Complementing the IMF’s $100 billion liquidity facility, the Federal Reserve has announced the establishment of swap lines with the central banks of Mexico, Brazil, South Korea, and Singapore for up to $30 billion each to help them deal with dollar shortages. This, in addition to the Fed’s unlimited swap lines with the BoE, ECB, BoJ, and the Swiss National Bank, is stretching the Fed’s balance sheet to unprecedented levels.
The G7 has expressed concern over the implications of excessive yen volatility for financial and economic stability, but fell short of promising coordinated action. The graph above illustrates the extreme nature of the yen’s rise. For example, the yen has appreciated 22% against the euro and 35% against the Aussie dollar in the last month alone. The G7 may have to intervene in foreign currency markets to restore stability.
The financial crisis has forced the IMF back onto the world stage. As the chart below indicates, many countries’ bank debt to GDP ratio has exploded in the past five years, suggesting they may need assistance rolling over their loans. The IMF has rediscovered its mission as evidenced by the number of countries considering assistance. The following articles discuss the revival of the IMF and suggest possible reforms.
The U.S. has left Russia to bail out Iceland with a $5.5 billion loan, even though the U.S. economy is over 11 times the size of Russia’s. Is Iceland really of no strategic interest, despite speculation that Moscow hopes to gain leverage over Iceland, which could use its NATO membership to veto the accession of Ukraine or Georgia? Or does the Iceland story show that a country with petrodollars will use its currency reserves as a foreign policy tool?
The Federal Reserve has announced a series of extraordinary measures to unclog credit markets. However, credit markets remain frozen, and as the graph above indicates, the equity markets have responded negatively. The continued credit market freeze points to a need for strong policy action. The following articles discuss a possible role for international coordination through the G7 and IMF.
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