What is an international lender of last resort?
It's a facility that's prepared to step in when no other lender can or will lend in sufficient volume to provide or guarantee liquidity in order to avert a systemic crisis or sovereign debt crisis. An international lender of last resort (ILLR) would be able to bailout several countries at a time if need be.
Where have you heard about an international lender of last resort?
The Mexican crisis of 1994-95 and the Asian and Russian financial crises of the late 1990s prompted widespread calls for an ILLR. There've also been suggestions that ILLRs could be set up to cover supranational regions such as the eurozone.
What you need to know about an international lender of last resort.
No comprehensive ILLR mechanism has yet been implemented, but in 1997 the International Monetary Fund established the supplemental reserve facility (SRF), designed to make big short-term loans with policy conditions at penalty rates during crises. Only South Korea, Russia and Brazil have made use of the SRF so far.
The greatest single objection to an ILLR centres on moral hazard - that access to such a liquidity facility could encourage reckless behaviour by states. In practical terms, no fiscal or taxing authority currently exists to finance the operations of an ILLR.
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