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International Monetary Fund. Finance Dept.
On October 30, 2020, the IMF’s Executive Board reviewed the adequacy of the Fund’s precautionary balances. Precautionary balances, comprising the Fund’s general and special reserves and the Special Contingent Account (SCA-1), are one element of the IMF’s multi-layered framework for managing financial risks. These balances provide a buffer to protect the Fund against potential losses, resulting from credit, income, and other financial risks. This review of the adequacy of the Fund’s precautionary balances took place on the standard two-year cycle, although it was delayed by a few months to allow for an assessment of the impact of the COVID-19 pandemic on Fund financial risks. In conducting the review, the Executive Board applied the rules-based framework agreed in 2010.
Bertrand Candelon, Mr. Amadou N Sy, and Mr. Rabah Arezki
This paper examines the spillover effects of sovereign rating news on European financial markets during the period 2007-2010. Our main finding is that sovereign rating downgrades have statistically and economically significant spillover effects both across countries and financial markets. The sign and magnitude of the spillover effects depend both on the type of announcements, the source country experiencing the downgrade and the rating agency from which the announcements originates. However, we also find evidence that downgrades to near speculative grade ratings for relatively large economies such as Greece have a systematic spillover effects across Euro zone countries. Rating-based triggers used in banking regulation, CDS contracts, and investment mandates may help explain these results.
International Monetary Fund. Monetary and Capital Markets Department

Abstract

The global financial system is still in a period of significant uncertainty. Although the ongoing recovery is expected to gradual strengthen balance sheets, progress toward stability has experienced a setback since the April 2010 GFSR. As discussed in this October 2010 report, policymakers in many advanced countries need to confront the interactions created by slow growth, rising sovereign indebtedness, and still fragile financial institutions by addressing legacy problems in the banking system, strengthening the fundamentals of sovereign and bank balance sheets, and clarifying regulatory reforms.