Photographer: Divyakant Solanki/EPA

India, Singapore Central Bankers Call for Global Safety Net

  • Rajan sees role for IMF as backstop of central banks’ swaps
  • IMF’s Furusawa says talks about liquidity facility ‘not easy’

Central bank chiefs from India and Singapore called for a strong safety net for countries to cope with financial crises, echoing a push by the International Monetary Fund that said available instruments are costly and fragmented.

Ad-hoc liquidity facilities between central banks could be channeled through the Washington-based IMF, Reserve Bank of India Governor Raghuram Rajan told a gathering of regulators in Bali, Indonesia, on Monday. Ravi Menon, the Monetary Authority of Singapore’s managing director, said a global safety net is “really critical.” Referring to the currency swap lines used during the 2008 financial crisis, he suggested institutionalizing those kind of measures.

“Longer term, we need some agreement between the Fund and major central banks,” Rajan said. The plan “would allow the Fund to be a backstop to a liquidity facility from the central banks that don’t come on an individual bilateral basis but on a multilateral consensus.”

Menon didn’t comment on the role the IMF could play, saying swaps are “best done through central banks given the speed at which central banks can move.”

‘Not Easy’

The Washington-based IMF has long mulled a system that would remove the stigma of borrowing money from an institution known for its accompanying policy conditions. While it’s now offering less stringent packages to countries that pre-qualify, many emerging markets still prefer to build up foreign exchange reserves as an insurance policy.

“The IMF is looking at its facilities and is certainly considering whether they are adequate, fast enough, whether countries approach the Fund well in advance rather than at the time of a crisis,” Rajan said.

Speaking at the same conference, IMF Deputy Managing Director Mitsuhiro Furusawa said the lender is discussing the facility, which could be used in case of a liquidity shock, but added that the push toward a global system is "not easy.” Member countries are split over the need for a larger safety net, with some fearing that expanding it would fuel moral hazard, Rajan said.

The existing system comprises international reserves, central bank swaps, regional financing arrangements and market instruments as well as IMF and development banks’ resources, according to a report released by the IMF in March. While they have expanded, the measures lack predictability and benefit advanced economies more than emerging markets, according to the paper.