Yesterday’s events on the multilateral fire-fighting front of the global crisis are revealing: there is no global lending of last resort arrangement in place to help prequalified, well-behaved emerging markets such as Mexico and Brazil to withstand the first truly global financial crisis. The FED and the IMF have revealed what their balance sheet and governance constraints allow them to put on the table: an approximate, combined US$60 billion for each. This is not going to be sufficient, if one of these economies ends up in serious trouble, as the scale of government interventions in advanced economies shows.
There is a need for a multilateral swap arrangement capable of transferring quickly and effectively FX liquidity from EMs in surplus to well-behaved EMs in actual or potential deficit, e.g., a mechanism to transfer FX liquidity within the BRICs. In the 1970s, the IMF arranged such transfers from oil-exporting countries to other developing countries starving for foreign financing. In the 1990s, the FED came to the rescue of the like of Mexico and South Korea. But its balance sheet is now approaching its limits, while congress would have a very hard time to authorize hundreds of billion of dollars in support of foreign countries. The IMF is constrained not only by the limited size of its balance sheet, but also by its outdated and ineffective governance framework.
China is willing to help, as the deal with Russia indicates, but is imposing its own, peculiar (to say the least), energy-obsessed conditionality standards: not really what Walter Bagehot had in mind!
Perhaps the BIS is the place to look next to set up a realistic and effective global LOR framework for prequalified, well-behaved EMs. The BIS is a multilateral institution already managing part of emerging Asia official reserves, and where China and other systemic important EMs deal with each other productively and sensibly, within a less constraining governance framework.