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
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- 1.
- 2.
Credit lines given by banks to firms have synergies with demand deposits. So banks can economize on reserves (Kashyap et al. 2002).
- 3.
For a formal treatment and related issues, see Singh (2013).
- 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.
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.
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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.
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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
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