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Banks Rip IMF's Proposed Rules On Loans to Emerging Markets (fwd)
AMERICAN BANKER
Tue., Sept. 21, 1999
Tuesday, September 21, 1999
Banks Rip IMF's Proposed Rules On
Loans to Emerging Markets
By James Kraus
Banks and private creditors are
heading into their biggest confrontation
with the International Monetary Fund
since it was founded more than five
decades ago.
The clash is brewing as Washington gets ready for an
estimated 10,000 bankers, finance officials,
consultants, and
journalists to arrive for the annual IMF/World Bank
meeting,
which officially starts today.
At the heart of the conflict is growing opposition to
IMF
proposals to revamp the rules of the game for lending
to
emerging markets.
The proposals, presented by the IMF last April in a
paper titled
"Strengthening the Architecture of the International
Financial
System," call for improving transparency,
internationally
accepted standards, surveillance, and monetary
policies.
"It's very much going to be the focus of the meetings,
and it
could get very ugly,'' said Elizabeth Morrissey,
managing
partner at Kleiman International, a Washington
financial
consulting firm. "People are gearing up for some
pretty heated
arguments."
Bankers do not take issue with many of the proposals.
But a
section of the plan laying out new rules for the
private sector in
preventing and helping resolve financial crises has
triggered
their ire.
These proposals, they say, boil down to letting loan
and bond
contracts be ripped up and rewritten if a country runs
into
problems. They also say that any aid the IMF provides
to a
country in difficulty would be conditional on banks'
and private
creditors' coming up with an accompanying package,
even if
that country has already gone into arrears. The
proposals
would also prohibit banks from suing to seize
collateral and
give the IMF power to continue lending to a country
even after
it has defaulted.
Banks and financial institutions, which usually favor
a low
profile, are becoming vociferous. In the strongest
attack so far,
the Washington, D.C.-based Institute of International
Finance,
representing about 300 financial institutions
worldwide, openly
rejected the IMF's suggestions.
Speaking at a press conference in Washington on
Thursday,
the institute's managing director, Charles Dallara,
suggested
that the IMF direct its efforts to "strengthening the
framework
for sustainable flows of capital to emerging markets"
and to
ensuring that "policies are not instituted that could
have the
opposite effect."
The institute warned the IMF that its efforts to force
lenders to
Pakistan, Romania, Ukraine, and more recently Ecuador,
to
modify bond contracts and supply fresh cash after
those
countries had threatened to default could easily
backfire.
"Such action would add to market concerns and could
have
negative implications for other borrowers in emerging
markets," the institute stated.
Bankers also argued that the proposals are unworkable.
"Ten years ago you could put 10 to 12 bankers in a
room and
restructure a country's debts," said a banking source.
"Now
you're talking about banks, two or three dozen mutual
funds,
and thousands of retail investors."
They add that the proposals could also generate "moral
hazard" -- industry slang for saying that a country
capable of
paying its debts might deliberately default in order
to get a
better deal.
The IMF drew up its proposals in response to
complaints
among its main shareholders, the governments of the
leading
industrialized countries, that the agency expects them
to bail
out the banks whenever their emerging-country
borrowers get
into trouble. These so-called G7 countries say that
after bailing
out Mexico, Thailand, South Korea, Russia, and Brazil,
among
other debtors, the IMF can no longer be the lender of
last
resort. Supporting the G7 countries is the U.S.
Congress,
which says banks and investors helped trigger the
crises by
reckless lending, and then got a free ride out at
taxpayers'
expense.
To be sure, banks share many of the IMF's concerns and
agree that crises could be avoided and mitigated by
improving accounting and reporting practices, making
information on capital flows more readily available,
and getting
debtor countries talking to creditors about possible
problems.
Third parties are also offering their good offices in
an effort to
strike a balance between the IMF and the private
sector.
"Unrestricted capital mobility and the absence of an
international lender of last resort are not a recipe
for a stable
financial system," cautioned Mervyn King, deputy
governor of
the Bank of England in a speech at the Federal Reserve
Bank
of New York this month.
"The crux of the problem lies in the short-term nature
of flows,''
he said, and until control systems are installed for
monitoring
and managing them, crises will recur.
Control systems will not eliminate the risk of
financial crises,
he added, but can still "reduce the frequency and
severity of
crises."
As the tone of the rhetoric mounts, banks are becoming
increasingly blunt. According to institute estimates,
emerging
market exposure at U.S. banks today amounts to about
29%
of capital, compared with 240% in 1982.
Over the last 10 years, banks and private investors
have lent
$1.7 trillion to emerging markets, far outweighing the
$320
billion from official lending agencies such as the
IMF, World
Bank, and InterAmerican Development Bank.
"Banks can absorb losses more readily today,'' said
Lex
Rieffel, director and senior adviser at the Institute
of
International Finance, pointing out that private
creditors have
over the last two years swallowed $350 billion of
losses in
Asia and Russia.
"The corollary to that is that official sector can't
exert the same
kind of leverage over banks," Mr. Rieffel added.
Faced with the prospect of accepting an unpalatable
debt
restructuring, banks and bond markets "will take a
walk."
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