3/1/99: camdessus talks to bankers

[Robert Weissman <rob@essential.org>]

99/4 

                           Capital flows, crises, and the private sector 
                                   Remarks by Michel Camdessus 
                           Managing Director of the International Monetary
Fund 
                                 to the Institute of International Bankers 
                                  Washington, D.C. March 1, 1999 

Thank you for your welcome, and for rejuvenating me, as, in some way you
bring me back to the time when as head of
the Tresthe Paris circle of foreign banks! But here it happens that both
you and I are foreigners in this country, yet also together
with our U.S. colleagues and friends, citizens of the same globalized
financial village. All this will tell you that I am very
pleased to join you at this conference, which takes place at a time of
great challenges for all of us whether we are engaged
in public policy issues or participating directly in the markets. 

The crises in the emerging markets since the mid-1990s all started with
abrupt shifts in investor sentiment that reversed
the large inflows of private capital enjoyed by most of the countries for
several years. Generally, the climate for financial
flows to emerging markets deteriorated sharply, graphically illustrated in
the soaring interest rates confronting emerging
markets in late 1998. Although conditions in the markets have eased
considerably since then, many risks remain. With
some countries distinctly beginning to recover, but others still in
crisis, inevitably thoughts turn on how to bring the
nightmare to an end, how to restart these flows, and how to make them less
volatile. You have invited me to discuss the
international efforts to address the current difficulties confronting the
global economy and financial markets, but as I
cannot take too much of your time, I will dwell on just one aspect: the
private sectorUs role within the new financial
architecture we are trying to put together. How can we create conditions
for the private sector to benefit more from the
opportunities of the globalized markets, while being a more efficient and
responsible intermediary for channeling
financial resources to their best use? 

These conditions confront us with an imposing agenda, but not at all an
idealistic dream. These are achievable objectives
provided we try to base the reforms on three straightforward principles: 

       the universal promotion of free market mechanisms strengthened by a
set of standards and principles of good
       conduct; 

       a mature partnership between banking and financial institutions and
their sovereign and corporate clients; and 

       a cooperative approach of crisis management in the mutual interest
of all market participants.

Let me elaborate on these three objectives, and tell you how the IMF
intends to contribute to their implementation. 

1. Toward universal free markets harnessed by well-defined and implemented
standards and
principles of good conduct 

To optimize the opportunities and to reduce the risks of globalization, we
must head toward a world with open and
integrated capital markets, achieved through a gradual process of
liberalization supported by good macroeconomic
policies and sound financial institutions. A world where financial
institutions in the emerging marketsQas
elsewhereQwill be better managed and more robust, as internationally
accepted standards of regulation and supervision
are implemented. Financial markets will be less prone to volatility
because participants will have more information, and
they will be able to assess risk more realistically. A world where market
participants and governments will operate
according to higher standards of transparency and governance. And, of
course, a world where the benefits of
globalization will be more widely dispersed than they are at present;
first, because of efforts to ensure that no countries
are marginalized, and second, through social policies designed to make
sure that people in each country have equitable
access to opportunities of education, health, livelihood, and social
protection in times of crisis. And last, but not least, a
world that will rely primarily on the private sectorQboth domestic and
foreign on a truly equal footingQto mobilize
resources for investment and growth. All this implies that it will be a
world where markets must be able to function
efficiently, with risks being assessed realistically and the rewards of
success and the cost of failure fairly distributed. 

This set of objectives is straightforward. It is noteworthy to observe
thatQin spite of the nostalgia for state intervention
of a few observers, and fortunately, even fewer policymakersQthe immense
majority of the world community wants to
achieve these objectives, not through controls or an onerous set of state
regulations, but instead through the active
promotion of well-conceived standards and principles of good conduct.
After all, markets are about liberty and
responsibility; they are about transparency, timely information and
equality of condition for all players; and they are about
enterprisesU decisions, accountability, and profitsQbut also losses as a
sanction against bad or ill-informed decisions. Of
course, we know only too well that in international markets these
conditions are unevenly fulfilled. Therefore, our aim
must be to create, at world level, the well-functioning markets you enjoy
here and in your home countries. This imposes,
without question, the tasks of defining essential standards and of
strengthening the agencies charged with disseminating
and monitoring the implementation of these standards. At this very moment,
within the IMF, we are pressing our
members to adopt a new code on transparency in their fiscal policies, and
we are working with other agencies and
members to design a similar code for monetary and financial policies. We
are also on the verge of consensus of an
important enhancement to the FundUs established standard for data
dissemination that will strengthen the reporting of
countriesU international reserves and related liabilities. Other agencies
have developed or are working on standards for
securities markets, accounting, auditing, bankruptcy, and corporate
governance. 

We will have to make sure that progressivelyQwith due regard to the
situation of individual countriesQsteps are taken
for the use of these standards to become generalized. This is where the
IMF, with its unique and exclusive mandate for
universal surveillance, will become more relevant than ever. The FundUs
permanent surveillance of its members will have
to focus more on capital movements, on countriesU progress toward
transparency and implementation of the principle of
good governance to which they should voluntarily subscribe. Also, together
with other international financial institutions
and bilateral donors, we will need to mobilize technical assistance to
help emerging and developing countries, including
the offshore centers, to adapt themselves to these new standards. This,
over time, should promote more efficient, more
orderly, and more mature marketsQat world level. In the final analysis,
nothing could be more important. 

2. Toward a more mature partnership between banking and financial
institutions and their clients 

In such mature markets, more mature relationships could be expected
between banking and financial institutions and their
clients. What would this mean? 

Certainly an effort to avoid the excessively risky behavior that has
recently taken such a toll on both financial institutions
and recipient countries. Surges in capital inflows have tended to end
badly when bankers and portfolio managers follow
each other without assessing adequately the structural weaknesses of the
financial system of the recipient countries. The
interests of both the creditors and the recipient countries call for
strengthening lending relations as much as possible. 

Ideally, this calls for two basic, straightforward changes in the recent
pattern of international financing, a task in which
the IMF and other international financial institutions could help. These
changes would:

       put more emphasis on non-debt creating flows, especially direct
investment, as these are perhaps the most
       constructive of all the flows for emerging markets. By their very
nature, such investments are less volatile, less
       prone to sudden withdrawal because of a shift in sentiment,
although they are by no means immune from such
       shifts. For such flows, the crucial issue is the need for an
environment that encourages foreign investment for
       the long haul: sound macroeconomic policies, good governance, a
robust financial system, and a transparent
       legal framework. This is an enormous agenda that the IMF and other
institutions must strive to promote. It is one
       that we will indeed promote whatever the clamor from those who
consider that combating "crony capitalism" is
       not our business. 

       encourage a shift from short-term lending to longer-term. Most of
the crises have developed around the "rush for
       the exits" that was led by short-term creditors and the threat to
liquidity that this posed. To guard against future
       stress, excessive short-term borrowing should be avoided in the
first place. To do so, prudential limits on banksU
       borrowing should be introduced. In particular, standards should be
more tightly defined to reduce the mismatch
       of maturities, so that banks would perform their traditional role
of "borrowing short and lending long" in a safe
       and balanced fashion. 

Closely related to this, and perhaps one of the most workable innovations,
has been suggested by Chairman Greenspan.
It would involve adjustments to the pricing of debt. On the debtor side,
the monetary authorities could charge domestic
borrowers for sovereign guarantees which, in my view, should be avoided
anyway. On the creditor side, it could be
done by revising the risk-weights attached to various types of lending
under the Basle capital adequacy standards. This
approach, which is being explored by the Basle Committee on Banking
Supervision, deserves to be pursued. One could
also mention market-based measures to raise the cost of short-term capital
imports already adopted in several countries. 

Beyond these changes in the instruments for financing, the very nature of
the relationship between creditors and debtors
should be helped to mature and to adapt to this new world. What this means
is quite straightforward: 

       Contracts should be honored. Debtors must observe this basic
principle. If extreme circumstances prevent them
       from making payments, then orderly amendments to loan contracts
should be sought. 

       Investors should expect to face an element of risk: therefore, they
should have the opportunity and the
       responsibility to assess that risk, and they should accept the
consequences of occasional failure. This should
       entail, on the debtor side, a greater readiness to share
information with their creditors, who are entitled, if they
       are invited to establish a durable partnership with their debtors,
to receive a permanent and relevant flow of
       information on the economic evolution of their clients. At the
request of any member government, the IMF
       would be ready to assist with this provision of information. 

       In a cooperative effort to avoid crisis, investors could equip
their borrowers with appropriate means to forestall
       the need for drastic measuresQprovided they maintain a responsible
macroeconomic stance. For instance, three
       countries (Argentina, Mexico, and Indonesia) have negotiated with
foreign banks to provide contingent credit
       lines, which are voluntary, market-based arrangements intended to
be drawn only if conditions were to
       deteriorate. Thus far, Indonesia and Mexico have drawn successfully
on these lines. These private contingent
       credit lines are by no means the only available instrument. One
could mention also the use of innovative financial
       instruments (call options, structured notes, etc.)Qall with the
potential of producing a more flexible debt
       structure, less vulnerable to disruption from external shocks. 

Governments should also be ready to adopt new attitudes and take
initiatives to avoid the risk of crisis or to promote an
orderly handling of them, if they occur. Let me mention two: 

       Governments need to avoid creating the impression of offering
implicit guarantees, including those associated
       with exchange rate management. ThailandUs long peg to the U.S.
dollar, and IndonesiaUs predictable crawling
       peg, are both examples of arrangements that outlived their utility,
encouraging excessive levels of unhedged
       foreign exchange exposure. But this takes us into the vast and
contentious arena of exchange rate regimes and
       policyQa topic for another occasion! 

       GovernmentsQand financial institutionsQshould also reflect on a
legal issue that can seriously disrupt the
       resolution of a countryUs external liabilities, notably its bonds.
To restructure them may involve a very large
       number of unidentifiable bondholders. As you know, it is possible
under U.S. law, which is used in most bond
       contracts, for any one of those creditors, no matter how small, to
pursue full, immediate payment by legal
       action. Such an event can completely disrupt a countryUs
restructuring, and indeed jeopardize its policy
       adjustment efforts. To avoid this possibility, suggestions have
been put forward that bond contracts should
       contain clauses that would permit majority voting, sharing, and
other provisions that are found under other legal
       systems (similar, for instance, to those that exist already under
British-style bonds). Such a change would
       require little more than a voluntary recognition, especially by a
number of the leading investing institutions, of
       the benefits associated with more flexible terms for issuing
securities. Today I sow this seed in your minds for
       reflection! 

We, in the IMF, are ready to contribute to countriesU efforts to avert
crisis with an important innovation. We are now
working to put in place a facility under which the Fund would commit
resourcesQon a contingency and conditional
basisQto countries that are in jeopardy of contagion from crises in other
emerging markets. This could, and should, go
well in parallel with the private instruments I have just mentioned. But I
should not hide some difficult issues that we are
wrestling with. For instance, how can large amounts of money be committed
and possibly disbursed, while at the same
time keeping the private sector "on board"? What types of policy
commitments would be sought from the authorities?
Will the countries most likely to need assistance be able to meet the
conditions that will have to be stipulated to
pre-qualify them? And what assurance is there that, once the funds are
committed, the country would continue to
implement sound policies? The complexity of these questions will not
discourage us. 

You have almost certainly observed that, due to the recent circumstances,
the discussion in various fora about
"involving" the private sector is concentrating on situations of crisis:
how to anticipate a potential crisis, how to head it
off, and how to react if it does strike. Let me therefore preface the rest
of my remarks by stressing a point I have repeated
ad nauseam: "Prevention is better than cure." The very best way of
ensuring that private investors want to continue
investing is to make sure that crises do not happen in the first place.
That is why the international community is trying to
reform the international financial system. And that is why it is so
important that the IMF, the newly created Forum for
Financial Stability, and all the relevant international agencies keep up
an active dialogue with countries to ensure that they
implement sound policies and keep their institutions and practices up to
date and in line with accepted standards and
codes of best practice. 

Having forcefully reaffirmed all this, it remains true that crises will
occur from time to time. Then, crisis resolution
should always favor voluntary, market-based options. 

3. Toward a cooperative and mutually beneficial approach to crisis
management 

Many proposals have been tabled to resolve crises in an orderly fashion.
On that the debate is still aliveQand lively. One
suggestion emerging from recent experience is that creditor councils or
committees can be critical in smoothing the
process. They are worth establishing since they can effectively contribute
to mutual understanding and to pragmatic
solutions. 

But what of the worst-case scenario, where a country is unable to service
its debt in the near-term, but wishes to stabilize
its economy and restructure its debt? How can it remain viable without
descending into a vicious spiral of default, the
loss of access to all forms of financial flows, and poverty? For such
circumstances, the IMF accepts as its
roleQexceptional and risky as it may beQto stand ready to lend into a
situation already characterized by arrears to
non-preferred creditors. If the country is clearly trying to address its
problems, including efforts to normalize relations
with its creditors, the IMF is able to extend financial assistance under
prudent safeguards, even in these cases. But this,
of course, can only make sense if such Fund lending triggers reasonable
cooperative contributions from other creditors,
including from the private sector. The aim is not simply to provide
near-term balance of payments support, but also to
catalyze financial flows from other sources, including debt restructuring,
and so, speed up the restoration of normal
credit flows. This objective is so important that, in times of crisis, the
IMF has to define the conditions of its loans in a
way that ensures the private sectorUs exposure is maintained or increased.
I will mention here also, our efforts on several
occasions to help in successful concerted debt rollovers (Korea being a
good example). 

But I must call to your attention that, even under extreme circumstances,
legal action by individual "dissident" creditors
can disrupt an otherwise orderly restructuring. Therefore, to maintain
order, the international community may need to
sanction a temporary halt to payments to all creditors, under clearly
defined conditions. An effective means of doing this
would be by explicitly recognizing the roleQalready suggested for the IMF
in its Articles of AgreementQof allowing it
to endorse a stay on litigation while a debt restructuring is in process.
To make this role safe and unquestionable, it could
be wise to amend Article VIII 2(b) of the IMFUs Articles of Agreement
where a basis for such a role exists. The purpose
of this action would not be, of course, to alter creditorsU rights
permanently, but instead to oblige all creditors to accept a
common procedure, refraining from litigation in circumstances where they
would be both disruptive and not necessary. I
have to confess that this has proved to be a controversial proposal, and
so far no consensus has emerged. I am
nevertheless personally of the view that such an initiative would be quite
in tune with the cooperative approach of crisis
situations that is called for in a world of globalized finance where
serious market membersQincluding on the creditor
sideQhave every interest in an orderly and prudently handled procedure to
allow for an early restoration of debtorsU
payments capacity. I believe that such a deviceQequally protective of
creditors and debtors against the risk of
panic-stricken asset-destructive episodesQshould merit more attention from
those who are particularly concerned about
creditor interests. 

                                             * * * * *

Mr. Chairman, as you can see, we are developing a comprehensive, but, I
repeat, achievable agenda. If we are to avoid
in the future such pitfalls as periodic country crises, erratic contagion,
and even threats to global financial stability, we
cannot go for less. We must create this new framework to facilitate a
constructive engagement among the players in each
country: private sector, public sector, and multilateral institutions
alike. But we need not stop there. I would also like to
see you, as private sector representatives, seize every opportunity to
have a say in this extensive process of deliberation
and consultation. The diversity and resourcefulness of the private sector
can be a key ingredient in the debate over the
structure of the financial system we envisage for the next century. More
importantly, without question, it is the private
sector that will provide the dynamism and impetus for renewed growth and
progress as we enter the new century.