1.
Precautionary Credit Lines as a Crisis
Prevention Tool: the IMF’s Experience
Hugh Bredenkamp
Deputy Director
December, 2018

2.
Potential Benefits and Costs of Precautionary Support
2
Benefits Costs
 Deters creditor “runs”
 Serves as commitment device
 Accelerates crisis response if
needed
 Systemic benefits (reserve
pooling; positive spillovers)
 Could overstretch available
funds
 “Policy” moral hazard
 Special instruments could
stigmatize regular facilities

3.
Crisis Prevention and Resolution Tools
3
Stand-By
Arrangement
(SBA)
Flexible Credit
Line
(FCL)
Precautionary
and Liquidity Line
(PLL)
Qualification
criteria
Very strong
fundamentals and policy
frameworks
Sound fundamentals and
policy frameworks
No qualification
Ex-post
conditionality
No Yes; to address remaining
vulnerabilities
Yes
Access1 Uncapped Capped at 500% of quota Uncapped
Duration 1 or 2 years Two windows: 1 to 2
years, or 6 months
Up to 3 years
1/ Access is determined case-by-case, depending on BoP need, strength of policies, and repayment capacity. Additional
safeguards required for access above normal limits.

4.
USE OF IMF PRECAUTIONARY
ARRANGEMENTS
4

5.
Use of IMF Precautionary Arrangements, 2008-18
5
FCL PLL/PCL SBA
Mexico (7)
Poland (6)
Colombia (7)
Macedonia
Morocco (3)
Honduras
Serbia (3)
El Salvador (2)
Costa Rica
Guatemala
Romania (2)
Jamaica
Note: Based on arrangements envisaged as precautionary at program approval, regardless of whether or not there was later disbursement.

6.
Scale of Support under IMF Precautionary Arrangements
6
0
2
4
6
8
10
12
14
HND ROU CRI GTM SRB COL SLV POL MAR MEX MKD JAM
Average Access at Program Approval
(Percent of GDP, average across arrangements for each country)
Sources: History of Fund Arrangements, WEO, and IMF staff calculations.
FCL
PLL/PCL
SBA

7.
BENEFITS AND COSTS
7

8.
Empirical Evidence on the Benefits (1)
8
From the “pre-FCL” era, a 2008 study1 found that:
 controlling for initial conditions, sovereign spreads were significantly lower
(by 100bps) for users of precautionary SBAs than for countries with
drawing programs;
1/ “IMF Support and Crisis Prevention,” Ghosh and others, 2008, IMF Occasional Paper NO. 262.
 P-SBA users’ spreads were not significantly different from those in countries
with no Fund program, again controlling for initial conditions—which implies
some benefit in risk-adjusted terms (since countries willing to pay for P-SBA
presumably faced greater perceived risks than non-users).

9.
Empirical Evidence on the Benefits (2)
9
2011 Review of FCL/PCL found that:
 FCL users saw sharp drop in
spreads (relative to EM class) and
exchange rate volatility upon
announcement.
-30
-20
-10
0
10
20
30
40
50
60
T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
Basispoints
Time
Mexico
Colombia
Poland
T= Date of Announcement
Sources: Bloomberg and 2011 Review of the FCL/PCL.
EMBI Spreads
(Adjusted for global factors)
 “Perceived qualifiers”1 also
benefitted: decline in probability
of distress, conditional on distress
in FCL-using countries.
1/ List of seven countries identified by investment banks.

10.
Empirical Evidence on the Benefits (3)
10
2014 Review confirmed that spreads
were reduced:
 for FCL users (by 30 bps on
average; 50 bps for MEX/COL); and
FCL countries face lower borrowing costs
 for “perceived qualifiers” (12 bps on
average, controlling for other
factors1).
1/ I.e.: spreads in comparators, VIX, reserves, real GDP growth, debt/GDP, current account balances.

11.
Empirical Evidence on the Costs
 Concern not borne out, given limited usage. Aggregate
precautionary commitments1 peaked at SDR 88 billion (2016), out
of total available Fund resources at the time of SDR 922 billion.
 Not evident. All FCL users:
(a) progressively improved structural fiscal balances;
(b) maintained own reserves above the Fund’s reserve-adequacy
metric;
(c) continued to meet stringent qualification criteria throughout.
 Possibly. Survey evidence for 2014 Review found that members
not qualifying for FCL/PLL were deterred from requesting support
under “lower quality” facilities.
Excessive burden on
Fund resources?
Reduced incentive to
maintain robust policies?
Special facilities
stigmatized use of
SBA/EFF?
111/ Includes precautionary GRA commitments whether or not they were later drawn. Excludes PRGT-blended programs.

12.
Why So Few Users?
12
 Given evidence of benefits, relatively low cost to users (avg. effective rate: 19-
33 bps1), and persistent global risks, greater take-up might have been
expected.
1/ As per 2017 FCL and PLL Arrangements. See “Adequacy of the Global Financial Safety Net—Review of the Flexible
Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform,” December 2017.
 Survey evidence points to two main factors for reluctance:
 Stigma—related to “coming to the Fund,” regardless of instrument.
 For EMs, fear of disqualification.

13.
Two Perennial Controversies (1)
13
 It has been suggested that the Fund could regularly assess all (or willing)
members for qualification to use FCL/PLL (e.g., as part of regular Article IV)—
this might alleviate stigma, encourage greater use. However…
1. Prequalification
 Fund’s membership has consistently rejected prequalification:
 “Rating agency” concern (markets may penalize countries that do not
qualify).
 Risk that it will taint surveillance (pressure on staff not to disqualify).

14.
Two Perennial Controversies (2)
14
 Majority view (hence, Fund policy):
 FCL/PLL use should be temporary—supplementing reserves only during
periods of heightened risk.
2. The “Exit” Expectation
 Minority view:
 Systemic benefit from providing continuous support (especially to EMs, so
long as they qualify), to counter ever-present risk of capital flow volatility.
 Exit expectation forces countries to self-insure, which is inefficient.

15.
THANK YOU
15