Facing the twin task of fighting the coronavirus pandemic today and building a better tomorrow, the world is experiencing a new Bretton Woods moment, IMF Managing Director Kristalina Georgieva said on Thursday.
Addressing the annual meeting of the International Monetary Fund’s Board of Governors, she said that what was true at Bretton Woods, when allies at the end of World War II gathered for a conference to create the institutions that would use economic cooperation to prevent future conflicts, remains true today.
“Today we face a new Bretton Woods moment. A pandemic that has already cost more than a million lives. An economic calamity that will make the world economy 4.4 per cent smaller this year and strip an estimated USD 11 trillion of output by next year. And untold human desperation in the face of huge disruption and rising poverty for the first time in decades, she said.
“Once again, we face two massive tasks: to fight the crisis today and build a better tomorrow, she said.
Prudent macroeconomic policies and strong institutions are critical for growth, jobs and improved living standards, she said.
Strong medium-term frameworks for monetary, fiscal and financial policies, as well as reforms to boost trade, competitiveness and productivity can help create confidence for policy action now while building much-needed resilience for the future, she added.
“We know what action must be taken right now. A durable economic recovery is only possible if we beat the pandemic. Health measures must remain a priority. I urge you to support production and distribution of effective therapies and vaccines to ensure that all countries have access,” Georgieva said.
She urged countries to continue support for workers and businesses until a durable exit from the health crisis.
“We have seen global fiscal actions of USD 12 trillion. Major central banks have expanded balance sheets by USD 7.5 trillion. These synchronised measures have prevented the destructive macro financial feedback we saw in previous crises,” she said.
“But almost all countries are still hurting, especially emerging market and developing economies. And while the global banking system entered the crisis with high capital and liquidity buffers, there is a weak tail of banks in many in emerging markets. We must take measures to prevent the build-up of financial risks over the medium term, she said.
The IMF expects 2021 debt levels to go up significantly to around 125 per cent of GDP in advanced economies, 65 per cent of GDP in emerging markets; and 50 per cent of GDP in low-income countries, Georgieva further said.
The fund is providing debt relief to its poorest members and, with the World Bank, they support extension by the G20 of the Debt Service Suspension Initiative.
“Beyond this, where debt is unsustainable, it should be restructured without delay. We should move towards greater debt transparency and enhanced creditor coordination. I am encouraged by G-20 discussions on a Common framework for Sovereign Debt Resolution as well as on our call for improving the architecture for sovereign debt resolution, including private sector participation, she said.
Georgieva said that to reap the full benefits of sound economic policy, they must invest more in people. That means protecting the vulnerable. It also means boosting human and physical capital to underpin growth and resilience, she argued.
“Just as the pandemic has shown that we can no longer ignore health precautions, we can no longer afford to ignore climate change…We focus on climate change because it is macrocritical, posing profound threats to growth and prosperity. It is also people-critical and planet critical, said the IMF MD.
The IMF, she said, is working tirelessly to support a durable recovery, and a resilient future as countries adapt to structural transformations brought on by climate change, digital acceleration and the rise of the knowledge economy.
Since the pandemic began, IMF has committed over USD 100 billion and still has substantial resources from its USD 1 trillion in lending capacity, she said.
“We will continue to pay special attention to the urgent needs of emerging markets and low income countries especially small and fragile states, helping them to pay doctors and nurses and protect the most vulnerable people and parts of their economies, she said.
U.S. Banks Urged To Stop Using Libor On New Loans By End Of 2021
Regulators support plan to end benchmark in June 2023, allowing most existing transactions to mature.
U.S. regulators on Monday pressed banks to stop using the London interbank offered rate on new transactions by the end of 2021 while backing a plan to allow many existing transactions to mature before Libor fully winds down in June 2023.
The moves amount to the strongest and clearest guidance yet from regulators about the risks to banks for writing new contracts based on Libor, an interest-rate benchmark that global policy makers moved to scrap after concluding it was balky and prone to manipulation.
Entering into new contracts using Libor after 2021 would “create safety and soundness risks,” U.S. regulators warned in a joint statement, pledging to “examine bank practices accordingly.”
At the same time, U.S. officials said they welcomed a plan to offer an additional 18 months for so-called legacy contracts—the roughly $200 trillion of existing interest-rate derivatives and business loans tied to the rate—to mature before Libor fully winds down in June 2023. Previously, U.K. and U.S. policy makers have said Libor couldn’t be guaranteed after 2021.
“These announcements represent critical steps in the effort to facilitate an orderly wind-down” of dollar-based Libor transactions, John Williams, president of the Federal Reserve Bank of New York, said in a statement. “They propose a clear picture of the future, to help support transition planning over the next year and beyond.”
Regulators estimate that most of the legacy contracts will mature before June 2023. For the rest, legislation will be needed to switch benchmarks for contracts that lack a clear-cut fallback once Libor ceases to exist, senior Fed officials told reporters on Monday.
“Today’s plan ensures that the transition away from Libor will be orderly and fair for everyone—market participants, businesses, and consumers,” Fed Vice Chair for Supervision Randal Quarles said in a statement.
The Bank Policy Institute, an industry group, said that “The decision to extend Libor for legacy contracts until 2023 is a prudent step that will help facilitate an orderly transition.”
Deeply rooted in markets, Libor was exposed by a 2012 scandal that led to convictions for some traders and penalties for numerous banks.
If the transition doesn’t go as planned, consumers could end up on the hook for increased payments on credit-card loans and other borrowings, while small businesses could face higher fixed rates for loans.
Libor’s Delayed Demise Rewards Slow-Moving U.S. Bankers
Why switch to the alternative if regulators will keep moving the goalposts?
When it comes to overseeing Wall Street, regulators must know that if they give an inch, banks and other large financial institutions will take a mile.
That’s part of the reason the years-long global effort to phase out the London interbank offered rate by the end of 2021 has been both impressive and nerve-wracking. On the one hand, the world’s policy makers have had more than three years to develop and adopt alternative lending benchmarks to replace Libor, which as of 2018 was tied to some $400 trillion of financial contracts.
And yet, as recently as October, or roughly 14 months before Libor’s supposed demise, financial markets were spooked by the prospect of a “big bang” shift on interest-rate swaps to the top U.S. alternative: The secured overnight financing rate, or SOFR, which has gained some traction but is still just a sliver of Libor’s reach.
Perhaps because of the slow adoption of SOFR in the U.S. financial industry, the ICE Benchmark Administration on Nov. 18 raised the possibility that the dollar version of Libor could survive the Dec. 31, 2021, expiration date. On Monday, it went even further, announcing it’s considering extending the retirement of the key three-month dollar Libor tenor to June 30, 2023.
It might also extend six-month and 12-month dollar Libor while sticking to its plan to cease publishing one-week and two-month Libor by the end of 2021.
At first glance, the move seems mostly technical. “Extending the publication of certain USD Libor tenors until June 30, 2023 would allow most legacy USD Libor contracts to mature before Libor experiences disruptions,” the IBA said in a statement.
In a separate joint press release, the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency struck the same tone.
But reading between the lines, it’s hard not to wonder whether bankers will seize on this as an opportunity to once again put off switching from the rate that has dominated financial markets for nearly a half-century. While the official stance from U.S. regulators is that they’re calling for banks to stop writing new U.S. dollar Libor contracts by the end of 2021, the actual language remains somewhat squishy:
“The agencies encourage banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.
New contracts entered into before December 31, 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation. These actions are necessary to facilitate an orderly— and safe and sound— LIBOR transition.
If the administrator of LIBOR extends the publication of USD LIBOR beyond December 31, 2021, the agencies recognize that there may be limited circumstances when it would be appropriate for a bank to enter into new USD LIBOR contracts after December 31, 2021.”
Yes, banks are “encouraged” to stop using Libor and they “should” use an alternative rate. And the regulators vow to “examine bank practices accordingly.” Bloomberg Intelligence analysts Ira Jersey and Angelo Manolatos say they don’t expect the transition to alternative rates to slow too much based on this announcement.
But Libor is so accessible and so ubiquitous that it’s hard to imagine that banks will move with the same sense of urgency — and certainly not with any greater haste — if key tenors are extended through June 2023.
It’s understandable, of course, why regulators felt the finance industry needed more runway before Libor disappeared. As my Bloomberg Opinion colleague Mark Gilbert noted, banks and other institutions have clearly been slow to embrace the alternatives, with at least one survey of hedge funds, private equity firms and banks showing that one in five hadn’t even started down the path of making the transition.
To further prove the point, Gilbert cited International Swaps and Derivatives Association data showing $96 trillion of dollar Libor swaps were traded this year, compared with $1.8 trillion for SOFR. It’s no contest.
The last thing financial regulators need coming out of a global pandemic that shook markets to their core is a mad dash to amend old Libor contracts and all the potential disruptions that come with that.
The question is whether this move opens the door to further delays and backtracking. If hedge funds, private equity firms and banks continue to drag their feet on adjusting to a post-Libor reality, particularly in the U.S., will the authorities keep accommodating them?
It should not be lost on anyone that the amount of swaps tied to the U.K.’s SONIA interest rate benchmark in 2020 has eclipsed those in sterling Libor, $15.6 trillion to $12 trillion. At least in some regions, people are taking the end of the Libor era seriously.
That’s seemingly why the IBA is comfortable moving ahead with its plan to cease the publication of all Libor settings for the British pound, the euro, the Swiss franc and the Japanese yen at the end of 2021. Yes, the dollar Libor market is bigger, accounting for roughly half of all the global contracts, but that doesn’t fully explain being this far behind in the transition.
The New York Fed, nestled in the heart of Wall Street, started a Twitter hashtag campaign, #LIBORsTickingClock, on Aug. 19, or 500 days until the end of Dec. 31, 2021. “NASA says it may take 500 days (or longer!) to go to Mars and back. No time to become an astronaut? You can prepare for the transition away from LIBOR instead!”
The “or longer!” turned out to be prescient — and exactly what late adopters were counting on.