and financial reform. In the Euro area, less concern about household balance sheets translated into more discussion of structural weaknesses that might delay recovery. By contrast, in China and Japan, whose banking systems remained relatively unscathed, discussions centered on policies to reorient demand to domestic sources and, in Japan, the structural agenda.

II. Crisis Response

6 Policy responses and staff advice across the S5 also reflected differences in spillovers, assessments of underlying risks, and effectiveness of instruments Rapid spillovers across highly integrated financial markets explain the contrast at the start of the crisis between the uncoordinated rush to provide bank protection and the slower but more synchronized provision of macroeconomic support. The latter was implemented most slowly in the Euro area, where the multicountry policy framework meant that policies were designed to facilitate exit from the outset. At a later stage in the crisis, a focus on constraints on bank lending helps explain the more proactive stance taken by staff with respect to bank support. Finally, differences in financial structures and in the degree to which monetary transmission was impaired help explain differing choices of monetary policy interventions.

A. What Caused the Rush to Protect Banking Systems?

7. The rush to bolster deposit guarantees and protect other bank liabilities largely reflected spillover risks from a run on wholesale bank funding (Table 1). Concerns about a withdrawal of wholesale funding spiked soon after the Lehman bankruptcy in mid-September 2008. The United States moved almost immediately to raise deposit guarantee limits (U.S. money market mutual funds were also protected). In Europe, the Irish government provided blanket liability guarantees to its highly exposed banks in late September 2008. Driven largely by the need to avoid highly disruptive spillovers from cross-border deposit flows between highly integrated banking systems, most other Euro area countries and the U.K. quickly followed, in some cases through verbal commitments rather than legislation. Despite subsequent attempts to unify approaches, the Euro area report noted continuing tensions from diverse approaches to bank support.

Table 1.

Timeline for Financial Sector Actions, October 2008 – May 2009

(Types of measures: I = Deposit and asset guarantees; II = Bank support; III = Liquidity and credit easing measures)

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Refers to changes made at the Euro Area level unless otherwise indicated.

Source: IMF, Global Policy Responses to Financial Crisis Range of Interventions: Tables I and II (updated as of May 26, 2009)

Deposit Guarantee Limits

(in US$ thousand)

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Note: * denotes unlimited guarantee.Source: Fund staff estimates, based on data from country authorities.

8. Similarly hurried policy decisions, interacting with local conditions, explains differing approaches to capital injections into weak financial institutions. The United Kingdom and a few other countries nationalized some weak banks, but in several Euro area countries laws requiring agreement of financial institutions and their shareholders limited the room to maneuver. In the United States, while a major insurer and the quasi-public housing government-sponsored enterprises (GSEs) were taken over by the government, the strong belief in private ownership and a desire to secure returns on public money led the authorities to avoid using common equity when injecting bank capital. While there is likely no “best way” to support weak institutions, the diversity of treatment across economies made the already difficult task of assessing the capital needs of banks and banking systems on a consistent basis even more complex.

B. Why was Advice on Bank Support More Aggressive than on Macro Stimulus?

9. Staff advice on capital injections reflected concern that U.S. and European banks could be substantially undercapitalized. These concerns were based on calculations in the Global Financial Stability Report (GFSR) of the capital needed for U.S. and European banks to restore the ratio of tangible common equity to assets to its historical average. This reflected market concerns that regulatory norms were inadequate and achieving them would still leave banks unwilling to lend. Officials regarded these calculations as overly conservative on a range of grounds, and preferred to use a narrower concept of risk weighted assets and a wider definition of capital (including hybrid instruments), benchmarked to regulatory ratios rather than historical norms. This resulted in lower official estimates of capital needs in the United States, United Kingdom, and Euro area. Japanese officials also viewed the wider regulatory definition of capital as appropriate, given the Japanese banking system’s more stable sources of funding, long investment horizon of holders of hybrid capital, and lower exposure to toxic assets.


Bank Equity Requirement, end 2008

(in percent)

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Source: GFSR and Fund staff estimates.1/ Excludes government-sponsored enterprises.The approximate leverage of U.S. banks in the mid-1990s was a 6 percent TCE/TA ratio, prior to the buildup in leverage in the banking system.

10. Similarly, S5 staff reports were concerned about the slow progress in removing toxic assets from U.S. and European bank balance sheets. The sluggish pace reflects a combination of concerns about valuation, stigma, and the complexities of resolving structured products. In the United States, guarantees on certain impaired assets did not assuage market concerns about weak banks, while the take-up of leveraged financing for sales of toxic assets to private investors has been limited by uncertainty over valuations and banks’ unwillingness to realize implicit losses. The U.K.’s asset insurance scheme has only been considered by the two large partly-nationalized banks, while the Euro area and Japan reports also expressed concerns about take-up of voluntary schemes including, in Japan, equity purchases at market prices. The EU adopted harmonized guidelines on bank resolution but left details on whether to establish a bad bank, guarantee assets, or hybrid schemes to individual authorities. Some countries have begun to set up “bad banks,” including Ireland and Germany on a national and bank-specific level, respectively.

11. Slower and more modest spillovers allowed greater uniformity in the size of macroeconomic support and congruence in views on its appropriateness. With spillover concerns of policy makers focused on the exchange rate consequences of monetary easing, whose immediate impact on activity is limited, individual central banks had significant policy leeway. Notwithstanding their different mandates, monetary authorities had time to coordinate policies, such as a multi-country interest rate cut in October. Faced by a simultaneous slowdown, all S5 central banks eventually cut policy rates significantly although Euro area easing was slower than staff advice, on lingering inflation concerns (Figure 5).

Figure 5.
Figure 5.

Monetary Policy Responses to the Crisis

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Sources: Bloomberg, CEIC and Fund staff calculations.

12. Relative uniformity was also achieved in the size of fiscal stimulus once automatic stabilizers are included and bank support excluded. Leadership by the Fund and G-20 appear to have helped generate a critical mass of commitments, avoid free-riding, and secure domestic support for expansionary measures. Coordination was particularly important in the Euro area where, like monetary policy, commitments to discretionary fiscal stimulus were relatively slow. This reflected the area’s large automatic stabilizers, constraints inherent in the EU’s Stability and Growth Pact, and an emphasis on the need to identify exit strategies in a multi-country monetary union.


Fiscal Measures – Average change in 2009–10 vs. 2007 baseline

(in percent of GDP)

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Source: Fund staff estimates.Euro 3 includes Germany, France, and Italy.

C. What Drove Differing Approaches to Unconventional Monetary Policies?

13. With policy rates at low levels, all S5 central banks have used unconventional policies chosen to fit local conditions to support financial intermediation. In China, the ending of earlier quantitative constraints on banks facing limited competition led to create a surge in broad money, but this success was not repeated elsewhere. Specific policy approaches to balance sheet expansion reflected varying institutional set-ups. At one extreme, the Euro area with its highly bank-based financial sector offered its support almost exclusively through relatively conventional repurchase (repo) agreements that provided banks with cash in return for less liquid collateral, albeit in massive quantities, at extended maturities, and using expanded classes of collateral. By contrast, in the United States, where nonbanks play a much larger role and collateral policy is more restrictive, such operations were less effective, with the few counterparties hoarding much of the liquidity. As a result, a wide variety of targeted loan programs were launched to directly address gaps in credit markets (e.g., in asset-backed securities and commercial paper markets). The United Kingdom and Japan, faced with intermediate financial systems, used more mixed approaches.


Broad Money Growth


Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Source: Datastream and Fund staff calculations.

14. The U.S. Fed and Bank of England (BoE) have moved beyond liquidity support to aggressively buying securities outright (“quantitative easing”). In an attempt to bypass severe problems in monetary transmission, the Fed and BoE have supported liquidity through direct purchases of assets. The BoE has taken a more conservative approach, mainly buying government securities and obtaining a government guarantee to cover any resulting balance sheet losses. Faced with a moribund housing market that was weighing on households and on financial sector balance sheets, the Fed has focused on buying mortgage-backed securities. But with the Fed’s balance sheet exposed to market risk, the staff have argued that facilities associated with failed financial institutions should be transferred to Treasury. Asset purchases were more limited in the case of the Bank of Japan, reflecting the lower degree of financial market disfunctionality there, and the European Central Bank, given its concerns about exit strategies.

15. Public funds have also been deployed to reduce strains in nonfinancial balance sheets in the United States and Japan. In the United States, which is facing a much larger wave of residential foreclosures than other S5 economies given its more liberal personal bankruptcy laws, the focus has been on assisting the housing market and household balance sheets. The government-controlled GSEs have been used to revive mortgage lending and a series of (relatively ineffective) programs aimed at easing loan restructuring have been introduced. Japan expanded existing government funded loan guarantees to small- and medium-sized enterprises (SMEs), whose already weak balance sheets were hit hard by the recession; the U.K. also introduced credit guarantees for SMEs. As with other forms of support, it will be an important priority to fix the underlying problem—the collapse in demand for securitized U.S. mortgages, the need for restructuring Japanese SME balance sheets—once the crisis subsides.

III. Crisis Exit

16. The S5 Article IV reports suggested that achieving a robust recovery will require bolder policies than have been announced so far. A major concern in the U.S., Euro area, and U.K. reports is that lending constraints at undercapitalized banks could delay the recovery and lower the efficacy of macroeconomic stimulus. A slower recovery could also increase pressure to extend such stimulus, possibly undermining policy credibility and potential output. By contrast, the China report emphasized the importance of early exit from highly successful monetary easing due to the risks that rapid credit growth could produce further overcapacity in export-oriented sectors and worsen credit quality. Japan faces the difficult task of restructuring SME balance sheets and lowering its high government debt ratio. The wider issue is policy consistency across these economies, with staff advice focused on the structural reforms needed to create a robust and sustainable recovery by avoiding pitfalls from inadequate global demand or a return to unsustainable external imbalances.

A. Exiting Macro Stimulus

17. The U.S., Euro area, and U.K. reports highlighted the risks to recovery if undercapitalized banks forego government aid to avoid associated stigma. The interest of private banks in public capital is starting to wane as the constraints associated with government money become clearer—a point reflected in the low take-up of Euro area capitalization schemes and in the desire of some U.S. banks to repay capital injections. More generally, the diversity of approaches to financial support, uncertainty about adequate capital ratios, and the large spillovers if market confidence were again undermined, all suggest care and coordination in exiting from guarantee programs. Past experience also suggests exit will be slow (Table 2). Given the size and large number of U.S. bank and liquidity support programs, the U.S. report particularly emphasized the importance of clearly communicating plans for exiting exceptional support.

Table 2.

Exiting from Blanket Guarantees: Selected Country Experiences

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Source: Ireland: Staff Report for the 2009 Article IV Consultation.

18. The exit from unconventional monetary policies, particularly in the United States, may be lengthy and limit freedom to act swiftly on policy rates. Officials observed that exit policies did not pose technical challenges, but staff thought that the unwinding of direct asset purchases could be complicated by large public financing needs, problems in securitization markets (mainly in the United States), and potential balance sheet losses. Thus, gradualism, and possibly coordination, may be needed to minimize market disruption, including in currency markets.

19. The U.K. report in particular emphasized the importance of preserving central bank independence, given market concerns about fiscal dominance. Staff fiscal projections (Figure 6), based on relatively conservative assessments of potential output growth and future interest rates, suggest that already-high U.S., Euro area, and U.K. gross public debt-to-GDP ratios could spiral to almost 100 percent of GDP in the medium term, and 240 percent in Japan (140 percent even on a net basis). In addition, large contingent liabilities from financial guarantees provide further upside risks, most notably in the United Kingdom, although the ultimate fiscal cost is difficult to judge. A firm commitment to central bank independence from the government is key to preserving credibility in price stability.

Figure 6.
Figure 6.

Projected Public Debt Paths

(In percent of GDP)

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Sources: IFS and Fund staff calculations.Note: 1. General government net debt for China, gross debt for other countries. 2. The shaded areas indicate projections (for Fall 2009 WEO).

20. Advanced economy reports argued that credible fiscal consolidation plans could help avoid a vicious cycle between government debt and potential output. With China again the exception given its relatively stable projected debt ratios, the other four staff reports were concerned that higher expected debt could raise borrowing costs, slow potential output growth, and hence further raise expected debt. The U.K. report in particular emphasized that despite widespread agreement on the need for future fiscal adjustment, additional concrete measures were needed. In the United States and Japan this message was linked to discussion of the supportive role of policy frameworks using debt targets and/or tight limits on the overall deficit to achieve a gradual future fall in the debt ratio. In the Euro area, where the fiscal framework is set by an international treaty encouraging fiscal discipline, staff emphasized the importance of members focusing more on lowering public debt ratios to create support for fiscal consolidation, including through national budgetary rules.

B. Restoring and Rebalancing Growth

21. The S5 reports present consistent policies for robust recovery but a major concern is that the recovery will be slowed by a lack of global demand. It is not completely clear that a lower U.S. external deficit will be offset elsewhere and, in fact, macroeconomic projections from S5 Article IVs suggest that this could be a problem.

Underlying Tensions

22. Current WEO forecasts imply that S5 external balances increase steadily over time—i.e., that S5 economies sell more goods than they buy (Figure 7). The difference between projected S5 demand and supply can be calculated in nominal terms using their projected aggregate current account balance and in real terms using their real net export position. As the rising difference between S5 supply and demand is not offset elsewhere, an increasing proportion of global output apparently has no outlet. The stronger S5 external position mainly reflects rapid growth in China and the erosion in the U.S. current account deficit. While China’s current account surplus remains around 10 percent of GDP, its dynamic growth adds some ½ percent of world GDP to net global saving in 2014 relative to 2008. A similar boost to global net saving comes from the reduction in the (absolute) size of advanced economy imbalances. Recalling that WEO projections are an aggregation of individual desk assessments based on announced policies and assumed constant real exchange rates, this suggests that current policies and constellation of exchange rates may not be sufficient to ensure the rebalancing of global demand needed to sustain a robust global expansion (this issue will be discussed further in the upcoming fall 2009 World Economic Outlook).

Figure 7.
Figure 7.

Trends in Current Account Balances, Saving and Investment

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Sources: WEO and Fund staff calculations.The shaded areas indicate projections.

S5 Current Account Projections

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

23. A delayed recovery because of a lack of demand would risk a further slowing in S5 potential growth (Figure 8). Existing downward revisions to potential output and current account imbalances largely reflect a projected increase in the cost of capital as government debt ratios rise and banks hold more prudent capital cushions, as well as a more general reevaluation of the efficiency with which the financial system intermediates saving into investment. A slower recovery would further lower potential output as continuing slack lowers business investment, the unused skills of workers gradually erode, and concerns over fiscal sustainability rise.

Figure 8.
Figure 8.

Projected Potential Real Output Growth and Current Account Balance

Citation: Policy Papers 2009, 054; 10.5089/9781498335690.007.A001

Sources: IFS and Fund staff calculations.Note: The shaded areas indicate projections (for Fall 2009 WEO).

24. Artificially boosting global demand by extending U.S./European stimulus after 2010 could boost short-term growth, but risks undermining growth potential. In addition to further straining government deficits, the return of global current account imbalances would risk further financial instability, including disorderly exchange rate adjustment across the major currencies, as international credit and debt positions again diverge rapidly. This would undermine potential growth by further increasing risk premiums and the cost of capital.

Policies for a Robust Recovery

25. Staff and officials agreed on the thrust of needed structural polices but staff often took a more proactive stance on policies. For example, staff took a more robust view on the need to consolidate U.S. regulatory bodies, increase U.K. bank disclosure, accelerate the pace of liberalization in Asia, and widen the role of central banks in the new Euro area regulatory system. Overall, staffs recommended strategy involves:

  • Major surplus countries (China as well as Japan) should rebalance demand towards domestic consumption to become less reliant on exports and investment for growth. In China, which is central to this process as the world’s largest saver (even in current dollar terms, let alone PPP exchange rates), priorities are reducing households’ precautionary saving by expanding social protection and market alternatives to self-insurance, and for the corporate sector raising the cost of capital, lowering corporate saving, and supporting financial development. In Japan, further deregulation of the agricultural and services sectors (medical, child and elderly care) and financial market development could support rebalancing.

  • The Euro area and Japan should continue and preferably accelerate structural reforms to boost growth by improving labor and product market flexibility. In the Euro area, the main focus should be on further labor market reforms, while in Japan staff advice centered on addressing product market rigidities.

  • All countries should reform their financial markets to ensure stable intermediation and appropriate pricing of risk. In addition to the general reform agenda-stronger resolution frameworks, tighter cross-border collaboration, less pro-cyclical capital regulatory frameworks, wider perimeter of regulation to avoid gaps, better stress testing, and higher capital (where warranted)—country-specific proposals included:

    • For the United States and the United Kingdom, where securitized assets are more significant, mismatched incentives can be addressed via specific capital charges, systemic risk taxes, and (in the U.K. in particular) better disclosure.

    • For the Euro area, where supervision is complicated by the existence of multiple countries, emphasis was placed on methods to better coordinate national supervision on rules, data, practices, and dispute mediation.

    • For China, emphasis was placed on the need to improve allocation of capital and raise household income through financial liberalization, with officials taking a more cautious approach than staff about the risks to financial stability and hence speed of implementation. Improving the allocation of domestic saving was also mentioned in the Japan report, together with the importance of improving tools for corporate restructuring, particularly of SMEs.

27 The above package would be more effective if accompanied by a real effective renminbi appreciation, offset by Euro and dollar depreciation Using the consistent framework provided by the Consultative Group on Exchange Rates, and with the pound and yen considered to be close to equilibrium following their large crisis-driven adjustments, the main counterparty to current modest dollar and Euro overvaluation in real effective terms is renminbi undervaluation. China authorities stressed that the needed rebalancing could not be achieved merely through a change in the exchange rate, but would require also the implementation of structural policies. Elsewhere, there was little policy dialogue as floating exchange rates were not seen as a policy lever.

28. Achieving such ambitious and diverse structural adjustment across major countries will be challenging. The experience with the Fund’s multilateral consultation on global imbalances underlines the difficulties of achieving international coordination even when the broad contours of policies are agreed. This paper has identified areas where surveillance—bilateral and multilateral—could foster such coordination. These include putting more emphasis on examining the consistency of external sector projections, identifying the size of needed rebalancing of global demand, and discussing the international implications of policy actions or policy inflexibilities.

Annex: Timeline of the Crisis

The definition of “the crisis” period is complex as it involves market events and macroeconomic developments that evolved across countries over a couple years. The five systemic economies have experienced the crisis with varying levels of severity over its course:

  • The U.S. housing downturn was underway by late-2006, with U.S. home prices peaking in the mid-2006 according to the Case-Shiller indices.

  • The housing downturn revealed the nature of some “toxic assets” in off-balance sheet entities in early 2007. The potential systemic effects of these assets on the banking sector did not become apparent until Bear Stearns had to rescue one of its hedge funds in June, and BNP Paribas froze three of its funds in August 2007. The need for exceptional support for the banking sector in Europe became apparent at Northern Rock and a few German banks in late 2007.

  • Real U.S. GDP declined every quarter starting in Q3 2008, when oil prices peaked. The NBER later declared that the U.S. recession began in December 2007.

  • Bear Stearns collapsed in March 2008, but its Federal Reserve-aided purchase by JP Morgan was initially seen as a reprieve. Only in September 2008, with Lehman Brothers’ bankruptcy, did a consensus emerge that a global crisis had unfolded.

Unless otherwise stated, what is meant by “the crisis” in this paper is the internationalization of financial and macroeconomic turmoil that took place after the collapse of Lehman Brothers.

Cross-Cutting Themes in Major Article IV Consultations
Author: International Monetary Fund