The IMF’s mandate is to safeguard the stability of the international monetary and financial system, and crypto assets are changing the system profoundly.
Crypto assets and associated products and services have grown rapidly in recent years. Furthermore, interlinkages with the regulated financial system are rising. Policymakers struggle to monitor risks from this evolving sector, in which many activities are unregulated. In fact, we think these financial stability risks could soon become systemic in some countries.

‘Uncoordinated regulatory measures may facilitate potentially destabilizing capital flows.’

While the nearly $2.5 trillion market capitalization indicates significant economic value of the underlying technological innovations such as the blockchain, it might also reflect froth in an environment of stretched valuations. Indeed, early reactions to the Omicron variant included a significant crypto selloff.

Financial system risks from crypto assets
Determining valuation is not the only challenge in the crypto ecosystem: identification, monitoring, and management of risks defy regulators and firms. These include, for example, operational and financial integrity risks from crypto asset exchanges and wallets, investor protection, and inadequate reserves and inaccurate disclosure for some stablecoins. Moreover, in emerging markets and developing economies, the advent of crypto can accelerate what we have called “cryptoization”—when these assets replace domestic currency, and circumvent exchange restrictions and capital account management measures.
Such risks underscore why we now need comprehensive international standards that more fully address risks to the financial system from crypto assets, their associated ecosystem, and their related transactions, while allowing for an enabling environment for useful crypto asset products and applications.
The Financial Stability Board, in its coordinating role, should develop a global framework comprising standards for regulation of crypto assets. The objective should be to provide a comprehensive and coordinated approach to managing risks to financial stability and market conduct that can be consistently applied across jurisdictions, while minimizing the potential for regulatory arbitrage, or moving activity to jurisdictions with easier requirements.
Crypto’s cross-sector and cross-border remit limits the effectiveness of national approaches. Countries are taking very different strategies, and existing laws and regulations may not allow for national approaches that comprehensively cover all elements of these assets. Importantly, many crypto service providers operate across borders, making the task for supervision and enforcement more difficult. Uncoordinated regulatory measures may facilitate potentially destabilizing capital flows.
Standard-setting bodies responsible for different products and markets have provided varying levels of guidance. For example, the Financial Action Task Force has issued guidance for a risk-based approach to mitigating financial integrity risks from virtual assets and their service providers. Actions by other standard-setting bodies range from broad principles for some types of crypto assets to rules for mitigating exposure risks of regulated entities and setting up information exchange networks. While useful, these efforts aren’t sufficiently coordinated towards a global framework for managing the risks to financial and market integrity, financial stability, and consumer and investor protection.
Making regulation work at the global level
The global regulatory framework should provide a level playing field along the activity and risk spectrum. We believe this should, for example, have the following three elements:

Crypto-asset service providers that deliver critical functions should be licensed or authorized. These would include storage, transfer, settlement, and custody of reserves and assets, among others, similar to existing rules for financial service providers. Licensing and authorization criteria should be clearly articulated, the responsible authorities clearly designated, and coordination mechanisms among them well defined.
Requirements should be tailored to the main use cases of crypto assets and stablecoins. For example, services and products for investments should have requirements similar to those of securities brokers and dealers, overseen by the securities regulator. Services and products for payments should have requirements similar to those of bank deposits, overseen by the central bank or the payments oversight authority. Regardless of the initial authority for approving crypto services and products, all overseers—from central banks to securities and banking regulators—need to coordinate to address the various risks arising from different and changing uses.
Authorities should provide clear requirements on regulated financial institutions concerning their exposure to and engagement with crypto. For example, the appropriate banking, securities, insurance, and pension regulators should stipulate the capital and liquidity requirements and limits on exposure to different types of these assets, and require investor suitability and risk assessments. If the regulated entities provide custody services, requirements should be clarified to address the risks arising from those functions.

Some emerging markets and developing economies face more immediate and acute risks of currency substitution through crypto assets, the so-called cryptoization. Capital flow management measures will need to be fine-tuned in the face of cryptoization. This is because applying established regulatory tools to manage capital flows may be more challenging when value is transmitted through new instruments, new channels and new service providers that are not regulated entities.
There is an urgent need for cross-border collaboration and cooperation to address the technological, legal, regulatory, and supervisory challenges. Setting up a comprehensive, consistent, and coordinated regulatory approach to crypto is a daunting task. But if we start now, we can achieve the policy goal of maintaining financial stability while benefiting from the benefits that the underlying technological innovations bring.
Crypto assets are potentially changing the international monetary and financial system in profound ways.  The IMF has developed a strategy in order to continue to deliver on its mandate in the digital age. The Fund will work closely with the Financial Stability Board and other members of the international regulatory community to develop an effective regulatory approach to crypto assets.
Authors:

Tobias Adrian is the Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department

Dong He is Deputy Director of the Monetary and Capital Markets Department (MCM) of the International Monetary Fund

Aditya Narain is Deputy Director in the IMF’s Monetary and Capital Markets Department (MCM)

Compliments of the IMF.
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Firm, market, and country level factors may weigh on metals production under a net-zero scenario.
The clean energy transition needed to avoid the worst effects of climate change could unleash unprecedented metals demand in coming decades, requiring as much as 3 billion tons.
A typical electric vehicle battery pack, for example, needs around 8 kilograms (18 pounds) of lithium, 35 kilograms of nickel, 20 kilograms of manganese and 14 kilograms of cobalt, while charging stations require substantial amounts of copper. For green power, solar panels use large quantities of copper, silicon, silver and zinc, while wind turbines require iron ore, copper and aluminum.

‘The needed ramp-up in mining investment and operations could be challenging.’

Such needs could send metal demand and prices surging for many years, as we outlined in a recent blog post based on our research for the October World Economic Outlook and a new IMF staff paper.
Metal prices have already seen large increases as economies re-opened, highlighting a critical need to analyze what could constrain production and delay supply responses. Specifically, we assess whether there are enough mineral and metal deposits to satisfy needs for low-carbon technologies and how to best address factors that could restrain mining investment and metals supplies.
Supply constraints
Under the International Energy Agency’s Net-Zero by 2050 Roadmap, the share of power from renewables would rise from current levels of around 10 percent to 60 percent, boosted by solar, wind, and hydropower. Fossil fuels would shrink from almost 80 percent to about 20 percent.
Replacing fossil fuels with low-carbon technologies would require an eightfold increase in renewable energy investments and cause a strong increase in demand for metals. However, developing mines is a process that takes a very long time—often a decade or more—and presents various challenges, at both the company and country level.
The first question is how far current metals production is stretched and whether existing reserves can provide for the energy transition. Given the projected increase in metals consumption through 2050 under a net zero scenario, current production rates of graphite, cobalt, vanadium, and nickel appear inadequate, showing a more than two-thirds gap versus the demand. Current copper, lithium and platinum supplies also are inadequate to satisfy future needs, with a 30 percent to 40 percent gap versus demand.

We also examined whether production can be scaled up, by looking at current metal reserves. For some minerals, existing reserves would allow greater production through more investment in extraction, such as for graphite and vanadium. For other minerals, current reserves could be a constraint on future demand—especially lithium and lead, but also for zinc, silver, and silicon.
Importantly, however, metal reserves and production are not static. Firms can expand reserves through innovation in extraction technology and further exploration efforts may lead to increasing the future supply of metals to meet future demands.
Moreover, metals recycling can also increase supplies. Reuse of scrap metals only occurs on a large scale for copper and nickel, but it’s now increasing for some scarcer materials like lithium and cobalt.
One complicating factor is that some important supplies are generally very concentrated. This implies that a few producers will benefit disproportionately from growing demand. Conversely, this lays bare energy transition risks from supply bottlenecks should investments in production capacity not meet demand, or in case of potential geopolitical risk inside or between producer nations.

The Democratic Republic of the Congo, for example, accounts for about 70 percent of cobalt output and half of reserves. The role is so dominant that the energy transition could become more difficult if the country can’t expand mining operations. Similar risks apply to China, Chile, and South Africa, which are all top producers for some of the metals most crucial to the energy transition. Breakdowns or disruptions in their institutions, regulations, or policies could complicate supply growth.
Financing concerns
A related challenge is insufficient financing for metals and mining investment due to growing investor focus on environmental, social, and governance considerations, or ESG. Mining involves environmental impacts and fuels global warming, albeit just a fraction of coal and gas generation, as pointed out by a World Bank report on the mineral intensity of the energy transition.
Reduced access to financing by firms with lower ratings could constrain production, adding another potential supply-chain bottleneck. In response, miners are trying to reduce their carbon footprint. An S&P Global analysis shows that the ESG average score of the S&P Global 1200, an index representing about 70 percent of global stock-market capitalization, stood at 62 out of 100, while the metals and mining sector’s score rose to 52 last year from 39 in 2018. This may indicate miners are catching up with other sectors to become more attractive to global investors seeking to build more responsible portfolios.
Commitment to better environmental scores could help unlock more green financing for mining firms. This is supported by our analysis of S&P 1200 firms, which shows that mining companies that raised their ESG ratings from 2018 to 2020 also saw an increase in debt and equity financing. More generally, the effort to unlock more green financing is also aided by global efforts from, among others, the World Bank’s Climate-Smart Mining Initiative and IMF support for greening the recovery and promoting green finance.
The world needs more low-carbon energy technologies to keep temperatures from rising by more than 1.5 degrees Celsius, and the transition could unleash an unprecedented metals demand. While deposits are broadly sufficient, the needed ramp-up in mining investment and operations could be challenging for some metals and may be derailed by market- or country-specific risks.
Authors:

Nico Valckx is currently a senior economist with the IMF’s Research Department

Martin Stuermer is an economist at the Commodities Unit of the IMF’s Research Department

Dulani Seneviratne is a financial sector expert in the IMF’s Monetary and Capital Markets Department

Ananthakrishnan Prasad is Deputy Division Chief in the Middle East and Central Asia Department at the IMF

This blog post benefitted from comments by Andrea Pescatori

Compliments of the IMF.
The post IMF | Metals Demand From Energy Transition May Top Current Global Supply first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

With the debt service suspension initiative expiring and interest rates poised to rise, low-income countries will find it increasingly difficult to service their debts.
Despite significant relief measures brought on by the COVID-19 crisis, about 60 percent of low-income countries are at high risk or already in debt distress. In 2015 that number was below 30 percent.

‘With policy space tightening for highly indebted countries, the framework can and must deliver more quickly.’

For many of these countries, the challenges are mounting. New variants are causing further disruptions to economic activity. COVID-related initiatives such as the G20 Debt Service Suspension Initiative (DSSI) are ending. Many countries face arrears or a reduction in priority expenditures. We may see economic collapse in some countries unless G20 creditors agree to accelerate debt restructurings and suspend debt service while the restructurings are being negotiated. It is also critical that private sector creditors implement debt relief on comparable terms.
Recent experiences of Chad, Ethiopia, and Zambia show that the Common Framework for debt treatments beyond the DSSI must be improved. Quick action is needed to build confidence in the framework and provide a road map for helping other countries facing increasing debt vulnerabilities.
2022: a more challenging debt outlook
Since the start of the pandemic, low-income countries have benefited from some attenuating measures. Domestic policies, together with low interest rates in advanced economies mitigated the financial impact of the crisis on their economies. The G20 put in place the DSSI to temporarily pause official debt payments to the poorest countries, followed by the Common Framework to help these countries restructure their debt and deal with insolvency and protracted liquidity problems. The international community also scaled-up its financial support, including record IMF emergency lending and a $650 billion allocation of special drawing rights, or SDRs—$21 billion of which was allocated directly to low-income countries. The G20 leaders committed to support low-income countries with onlending $100 billion of their SDRs to significantly magnify this impact.
No doubt 2022 will be much more challenging with the tightening of international financial conditions on the horizon. The DSSI will expire at the end of this year forcing participating countries to resume debt service payments. Countries will need to transition to strong programs, and for low-income countries that need comprehensive debt treatment, the Common Framework will be critical to unlock IMF financing.
But the Common Framework is yet to deliver on its promise. This requires prompt action.
Implementation so far has been slow
The Common Framework is intended to deal with insolvency and protracted liquidity problems, along with the implementation of an IMF-supported reform program. G20 official creditors—both traditional “Paris Club” creditors, such as France and the United States, and new creditors, such as China and India, which, as shown in the chart below, overtook the Paris Club as lenders in the last decade—agreed to coordinate to provide debt relief consistent with the debtor’s capacity to pay and maintain essential spending needs. The Common Framework requires private creditors to participate on comparable terms to overcome collective action challenges and ensure fair burden sharing.

But so far, only three countries—Chad, Ethiopia, and Zambia—have made requests for debt relief under the Common Framework. And each case has experienced significant delays.
In part, these delays reflect the problems that motivated the creation of the Common Framework in the first place. These include coordinating Paris Club and other creditors, as well as multiple government institutions and agencies within creditor countries, which can slow down decisions. The Common Framework aims to mitigate these problems but does not eliminate them. New creditors, including relevant domestic institutions, need to gain comfort with restructuring processes that would allow all creditors to work together in providing relief and enable the IMF to lend to countries facing debt difficulties. This takes time.
But there were also delays for reasons that have nothing to do with the Common Framework. To restore debt sustainability, Chad must restructure a large, collateralized obligation held by a private company, which is partly syndicated to a large number of banks and funds. This complicates the decision-making process. Domestic challenges slowed progress in Ethiopia and Zambia.
No time to waste
With policy space tightening for highly indebted countries, the framework can and must deliver more quickly.
First, greater clarity on the different steps and timelines in the Common Framework process is vital. Alongside earlier engagement of official creditors with the debtor and with private creditors, this would help accelerate decision making.
Second, a comprehensive and sustained debt service payment standstill for the duration of the negotiation would provide relief to the debtor at a time when it is under stress, as well as incentivize faster procedures to get to the actual debt restructuring.
Third, the Common Framework should clarify further how the comparability of treatment will be effectively enforced, including as needed through implementation of the IMF arrears policies, so as to give greater comfort to creditors and debtors.
Last but not least, the Common Framework should be expanded to other highly-indebted countries that can benefit from creditor coordination. Timely and orderly debt resolution is in the interest of both debtors and creditors.
Ensuring a success in the early cases will not only benefit the countries, but foster confidence in the Common Framework. In that regard, finalizing Chad’s restructuring quickly can serve as an essential precedent for other countries. In Ethiopia, the creditor committee should continue the technical work that will allow early provision of debt relief assurances once the situation stabilizes. In Zambia, G20 creditors should expeditiously form a committee of official creditors and begin engaging with the authorities and private creditors on debt relief, while also providing a temporary debt-service suspension for the duration of the debt-restructuring discussions. Otherwise, the country would be confronted with the impossible choice of cutting priority expenditures or piling up arrears.
Debt challenges are pressing and the need for action is urgent. The recent Omicron variant is a stark reminder that the pandemic will be with us for a while. Determined multilateral action is needed now to address vaccine inequality globally and also to support timely and orderly debt resolution. For its part, the IMF is ready to work with the World Bank and all our partners to help ensure the framework delivers for the people it was put in place to help.
Authors:

Kristalina Georgieva, Managing Director of the IMF

Ceyla Pazarbasioglu is Director of the Strategy, Policy, and Review Department (SPR) of the IMF

Compliments of the IMF.
The post IMF | The G20 Common Framework for Debt Treatments Must Be Stepped Up first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

With inflationary pressures intensifying and Omicron generating new uncertainties, monetary policymakers are facing new and challenging tradeoffs.
The resurgence of the pandemic and the latest variant, Omicron, have sharply increased uncertainty around global economic prospects. This comes as several countries grapple with inflation well above their monetary policy targets. It is however evident that the strength of the economic recovery and magnitude of underlying inflationary pressures vary significantly across countries. Accordingly, policy responses to rising prices must be calibrated to the unique circumstances of individual economies.

‘Inflation is likely to be higher for longer than previously thought.’

We see grounds for monetary policy in the United States—with gross domestic product close to pre-pandemic trends, tight labor markets, and now broad-based inflationary pressures—to place greater weight on inflation risks as compared to some other advanced economies including the euro area. It would be appropriate for the Federal Reserve to accelerate the taper of asset purchases and bring forward the path for policy rate increases.
Over time, if inflationary pressures were to become broad-based in other countries, more may need to tighten earlier than currently expected. In this environment it is essential for major central banks to carefully communicate their policy actions so as not to trigger a market panic that would have deleterious effects not just at home but also abroad, especially on highly leveraged emerging and developing economies. Needless to say, given the extremely high uncertainty, including from Omicron, policymakers should remain agile, data-dependent, and ready to adjust course as needed.
The global inflation landscape
Rising energy and food prices have fueled higher inflation in many countries. These global factors may continue to add to inflation in 2022, especially high commodity food prices. This has particularly negative consequences for households in low-income countries where about 40 percent of consumption spending is on food.
A measure of inflation which strips out volatile fuel and food inflation, so-called core consumer price inflation has also risen but exhibits significant variation across countries. Some of the increase in core inflation in countries reflects reversals of price falls in 2020, such as from the unwinding of VAT tax cuts in Germany. It therefore helps to focus on annualized cumulative inflation since pre-pandemic. By this measure, core inflation among advanced economies has risen most sharply in the United States, followed by the United Kingdom and Canada. In the euro area the increase is much less so. There are also limited signs of core inflationary pressures in Asia, including in China, Japan and Indonesia. Among emerging markets, core is dramatically elevated in Turkey.
Median inflation, a measure that is not affected by exceptionally large or small price changes in a few categories of goods and therefore conveys the breadth and likely persistence of price pressures, similarly varies across countries. The recent rise in median inflation for the United States to around 3 percent in October is also higher than for other Group of Seven countries.

While inflation is likely to remain elevated well into 2022 in several countries, measures of inflation expectations for the medium and long-term remain close to policy targets in most economies. This reflects, in addition to expectations of waning inflationary forces, that policy actions can bring inflation back to target.
In the United States, long-term inflation expectations have increased but remain close to historic averages and thus appear well-anchored. Euro area expectations have increased but from levels well below target to now close to it, which suggests long-term expectations may have become better anchored to the European Central Bank’s 2 percent objective. For Japan, inflation expectations remain well below the target.
For several emerging markets, including India, Indonesia, Russia, and South Africa, expectations show signs of being anchored. Exceptions include Turkey, where the risk of inflation expectations becoming unmoored is apparent as monetary policy is eased despite rising inflation.
Sources of price pressures
The rise in core inflation reflects multiple factors. Demand has rebounded strongly supported by exceptional fiscal and monetary measures, especially in advanced economies. In addition, supply disruptions caused by the pandemic and climate change, and a shift in spending toward goods over services have increased price pressures. Furthermore, wage pressures are apparent in some segments of labor markets. The United States has experienced a more prolonged reduction in labor-force participation relative to other advanced economies, further adding to wage and inflationary pressures.
We expect the mismatch in supply and demand to attenuate over time reducing some price pressures in countries. Under the baseline, shipping delays, delivery lags, and semiconductor shortages will likely improve in the second half of 2022. Aggregate demand should soften as fiscal measures come off in 2022.
That said, it’s important to keep in mind that economic activity has rebounded quickly in several countries, with the United States experiencing the fastest recovery among large, advanced economies. It is in such countries, where economic activity has rebounded more quickly to pre-pandemic trends, that core inflation has risen sharply relative to levels before the crisis. This relationship between recovery strength and core inflation, while far from perfect, suggests stronger underlying inflationary pressures in countries where demand has recovered the fastest.
Varied policy action
At the onset of the pandemic, policymakers around the world were synchronized in dramatically easing monetary policy and expanding fiscal policy. These actions helped prevent a global financial crisis, despite lockdowns and health shocks causing a historic recession. The confluence of very low inflation and weak demand provided a strong rationale for easy monetary policies.
Earlier this year, when inflation picked up sharply, it was driven by exceptionally high inflation in a few sectors such as energy and autos, much of which was expected to reverse by the end of the year as pandemic related disruptions declined. Central banks, with a long track record of keeping inflation low and stable could appropriately “look through” the runup in inflation and keep interest rates low to support the economic recovery.
However, risks of a further acceleration of inflation previously flagged in our global publications and country-specific reports are materializing, with supply disruptions and elevated demand lasting longer than expected. Inflation is likely to be higher for longer than previously thought, which means that real rates are even lower than before, implying an increasingly expansionary stance of monetary policy.
While we still anticipate that supply-demand imbalances will wane next year, a singular focus of monetary policy on supporting recovery may well fuel substantial and persistent inflationary pressures, with some risk of de-anchoring inflation expectations. Accordingly, in countries where economic recoveries are further along and inflationary pressures more acute it would be appropriate to accelerate the normalization of monetary policy.
Potentially challenging spillovers
The challenge of addressing large and persistent supply shocks is even greater for emerging market central banks. Given the greater risk to de-anchoring of inflation expectations relative to advanced economies, they see the need to get ahead of inflationary pressures and some—such as Brazil and Russia—have raised policy rates sharply. Such tightening comes amid large COVID-related output shortfalls and could further depress output and employment. Emerging markets face potentially challenging spillovers if tightening by advanced economies causes capital outflows and exchange rate pressures that could require them to tighten even more.
Lastly, there remains tremendous uncertainty around the evolution of the pandemic and on its economic consequences. A variant that significantly reduces vaccine efficacy could lead to further supply chain disruptions and contractions in labor supply pushing up inflationary pressures, while lower demand could have opposing effects. The sharp fall in oil prices following the discovery of Omicron and the rapid imposition of travel restrictions by countries is a sign of the volatility ahead.
In sum, policymakers must carefully calibrate their response to incoming data. Varying inflation conditions and strength of recoveries across countries show why the policy response needs to be tailored to country specific circumstances, given sharply higher uncertainty associated with Omicron. Clear central bank communication, too, is key to fostering a durable global recovery.
As we warned in recent reports such as the World Economic Outlook, a more frontloaded Fed response to dampen inflation risks could result in market volatility and create difficulties elsewhere—especially in emerging and developing economies. To avoid that, policy shifts need to be telegraphed well, as has so far been the case. Emerging market and developing economies should also prepare for increases in advanced economy interest rates through debt maturity extensions where feasible, thereby reducing their rollover needs, and regulators should also focus on limiting the buildup of currency mismatches on balance sheets.
Authors:

Tobias Adrian is the Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department

Gita Gopinath is the Chief Economist of the International Monetary Fund

Compliments of the IMF.
The post IMF | Addressing Inflation Pressures Amid an Enduring Pandemic first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Crisis Management Groups (CMGs) of Global Systemically Important Banks (G-SIBs) have been in place for over 10 years as a core part of the post global financial crisis coordination infrastructure.

This report sets out good practices that have helped CMGs to enhance their preparedness for the management and resolution of a cross-border financial crisis affecting a Global Systemically Important Bank (G-SIB) as per the FSB Key Attributes. It draws on a stocktake carried out by the FSB in 2020 and CMG members’ experience during the COVID-19 pandemic.
The focus is on CMG activities that seek to enhance crisis preparedness rather than on cooperation during a actual itself. The good practices identified in this report are organised along 16  desired outcomes that CMGs seek to achieve and relate to:

the structure and operation of CMGs;
resolution policy, strategy and resolvability assessments;
coordination on enhancing firm’s resolvability; and
enhancing home-host coordination arrangements for crisis preparedness.

A shared understanding of these practices can help lean against fragmented approaches and help to enhance the effectiveness of CMGs.. While many of these practices have been well established, others are emerging or developing.
As CMGs continue to evolve, the FSB will continue to monitor the development of their practices and consider any future work to promote consistency and effective operation of CMGs.
Compliments of the Financial Stability Board.
The post FSB | Good Practices for Crisis Management Groups (CMGs) first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.