Boorman on revamped CCL
The IMF’s CCL Facility is a new set of lending policies designed to offer countries with sound economic policies a precautionary line of credit to help them counter the effects of financial crises beyond their own making. Whereas IMF loans have traditionally helped countries recover from balance of payments crises, the CCL loan facility is intended to defend against future balance of payments problems that might arise from financial contagion.
The facility was introduced in May 1999 to help emerging market countries cope with recent changes in international capital markets, Boorman explained. “To put it in perspective, in 1990, private capital flows to emerging markets amounted to about $40 billion; in 1997, that figure was at $290 billion,” he remarked. The downside risks of these flows have proven enormous: “Even countries with relatively good policies can be pushed . . . to a bad equilibrium when capital flows dry up or reverse. Through herd behavior and contagion, countries can be seriously affected”
For prequalified countries with sound economic policies, CCL resources would help counter potentially damaging capital flow reversals. Perhaps just as important, Boorman added, the IMF hopes the signal broadcast by its commitment of CCL resources—and the judgment that commitment implies about the member’s policies—would stabilize the country’s position vis-à-vis the capital markets.
CCL design and eligibility criteria
To qualify, the recipient country must have no balance of payments problem at the time the credit line is extended, enjoy constructive relations with its private creditors and take measures to limit its external vulnerability, outline to the IMF’s Executive Board the policies it intends to pursue during the one-year period covered by the CCL, and earn a positive assessment of its economic prospects from the Executive Board.
The IMF recognized that relatively large sums of money may be needed, Boorman noted, and therefore placed no access limits on the CCL. It expected commitments to be in the range of 300–500 percent of a country’s IMF quota. Charges would be set high and increased over the time outstanding. Maturities would be set short, the resource commitment would be for one year, a mid-term report would be required to evaluate the recipient country’s progress, and an activation review mechanism would be employed to consider a country’s request to draw under the facility.
Reactions to the CCL
In the first year of the CCL’s existence, some countries considered applying for the facility, but ultimately none did. Boorman cited concerns that member country officials and outside critics raised about the new facility. Would capital markets interpret a country’s application for the credit line as a sign of strength or a sign of weakness? If the latter, the result could be a negative market reaction and a reversal of capital flows—the very opposite of what was intended. And markets might react negatively to CCL countries leaving the facility—especially if a country’s economic situation turned bad, or the IMF did not wish to renew the facility. Critics also speculated that the CCL facility might crowd out private lending; for instance, a CCL country with private market access might prefer to borrow more cheaply from the IMF rather than pay the prevailing private market spreads.
Emerging market countries might also hesitate to apply for the CCL because of what Boorman termed the “club” factor—each is reluctant to be the first to join, fearful of how the private sector will view its association with other countries that might join later. Another factor is cost: a few IMF member countries mentioned that the surcharge and commitment fee dampened their interest. Many interested parties expressed unease about the activation review mechanism and the fact that it was, in their view, insufficiently automatic. Boorman also observed that relative calmness in the global economic environment after the facility was introduced probably led to decreased interest in the insurance that it provided.
Revisions to the CCL
Despite these concerns, there was strong interest, particularly in Latin America, in a facility that would encourage potentially vulnerable countries to frame their economic policies to prevent future crises, Boorman explained. So, the IMF redesigned the CCL in November 2000 to distinguish it more clearly from other IMF facilities, to enhance its positive signaling effect, and to introduce greater automaticity into the availability of the committed resources. According to Boorman, the changes have made the new facility more attractive: the IMF reduced the surcharge on the loan and virtually eliminated the commitment fee; neither a memorandum of understanding nor periodic quantified benchmarks are required; and the mid-term review can be completed on a time-lapsed basis. Most important, Boorman noted, the Board recognized that members want assurance that resources will be quickly available when requested. Thus, the activation review is now divided in two, and the release of resources in the first review is both larger and more automatic than under the previous system.
The IMF is currently discussing eligibility with interested member country officials. Like other facilities that encourage countries to improve their institutional footings, the CCL, Boorman emphasized, will work not through encouragement or lecturing from IMF staff, but only when countries see that it is in their interest to sign up—including the prospect that eligibility for the facility could reduce the spreads paid by emerging market countries in international capital markets.
Photo Credits: Denio Zara, Padraic Hughes, Pedro Márquez, and Michael Spilotro for the IMF.