Skip to main content

Systemic Sudden Stops, Credit Lines, and Funding Liquidity

  • Chapter
  • First Online:
  • 1144 Accesses

Abstract

This article considers credit lines (CLs) as safeguards against the pure liquidity problem due to a sudden stop. Such CLs are new and not well understood—possibly due to a lack of clear understanding of the elusive concept liquidity. We will distinguish between two types of CLs: those that need to be backed by reserves and those that do not require such backing. This distinction clarifies why liquidity is hardly a constraint in the context of the relevant CLs. However, there can be implementation difficulties. These can be reduced if the International Monetary Fund (IMF) acts as mediator (rather than as provider of liquidity).

An erratum to this chapter can be found at http://dx.doi.org/10.1007/978-81-322-1659-9_24

This is a preview of subscription content, log in via an institution.

Buying options

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD   109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

  1. 1.

    There are similarities between the problem of sudden stop in international economics and the problem of panic run in economics of banking. See Diamond and Dybvig (1983) and Chang and Velasco (2001).

  2. 2.

    Credit lines given by banks to firms have synergies with demand deposits. So banks can economize on reserves (Kashyap et al. 2002).

  3. 3.

    For a formal treatment and related issues, see Singh (2013).

  4. 4.

    The problem of enforcement of recovery of loans under CL contracts is particularly acute. It is true that this is a general problem in international economics given that there is effectively hardly any legal way by which capital market transactions can be settled. However, there are some second best solutions. In foreign direct investment (FDI), there is direct control over assets by foreign investors. In equity or bond markets, there is an obvious exit route as there is liquidity and the investor is often free to sell and move funds out of the country (Diamond and Rajan 2001). These kinds of solutions are missing in case of loans under CL contracts.

  5. 5.

    It is possible that some member countries pay up their more or less permanent contributions gradually, while others make an immediate payment but that is a matter of detail. The pending payments from member countries are in the form of receivables. These are substantively different from the funds that the IMF borrows temporarily under CLs exercised.

References

  • Aizenman J, Pasricha GK (2010) Selective swap arrangements and the global financial crisis: analysis and interpretation. Int Rev Econ Finance 19:353–365

    Article  Google Scholar 

  • Chang R, Velasco A (2001) A model of financial crises in emerging markets. Q J Econ 116:489–517

    Article  Google Scholar 

  • Diamond DW, Dybvig PH (1983) Bank runs, deposit insurance and liquidity. J Polit Econ 91(3):401–419

    Article  Google Scholar 

  • Diamond DW, Rajan RG (2001)Banks, short-term debt and financial crises: theory, policy implications and applications. Carnegie-Rochester Conference Series on Public Policy 54(1):37–71

    Article  Google Scholar 

  • Fernandez-Arias E, Levy-Yeyati E (2012) Global financial safety nets: where do we go from here? Int Finance 15(1):37–68

    Article  Google Scholar 

  • International Monetary Fund (2012a) Flexible credit line—operational guidance note prepared by the strategy, policy and review department, May 31

    Google Scholar 

  • International Monetary Fund (2012b) Precautionary and liquidity line—operational guidance note prepared by the strategy, policy and review department, May 31

    Google Scholar 

  • Kashyap A, Rajan R, Stein J (2002) Banks as liquidity providers: an explanation of the coexistence of lending and deposit taking. J Finance 57(1):33–73

    Article  Google Scholar 

  • Loukoianova E, Neftci SN, Sharma S (2007) Pricing and hedging of contingent credit lines. J Deriv Spring 14(3):61–80

    Article  Google Scholar 

  • Obstfeld M (2009) Lenders of last resort in a globalized world, IMES Discussion Paper Series 2009-E-18, August

    Google Scholar 

  • Radelet S, Sachs JD (1998) The east Asian financial crisis: diagnosis, remedies, prospects. Brookings Pap Econ Act 1998(1):1–90

    Article  Google Scholar 

  • Singh G (2012) Banking crises, liquidity, and credit lines—a macroeconomic perspective. Routledge, Abingdon

    Google Scholar 

  • Singh G (2013) Credit lines to mitigate sudden stop: why the market does not exist. https://sites.google.com/site/gurbachansingh61/papers (An early version presented at 7th Annual Conference on Growth and Development, December 15–17, 2011, Indian Statistical Institute, Delhi Centre)

Download references

Acknowledgments

I thank Chetan Ghate and Rajat Kathuria for the invitation to make a contribution to this volume. I appreciate the role of ISI and that of my family in making this work possible. I appreciate the comments on an earlier version by Partha Sen and Arti Singh. Last but not the least I am grateful to a referee for useful comments which have helped in writing this revised, longer, and clearer version.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Gurbachan Singh .

Editor information

Editors and Affiliations

Rights and permissions

Reprints and permissions

Copyright information

© 2014 Springer India

About this chapter

Cite this chapter

Singh, G. (2014). Systemic Sudden Stops, Credit Lines, and Funding Liquidity. In: Callaghan, M., Ghate, C., Pickford, S., Rathinam, F. (eds) Global Cooperation Among G20 Countries. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1659-9_17

Download citation

Publish with us

Policies and ethics