The Imf and The Vienna Initiative

Introduction

The Vienna Initiative brought together the IMF, the European Bank for Reconstruction and Development, the European Investment Bank and the World Bank, the EC and ECB, home and host country central banks, regulatory and fiscal authorities, as well as the largest western banking groups active in Europe. It helped ensure that foreign banks remained to be engaged in Eastern Europe and that overall commitments remained intact, in conjunction with IMF-EU supported packages for Hungary, Bosnia and Herzegovina, Latvia, Romania and Serbia.

While banks' exposure maintenance commitments under the Vienna Initiative have lapsed with the end of the programs supported by the IMF and the EU, the Vienna Initiative participants remain in close contact. They stand ready to address the renewed risks of excessive deleveraging in Eastern and Central Europe and to bolster supervisory cooperation as cross-border banking groups are under financial pressure.

The Vienna Initiative performs control functions in relation to each IMF member country under Article IV of the Statute. Current economic and financial situation of the country and plans for the coming years are analyzed and assessed. It is proposed that bilateral consultations be complemented with multilateral international comparisons, financial connections and flows of impulses at a broader regional and international scale, as well as with systemic stability problems and the identification of national policies which may adversely affect the global balance.

Creating a crisis firewall

Increasing the financial resources available for IMF support to member countries was a key part of the efforts to overcome the global financial crisis. In 2009 and 2010, members provided additional financial assistance to the Fund through bilateral borrowing agreements for about Special Drawing Right (SDR) 170 billion. These resources were subsequently incorporated into expanded New Arrangements to Borrow (NAB), increasing their size from SDR 34 billion to SDR 370 billion (about $510 billion).

In 2012, to respond to worsening global financial conditions, a number of members pledged to further enhance IMF resources through a new round of bilateral borrowing. By the end of 2015, 35 agreements for a total of about SDR 280 billion ($390 billion) were finalized. The 14th General Review of Quotas, approved in December 2010, doubled the IMF’s permanent resources to SDR 477 billion (about $663 billion).

Nowadays, the Fund’s total lending capacity (comprising quotas, the NAB, and the 2012 Borrowing Agreements after prudential balances) stands at about SDR 690 billion (about $950 billion). Additionally, to increasing the Fund’s own lending capacity, in 2009, the membership agreed to make a general allocation of SDRs equivalent at the time to $250 billion, resulting in a near ten-fold increase in SDRs. This represented a significant increase in reserves for many states, in particular low-income countries.

Reforming the IMF’s lending framework

Firstly, there was introducing of the Flexible Credit Line (FCL), in April 2009 and further enhanced in August 2010, is a lending tool for countries with very strong fundamentals that provides large and upfront access to IMF resources, mainly as a form of insurance for crisis prevention. There are no policy conditions to be met once a country has been approved for the credit line FCL approval has been found to lead to lower borrowing costs and raised room for policy maneuver. Secondly, by providing rapid and adequate short-term liquidity to such crisis bystanders during periods of stress could bolster market confidence, limit contagion, and reduce the overall cost of crises. The Precautionary and Liquidity Line (PLL), which was established in 2011, is designed to meet the liquidity needs of member countries with sound economic fundamentals but with some remaining vulnerabilities.

Also, the IMF conducted several reviews to learn from Fund-supported programs that began after the 2008 global crisis. The reviews found that supported programs by the IMF helped chart a path through the global financial crisis that avoided the counterfactual scenario many initially feared, involving a cataclysmic meltdown of the global economic system.

The IMF undertook major initiatives to improve surveillance to respond to a more globalized and interconnected world. As part of these efforts, in July 2012 the Executive Board adopted a new Integrated Surveillance Decision to strengthen the underlying legal framework for surveillance. In September 2012, the Executive Board endorsed a new Financial Surveillance Strategy that included concrete and prioritized steps to further strengthen financial monitoring.

Reforming IMF governance to better reflect the global economy

A top priority for the IMF’s legitimacy and effectiveness has been the completion of governance reform. On December in 2010, the Board of Governors approved far-reaching governance reforms under the 14th General Review of Quotas. The package included a doubling of quotas, with a more than a 6 percentage point shift in quota share to dynamic emerging market and developing countries while protecting the voting shares of the poorest member countries. The reform also included a move to a more representative, fully elected Executive Board and advanced European countries committed to reduce their combined Executive Board representation by two chairs.