market, or indirect policies such as monetary, fiscal, and trade policies or regulations of capital movements, regardless of the intent or purpose, can affect the level of the exchange rate, and can be interpreted as “ manipulation ”. the interpretation of the articles of agreement could perhaps be broadened in scope to include a wider range of policies, which can primarily have effects on the exchange rates, and therefore beggar - thy - neighbor consequences. while the articles of agreement include members ’ obligations in relation to exchange rate policies, global financial stability implications of country specific policies are not touched upon anywhere in the articles. members ’ obligations are considered only in relation to domestic growth objectives. for example, based on the articles, a country with a weak economy can pursue loose monetary policies to stimulate output and employment. despite the implications of such policies for financial stability in other countries, the country would argue that its policies are in line with article iv, section 1 ( i ) which allows each member to “ ( i ) … direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability … ”. more generally, the fund ’ s articles may need altering based on the discussion of the rules of the game. moreover, although broader surveillance by the fund of its members ’ exchange rate policies, and other policies with significant financial sector spillovers, and perhaps public statements about such policies can have signaling effects, countries are not obligated to follow fund advice unless in a program. the more pertinent question, therefore, might be what can the fund really do once its executive board determines that a particular country is in violation of its obligations under the new rules of the game? hopefully, the clear focus on the downsides of the particular country ’ s actions for the rest of the world will lead to political and economic pressures from around the world that make the country cease and desist. the clearer the eventual rules of the game, the more likely this outcome. conclusion given the importance of spillovers from monetary policies, especially in the face of globally low inflation, it is important we start building a global consensus on how to get better outcomes for the world. nevertheless, with economic analysis of these issues at an early stage, it is unlikely we will get strong policy prescriptions soon, let alone international agreement on them, especially given that a number of country authorities like central banks have explicit domestic mandates. this paper therefore suggests a period of focused discussion, first outside international meetings, then within international meetings

as borrowing costs have increased due to perception of high risk associated with sovereigns. in fact, the borrowing costs in spain and italy are inching towards unsustainable levels of 7 per cent and 6 per cent respectively ( chart 1 ). bis central bankers ’ speeches it is important to note that a large number of banks in the eurozone stand to suffer significant losses in the event of further escalation of sovereign debt crisis which may put many banks on the verge of bankruptcy and trigger a worldwide credit crunch. another equally important aspect to reckon is the fund availability of the european financial stability facility ( efsf ) is likely to be over - stretched if bigger economies like italy and spain require bail - out funds. the latest twist to the story is news of regional governments in spain facing insolvency. recently, catalonia and valencia regions in spain sought bail outs from the spanish central government. this has made the job of policymakers even more challenging. business confidence continues to remain weak and the keynesian “ animal spirits ” have long been absent. any further escalation of the european problem would possibly lead to a deeper crisis with a potential recessionary impact not only in those economies under sovereign debt distress but also on other economies across the globe. the us “ fiscal cliff ” and the chinese slowdown another potential crisis on the horizon is the “ fiscal cliff ” in the us. there is a risk that government spending could fall abruptly in the us by as much as 4 per cent of gdp in 2013. the political deadlock over the budget could potentially harm the economic growth if it leads to severe fiscal austerity. with the huge unemployment rate unlikely to fall soon, the already shaken confidence of the households and businesses could be further depressed and possibly intensify the stressed housing sector, leading to foreclosures which, in turn, would put the united states banking sector at risk again. obviously, this has implications for global growth and financial stability. it has therefore been suggested that the policy - makers in the us must take steps to avoid the fiscal cliff and also raise the debt limit while devising plans to return to long term fiscal prudence – a medicine long prescribed by them to the others. china, according to the imf, is the most “ central ” trading power in the world, based on its extensive trade links with other economies that are themselves tightly interwoven. it is the largest trading partner for 78 countries. this makes the imf to classify china as a