IMF Takes Action

To Stem Crisis.

PRESENTED BY:
AAKANKSHA (B3-01)
ARVIND (B3-03)
ASHWANI (B3-05)
DIVYA (B3-09)
HISTORY OF IMF
IMF The International Monetary Fund Was created in 1944, at the Bretton Woods
conference to prevent the kinds of chain reaction in the economic system that
caused world currencies to collapse like in the Great Depression of the 1930s.

 IMF started to make service with IBRD (international bank of reconstruction and
development) in 1947.

The IMF was created to support orderly international currency exchanges and to
help nations having balance of payment problems through short term loans of cash.

 IMF headquarters is in Washington D.C , U.S.A Five largest shareholders are

United States, Japan, Germany, France, United Kingdom. China, Russia, and Saudi
Arabia have their own seats on the Board. 16 other Executive Directors are elected
for two year terms by groups of countries, known as “Constituencies”.
Incorporation date: July,1944
Head office: Washington DC
Managing Director: Dominique Strauss-Kahn
Members: 187 country
Role of the IMF
Created to police monetary system by ensuring
maintenance of the fixed-exchange rate
Promote int’l monetary cooperation and facilitate
growth of int’l trade
A) Discipline
Maintaining a fixed exchange rate imposes monetary
discipline, curtails inflation
Brake on competitive devaluations and stability to the
world trade environment
Role of the IMF
B) Flexibility
Lending facility:
Lend foreign currencies to countries having
balance-of-payments problems
Adjustable parities:
Allow countries to devalue currencies more
than 10% if balance of payments was in
“fundamental disequilibrium’
Persistent borrowings leads to IMF control of a
country’s economic policy
Principal duties
Surveillance of exchange rate policies (No longer fixed
rate exchange)
Financial assistance (including credits and loans)
Technical assistance (expertise in fiscal/monetary
policy)
"The International Monetary Fund (IMF) has activated an emergency
finance mechanism to help countries hit by the financial crisis.

IMF was ready to assist any country in need of funding through its
emergency aid mechanism

The Philippines, Thailand, Korea and Indonesia also drew on the

mechanism to access billions of dollars of loans after the eruption of the
Asian financial crisis in 1997.

The IMF has about $200 billion immediately available to lend to

countries in need but can tap other sources.
Membership in the IMF
Open to any country willing to
agree to its rules and regulations
Must pay a deposit (quota)
Quota size reflects global
importance of a nation’s economy
IMF quota formula takes into account each nation’s
GDP, foreign exchange reserves and current account
data
Quota determines voting powers
 TOP TEN $ US HOLDING
COUNTRIES
RANK COUNTRY RESERVE INTERNATIONAL RESERVE (IN Million
of $ US)

1 CHINA $2,344,287
2 JAPAN $1,069,346
3 RUSSIA $439,850
4 TAIWAN $347,190
5 INDIA $283,720
6 SOUTH KOREA $273,868
7 HONKONG $255,860
8 BRAZIL $240,484
9 SINGAPUR $187,809
10 GERMANY $187,809
Is it wonderful to become rich?
Are we always telling the truth about
ourselves?
Mexican currency crisis of 1995
Peso pegged to U.S. dollar
Mexican producer prices rise by 45% without
corresponding exchange rate adjustment
Investments continued ($64B between 1990 -1994
Speculators began selling pesos and government
lacked foreign currency reserves to defend it
IMF stepped in
The Rescue Package
1995: U.S. & IMF set up $50b line of credit to provide
loan guarantees to Mexico’s govt.
This helped restore confidence in Mexico, reduced the
risk premium.
After a hard recession in 1995, Mexic began a strong
recovery from the crisis.
The Asian Crisis
Factors leading to the Asian financial crisis of 1997
The investment boom
Excess capacity
The debt bomb
Expanding imports
The Asian crisis
Mid 1997 several key Thai financial institutions were on
the verge of default
Result of speculative overbuilding
Excess investment (dollar denominated debt)
Deteriorating balance-of payments position
Thailand asks IMF for help
$177.2 billion in loans, given with restrictive conditions
Following devaluation of Thai baht speculation hit
other Asian currencies
Malaysia
Singapore
Indonesia
Korea
 Data on the SE Asian crisis
exchange rate
% change from 7/97
stock market
% change from 7/97 to 1/98
nominal GDP
% change 1997-98
to 1/98

Indonesia -59.4% -32.6% 16.2%

Japan -12.0% -18.2% -4.3%

Malaysia -36.4% -43.8% -6.8%

Singapore -15.6% -36.0% -0.1%

S. Korea -47.5% -21.9% -7.3%

Taiwan -14.6% -19.7% n.a.

Thailand -48.3% -25.6% -1.2%

U.S. n.a. 2.7% 2.3%

GREECE DEBT CRISES
BAIL –OUT PACKAGE
$ 61 bn
NET DEBT BY G7 COUNTRIES
United States ... US$7.387 trillion in net debt
Japan ... $5.699 trillion
Italy ... $2.131 trillion
Germany ... $1.85 trillion
France ... $1.503 trillion
United Kingdom ... $793.3 billion
Canada ... $266.2 billion.
 TURBULENT WEEK
 The Fund that the international community has
shown its willingness to act in this way in many
crises.
Iceland's financial system collapsed it was probably
only a matter of time before the country would have
to turn to the IMF for help
The UK has condemned Iceland's handling of the
collapse of its banks and its failure to guarantee
British savers' deposits.
Strauss-Kahn had proposed
a four-point action plan
a four-point action plan
1) Government Guarantee Of
Liabilities,
2) Government Action To Take Out Troubled Assets And
Force The Recognition Of Losses,
3) Government Provision Of Capital To The Financial
System,
4) A High Degree Of International Cooperation.
The Mexican and Thai crises, and the proposed amendment
of the Articles of Agreement, raise two important inter
related questions about Fund lending.
1}The first is whether we should expect a change in the
scale of international financial crises;
2} The second is whether the Fund’s willingness to lend in a
crisis contributes to moral hazard.
 Capital inflows problem that so many countries seeking to stabilize from
moderate rates of inflation have faced.

IMF set out in the first Article of Agreement is To give confidence to

members by making the general resources of the Fund temporarily
available to them under appropriate safeguards, thus providing them with
opportunity to correct maladjustments in their balance of payments
without resorting to measures destructive of national or international
prosperity".
business is booming in the trade finance market as
exporters and importers return to a tried and tested
form of credit amid the chaos of the financial crisis.

bankers sector say, a traditional form of banking dating

back to the Middle Ages is so strong that some houses say
they are turning away business for lack of capacity.

Asian and Middle Eastern governments available to

support IMF-led bailouts. Japan alone has $995 billion
in official foreign currency reserves. China has $2
trillion, the world's largest stockpile.
FURTHER...
The finance ministers of the world's seven richest
nations will work in unity.
Demand for trade finance.
Volumes are up, so is the price, with deals currently
offered at 300 basis points over interbank refinancing
rates.
Making it hard for developing countries to finance
their exports.
Statement by IMF on Ireland
December 10, 2010“The Government of Ireland decided
yesterday to table a motion on the EU-IMF Financial
Assistance Program for Ireland in the Irish Parliament
(Dáil). The vote on this motion is scheduled for
Wednesday, December 15, 2010.
Bank Capital: Lessons from the Financial
Crisis- IMF
Using a multi-country panel of banks, conducted a study whether better
capitalized banks experienced higher stock returns during the financial crisis.
Differentiated among various types of capital ratios: the Basel risk-adjusted
ratio; the leverage ratio; the Tier I and Tier II ratios; and the tangible equity
ratio. To find several results:
(i) before the crisis, differences in capital did not have much impact on stock
returns;
(ii) during the crisis, a stronger capital position was associated with better stock
market performance, most markedly for larger banks;
(iii) the relationship between stock returns and capital is stronger when capital is
measured by the leverage ratio rather than the risk-adjusted capital ratio;
(iv) higher quality forms of capital, such as Tier 1 capital and tangible common
equity, were more relevant.
Dominique Strauss-Kahn: Greece's economy
at a crucial crossroads
The program for the consolidation of the Greek
economy is at a crucial crossroads as a series of
fundamental structural changes have to be
implemented in the following few months.
He estimated that if Greece can maintain the
momentum of reform, investors' confidence will grow,
and through the gradual return of competitiveness will
follow growth.
CONCLUSION
The IMF works to foster & economic stability & global
growth. It provides policy advice & financing to
member in economic difficulties & also work with
developing nations to help them achieve
macroeconomic stability and reduce poverty.