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IMF: INTRODUCTION AND ITS ROLE IN

SOME MAJOR INTERNATIONAL


FINANACIAL CRISIS
MADE BY- NUSRAT ALI MALLA
DEBASMITA PADHI
ARADHANA SHUKLA
ANUSHEE TIWARY
LAYOUT
◦IMF: introduction, functions and objectives
Some important international crisis and IMF’s
role:
◦Oil crisis
◦South-east Asian crisis
◦The sub-prime crisis
IMF(International Monetary Fund)
◦Organization of 189 member countries
◦It stabilizes global economy in three ways
◦Monitors global conditions and identifies risks
◦Advises it's members how to improve their
economies
◦Provides technical assistance and short term loans
Objectives
◦Promote international monetary cooperation
◦Facilitate expansion and balanced growth of
international trade
◦Promote exchange rate stability
◦Make its resources available to it's members who are
experiencing BOP problems
◦To establish multilateral system of payments
Functions:
◦Principal function is to supervise the international
monetary system and all the functions of IMF are
combined into three categories.
These are:
◦Regulatory function.
◦Financial function.
◦Consultative function.
Special Drawing Rights (SDRs) : A Tool of IMF
◦SDRs as an international reserve asset in international monetary
system was established by IMF in 1969 with the objective of
alleviating the problem of international liquidity.
◦Allocated to member countries in proportion to their quota
subscriptions.
◦SDRs are used to maintain constant exchange rate.
◦To settle financial obligations and internal counting purposes.
Financial crisis: An Overview
◦ One of the serious problems facing the present international monetary
system is its inability to prevent financial crisis in emerging and advanced
market economies. There have been many crisis in world. Some major ones
are-
◦ Oil crisis 1973-1974
◦ Southeast Asia in 1997-1999.
◦ Sub-prime crisis
◦ Russia in summer 1998.
◦ Brazil in 1999.
◦ Turkey and Argentina in 2001-2002.
OIL CRISIS
Oil Crisis
◦Definition-Oil crisis, a sudden rise in the price of oil
that is often accompanied by decreased supply.
◦The major oil crisis that has taken place in the past is
the oil crisis of 1973.
◦It is also termed as 1973 oil embargo of OPEC
against US.
◦ The 12 member countries of the OPEC agreed to the
embargo on October 19, 1973.
Causes
◦To retaliate against the United States
◦To reduce the supremacy of the U.S dollar as sole
currency of exchange in the international market.
◦To increase its export earnings which was earlier
declining due to persistent decline in U.S dollar (the
denominated currency for oil sales).
Consequences
◦ It led to causing the 1973-1975 recession
◦ The oil embargo aggravated inflation, already at 10 percent for some
commodities, by raising oil prices. It came at a vulnerable time for the U.S.
economy. Domestic oil producers were running at full tilt. They were unable
to produce more oil to make up the slack.
◦ U.S. oil production was declining as a percent of world output.
◦ higher gas prices meant consumers had less money to spend on other goods
and services. This lowered demand, worsening the recession.
◦ Quadrupled the oil prices from $3/barrel to $12/barrel.
◦ It led to stagflation in US economy.
IMF’S ROLE
◦The IMF's response to developments in the balance of payments of
‘non-oil developing countries’(l) after 1973-74 has been largely ad
hoc in nature. Temporary ‘oil facilities’ were established in 1974 and
1975 under which the Fund borrowed and recycled some SDR 6.9
billion(2). An Extended Fund Facility (EFF) was also created in 1974
to assist countries to overcome structural balance of payments
maladjustments and at the end of 1975 the Compensatory Financing
Facility (CFF) was liberalized. by adapting its lending instruments. To help oil importers
deal with anticipated current account deficits and inflation in the face of higher oil prices, it set up the
first of two oil facilities.
ASIAN
MIRACLE
Reasons
◦ Making income distribution more equitable.
◦ Rapid capital accumulation by making banks more reliable and encouraging
high levels of domestic savings.
◦ Increased the skilled labor force by providing universal primary schooling and
better primary and secondary education.
◦ New technology.
◦ Legal and regulatory structures created a positive business environment.
◦ Targeted key industries for rapid development. In key areas, resource
allocation was strictly managed.
◦ Export Promotion
ASIAN CRISIS
◦ Five East Asian crisis economies: Indonesia, S Korea, Malaysia, the
Philippines, and Thailand
◦ Series of currency devaluations beginning in the summer of 1997.
◦ The currency markets first failed in Thailand as the result of the
government's decision to no longer peg the Baht to the U.S. dollar (USD).
◦ Currency declines spread rapidly causing stock market declines, reduced
import revenues and government upheaval.
Reasons

◦Rapid reversal of private capital


flows
◦Leading to credit crunch and
bankruptcies
Reasons for capital outflows
◦Revelation of unsound debts
◦Contagion Effect
◦Higher US interest rates
◦Speculative Attacks
IMF adjustment plan
◦ Financial intervention from the IMF and the World Bank
◦ Cut Government spending
◦ Raise interest rates
◦ Pledges of more than $100 billion in emergency funds to Thailand,
Indonesia, and Korea.
◦ Initial programs focused on fiscal deficits, high interest rates, restrictive
money growth, immediate closures of insolvent financial institutions
◦ Discarded within months
◦ Debt restructuring, accelerated disbursements of international funding,
and more comprehensive and rational restructuring of the financial
sector : Dec 1997
The Sub Prime Crisis in US
◦ Introduction
◦ Subprime meltdown led to sharp increase in the high risk mortgage in January
2007 leading to the most severe recession
◦ Housing industry boomed in the mid 2000’s leading to low interest rates
◦ After U.S. house sales prices peaked in mid-2006 due to the fact that loans were
easy to get
◦ Individuals took sub prime mortgage with the expectation that the price of the
houses would increase and could refinance their homes before the interest rates
increased
◦ 1 in 5 were mortgaged
◦ LEVERAGE is to borrow money to amplify the outcome of a deal
◦ The investor divides the box of mortgages into three parts : safe , okay and risky,this is known
as COLLATERALIZED DEBT OBLIGATIONS (CDO)
◦ To make the topmost box even more safer ,banks charged a fee called the CREDIT DEFAULT
SWAP
◦ CDS covers mortgage backed securities of insurance companies
◦ Due to this the banks give designations where AAA is the first box
◦ SUB PRIME LOAN are offered to the borrower with bankruptions, defaults, late payment
histories
◦ HOUSING BUBBLE BURST
Causes
◦Hedge funds
◦Banks
◦ Insurance companies
◦Home ownership
◦ Residential real estate as safe
◦Buying for speculations
Losses incurred by
◦Mortgage lenders
◦Investment bankers
◦Foreign investors
◦Insurance companies
NEGAVTIVE IMPACTS OF SPM
◦ Decrease in home construction led to decrease in GDP
◦ Decrease in home prices led to decrease in the household consumption due to
the wealth effect
◦ Shocked the entire financial system
◦ Loss in the US stock market by 2-3%
◦ Ever increase in recession
◦ Recessions led to job loss
◦ Major unemployment issues
PRECAUTION
◦According to IMF, the entire international
financial system had to stabilize by crisis
prevention and mitigation with the help of
IMF surveillance ,technical assistance and
information provision.