The Risk Telescope — The IMF and the Eurozone
We stand today at the threshold of a massive event horizon. The decisions taken by policymakers internationally before year-end will define the scale and scope of the fallout from the Eurozone. They will also lay the foundations for how financial systems (e.g., risk pricing formulas; risk management systems; regulatory oversight functions) will operate in the future.
We do not yet know exactly how the Eurozone sovereign bond crisis and fiscal union arrangements will be resolved. The details are unclear and remain subject to political negotiation tonight as the U.S. Secretary of the Treasury prepares for a round of shuttle diplomacy in Europe and Eurozone leaders contemplate the form and structure of treaty reform.
It is becoming increasingly clear this weekend that the International Monetary Fund (IMF) will be playing a larger role in any crisis management efforts in Europe. The technical structure through which the IMF operates will be of intense interest in the coming days. This issue of The Risk Telescope focuses on how the demands placed on the IMF by the Eurozone situation will accelerate changes in how the IMF operates.
Global economic rebalancing may ultimately lead to a new equilibrium. But the path to that equilibrium runs directly through the IMF structure and the path is likely to be discontinuous. As today’s issue of The Risk Telescope indicates, the IMF structure itself seems likely to come under severe architectural stress in the next 12-18 months. All previous assumptions about what the IMF might or might not do cannot be taken for granted and internal risk modeling systems should be reviewed accordingly.
Section I provides a brief factual recap of the situation as it stands today, largely for the benefit of readers not tapping into the news stream on an intra-day basis.. Section II focuses on the IMF’s lending facilities in the context of how those facilities might be used (or not) in Europe. Section III concludes. It is possible that Eurozone developments may also accelerate the expansion of the IMF’s role in regulatory policy generally, and macroprudential policy specifically. Macroprudential policies will be the focus of the next issue of this publication.
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