Safety First: Expanding the Global Financial Safety Net in Response to COVID-19

In a new journal article published in Global Policy, Kevin P. Gallagher, William N, Kring, Haihong Gong, José Antonio Ocampo and Ulrich Volz explain how the protection of the Global Financial Safety Net (GFSN) – comprising the nations’ foreign reserves, central banks’ bilateral swap lines and financial resources of global financial institutions, particularly of the International Monetary Fund (IMF) and the regional financial arrangements (RFAs) – is insufficient to deal with the COVID-19 crisis of current proportions. The authors discuss the shortcomings of the current system and develop a set of immediate and intermediate proposals to expand and reform the GFSN to help both the crisis response, as well as the development of a more robust and functional global financial system in the long-term.

The authors call for strengthening of the GFSN to manage the economic effects of COVID-19, in particular the massive capital outflows from emerging market and developing economies and the global shortage of dollar liquidity. In the study, they map out eight recommendations, including broadening the coverage of the Federal Reserve currency swaps; issuing at least $500 billion of Special Drawing Rights, the IMF’s reserve currency; improving the IMF’s precautionary and emergency facilities; establishing a multilateral swap facility at the IMF; increasing the resources and geographic coverage of regional financial arrangements; coordinating capital flow management measures; initiating debt restructuring and relief initiatives; and requesting credit-rating agencies to stop making downgrades during the crisis.

Additionally, the authors argue leaders should swiftly move to address four key structural gaps in the GFSN by agreeing on a quota reform at the IMF; creating an appropriate sovereign debt restructuring regime; expanding IMF surveillance activity; and adopting IMF governance reform and strengthening its relations with all agents of the GFSN. Furthermore, they argue these reforms must be calibrated toward a just transition to a more stable, inclusive and sustainable global economy.