Endnotes

¹The FSF was reorganized as the Financial Stability Board (FSB) in April 2009 as part of international financial architecture reforms endorsed by the Group of Twenty (G20) Leaders Summit.

²

³For this reason, unless noted otherwise, the numbers quoted in the paper come from the IMF documents for the initial programs even when they were subsequently revised.

⁴IMF (2009b) notes that, out of the 15 recent crisis cases considered, only in Iceland, Latvia, and Ukraine was the financial sector key in triggering or exacerbating the crisis.

⁵The negative wealth effect of exchange rate devaluation when there is net external debt in foreign currencies was first recognized almost half a century ago by Diaz-Alejandro (1963). Among development economists, the contractionary impact of currency depreciation was a well-known empirical regularity even at the time of the Asian crisis (see Edwards 1989).

⁶Unless noted otherwise, the IMF “program documents” refer to the relevant Letters of Intent, Press Releases and, where available, Staff Reports that are published following the Executive Board approval of IMF-supported programs.

⁷This comparison appears to remain valid for a larger sample. The median access in 15 recent programs (2008–2009) was 7% of GDP, compared to 4% in past capital account crisis programs (IMF 2009b).

⁸According to the program documents, Latvia's gross external liabilities maturing within a year amounted to over 60% of GDP. The private sector's total net liabilities, however, were 70% of GDP (with the banking sector's short-term liquid assets amounting to 45%), and the public sector was a net external creditor.

⁹It is possible that these capital and exchange controls contributed to the observed, reasonable stability of exchange rates during the first months of the IMF programs.

¹⁰As a result of the exchange controls, arrears on current obligations have emerged in these countries.

¹¹Iceland removed all payment restrictions on current account transactions in late November 2008, allowing the foreign exchange market to reopen in early December.

¹²In 1998, many observers thought that the IMF was hostile to the introduction of a capital outflow control by Malaysia. See IEO (2005) for a general review of the IMF's approach to capital account liberalization and related issues.

¹³On the other hand, as EU member countries, Hungary and Latvia did not have the option to introduce capital controls.

¹⁴In practice, the Thai and Indonesian authorities had already begun to raise interest rates before they approached the IMF.

¹⁵Another dimension concerns the timing of the interest rate increases—rates should be raised early by a very large amount to help stabilize the external situation and in an ideal situation would be quickly reduced as external pressures ease.

¹⁶The actual outcome in all three countries was more expansionary than programmed because the IMF quickly relaxed the targets and automatic stabilizers came into motion.

¹⁷This appears to be true of all recent IMF standby programs adopted between November 2008 and May 2009 except for the program with Pakistan. Given the nature of the underlying problem, net fiscal tightening was programmed for Pakistan in a manner similar to the Asian programs. See IMF (2009b).

¹⁸In addition, the program documents all referred to the need to protect the poor through a social safety net measure. The consideration of the social impact of a program was a response to the criticisms voiced at the time of the Asian crisis and such need has routinely been noted in all recent IMF program documents.

¹⁹The Thai authorities had already announced the suspension of 16 finance companies in June (before the onset of the full blown crisis) and an additional 42 companies in early August (before they concluded the program with the IMF). Under the program, the government recapitalized, merged with other partners, or liquidated these 58 finance companies as well as nationalized 6 commercial banks and 5 finance companies.

²⁰“The Interim Guidance Note on Streamlining Structural Conditionality,” 18 September 2000. IMF (2005) explains that, the 2000 requirement that a conditionality measure be in the IMF's core areas of competence (macro-relevant) was changed in 2002 to the requirement that it be critical to the success of the program (macro-critical).

²¹“Transcript of a Press Conference by IMF Managing Director Dominique Strauss-Kahn on the Launch of a New Facility for Emerging Markets Hit by Crisis,” 29 October 2008, available at: www.imf.org/external/np/tr/2008/tr081029.htm.

²²Cottarelli and Giannini (2002) and Mody and Saravia (2003) provide empirical evidence on the effectiveness of the IMF's catalytic finance.

²³As quoted in IMF, Press Release No 08/261, 28 October 2008.

²⁴In Thailand, the IMF pursued a different type of transparency policy by requiring disclosure of its forward foreign exchange position, but the timing was not helpful in restoring market confidence.

²⁵In the event, the first review of April 2009 did allow the fiscal target to be revised downward from balance to a deficit of 4% of GDP.

²⁶According to the IMF document on program design (IMF 2004b), the primary focus of an IMF program designed to deal with a capital account crisis is placed on “preventing excessive, and achieving orderly, external adjustment.”

²⁷The US dollar exchange rate of the Latvian lat simply reflects the movement of the dollar against the euro, to which it is pegged. The point here is that Latvia has been able to maintain the peg as long as it has after the onset of the full-blown crisis.

²⁸In late 2008, the Republic of Korea agreed with the Federal Reserve on a currency swap arrangement for US$30 billion and with the PRC for about US$28 billion, and agreed with Japan to increase the existing yen-won arrangement from US$3 billion to US$20 billion (the amounts with the PRC and Japan were outside the commitments under the Chiang-Mai Initiative). From late 2008 to early 2009, Indonesia received standby credit lines from the Asian Development Bank (US$1 billion), the World Bank (US$2 billion), Australia (US$1 billion), and Japan (US$1.5 billion) for a total of US$5.5 billion.

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