Report of the Managing Director to the Interim Committee
on Strengthening the Architecture of the International Monetary System
I. Introduction
1. The globalization and integration of international capital markets has contributed to higher
investment, faster growth and rising living standards in many countries. In the current
environment, we must not lose sight of these real gains. But, as recent developments have shown,
increased capital mobility and financial market integration also pose difficult challenges for
policy makers, not only in countries reliant on capital inflows but also more generally. The still
unfolding effects of the Asian crisis, the more recent turmoil in Russia, and their spillover to
other markets, have imposed significant costs on individual countries and on the world economy.
This underscores both the need to address policy weakness at the national level and the
importance and urgency of our work on the international architecture.
2. The Interim Committee in April called on the Executive Board to consider steps to strengthen
the architecture of the international monetary system.1 Since then, progress has been made on several fronts, but further
work on many aspects of this complex challenge will be necessary in the period
ahead.2 There is already broad agreement
that:
- a key lesson from the Asian crisis is the urgent need to strengthen domestic financial
systems, including particularly prudential supervision3;
- more transparency, both of the public and private sectors, is a critical ingredient to better
functioning financial markets;
- more comprehensive, frequent, and timely disclosure of countries’ international
reserve positions is needed and work must proceed expeditiously to improve the available data
on reserves as well as on external debt and capital flows, particularly of short-term, private
capital;
- there is an urgent need to further develop and disseminate internationally accepted
standards—in areas such as accounting, auditing, bankruptcy and corporate
governance—to encourage good practices and to allow financial markets to differentiate
better across borrowers;
- fiscal and monetary operations and policy should be open and transparent. Codes of practice
will clarify ways in which national authorities can improve transparency in those areas;
- the Fund and its members should contribute through more transparency in their own
operations, reflected in a wider use of Public Information Notices (PINs), the publication of more
Letters of Intent (LOIs) and Policy Framework Papers (PFPs) underpinning Fund-supported
programs, and more information on, and public evaluations of, the Fund’s operations and
policies;
- involving the private sector in the prevention and resolution of financial crises is of critical
importance. The issues here are difficult and complex and will require much further debate.
Nonetheless, faced with several cases requiring rapid and concrete action over the past nine
months, member countries, creditors, and the Fund have found practical approaches that are
proving workable and will help to inform this debate;
- the Fund should be willing to consider providing support, under carefully designed
conditions and on a case-by-case basis, to members with sovereign arrears to private creditors,
and members with nonsovereign arrears to private creditors stemming from the imposition of
exchange controls. This would be done only in exceptional circumstances, where other avenues
have proved unworkable and the international community accepts that a country cannot service
its debt in a timely manner;
- while the integration of financial markets brings substantial benefits to countries, greater
attention needs to be given to the process of global integration so as to minimize risks; and
- the importance of effective collaboration and genuine cooperation between the Bank and the
Fund has been underlined. The two agencies have taken the needed steps to draw the immediate
lessons that their recent experience in Asia would suggest, particularly for the distribution of
their responsibilities in the financial sector.
3. The complexity of the tasks ahead underscores the importance of collaboration within the
international community. Much valuable work related to the architecture of the international
monetary system is ongoing in other fora, and this will be reflected in the forthcoming work of
the Executive Board. Increased efforts on the part of national authorities and other
agencies—both public and private—will be needed to ensure a profound and durable
strengthening of the international architecture. There is a shared responsibility for all—
national authorities, the international financial institutions, especially the Fund, and the private
sector—to address urgently the issues involved in this complex task.
4. It would be unrealistic to expect that a strengthened international architecture will prevent all
crises from occurring; indeed, our understanding of the causes and transmission mechanisms of
financial crises is still imperfect. However, it is imperative that, in addition to striving urgently to
resolve the current crises, we strengthen the international monetary system to prevent crises
where we can, and seek to put in place strong mechanisms to deal with them when they do occur.
Priority also needs to be given to ensure that the necessary tools are available. In particular,
ensuring that the Fund has adequate resources and expertise is an integral element of the efforts
to strengthen the architecture and is vital for the Fund to be an effective partner with its
membership.
5. This report focuses on the main—and interrelated—areas covered by the Executive
Board in relation to the agenda on international architecture, laying out key issues and priorities
for the work that remains ahead on strengthening that architecture.
II. International Standards and
Transparency
6. Recent events have demonstrated that markets operate better when information is abundant,
institutions are strong, legal underpinnings are enforced, and transparency and accountability
prevent decision makers from favoring particular groups at the expense of the community at
large. Moreover, the stability of financial systems requires that sufficient attention is paid to
ensuring that all market participants operate in a transparent environment and under an
internationally accepted set of principles or standards.
The Role of Standards
7. The development, dissemination, and adoption of internationally accepted standards, or codes
of good practice,4 can make an
important contribution to the better working of markets by allowing participants to compare
information on country practices against agreed benchmarks of good practice. The adoption of
standards can also improve transparency and good governance, and increase the accountability
and credibility of policy. However, it is not sufficient simply to develop and disseminate
standards.
- International standards need to be reflected in the practices of public and private sector
entities if they are to improve the efficiency of international capital markets.
- Market forces should lead to lower borrowing costs for those whose practices are in accord
with accepted standards. If interest rate spreads are sufficiently differentiated, this would provide
an important incentive for the adoption of standards.
- The public sector has a role in strengthening incentives to adopt and comply with
standards.5
The Fund’s Role in Relation to Standards
8. The intensity of the Fund’s involvement with standards should relate to the
Fund’s mandate and technical expertise.
- It is agreed that the Fund should take a lead role in the development, dissemination, and
monitoring of standards in those areas that are of core Fund concern—data dissemination,
monetary and financial policies, and fiscal transparency.
- In areas beyond the Fund’s core responsibilities, such as banking supervision, the
Fund needs to coordinate its activities with the relevant institutions (Box
1). Collaboration between the Fund and the World Bank will be particularly important in
helping countries strengthen financial systems, but enhanced collaboration between the
international financial institutions and other standard-setting bodies will also be critical.6
- In areas of less direct operational concern—such as accounting, auditing, bankruptcy
and corporate governance—Fund staff will maintain contact with the relevant
standard-setting bodies and assist by providing feedback on members’ experiences where
relevant.
- As a part of its surveillance and technical assistance activities, the Fund will monitor the
extent to which members adhere to standards in those areas of most direct concern to it and
where it has the relevant technical expertise. The form that such monitoring will take will have to
evolve over time and can be expected to vary with the nature of the standard.7
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Box 1. Collaborative Efforts to Strengthen Financial
Standards |
| Efforts are under way among international organizations in the
following areas:
- The Basle Committee on Banking Supervision is helping countries implement the
Core Principles for Effective Banking Supervision including through the recently
established Institute for Financial Stability. Fund staff will be intensifying its efforts to promote
the effective dissemination of these principles, including through Article IV consultations, and
provide practical guidance as necessary.
- The International Organization for Securities Commission (IOSCO) has adopted and is now
promoting Objectives and Principles of Securities Regulation, and Fund staff are
expected to contribute to the promotion of these principles.
- The United Nations Commission on International Trade Law (UNCITRAL) has made some
progress toward harmonizing cross-border bankruptcy laws. UNCITRAL has prepared a model
law designed to promote judicial cooperation and greater predictability regarding the recognition
of creditor actions across jurisdictions. Fund staff, along with the staff of other international
organizations, have increasingly been providing technical assistance in the design and
implementation of effective bankruptcy systems.
- A Financial Sector Liaison Committee between the Fund and the World Bank has been
established to improve operational coordination by facilitating early and continuing agreement
on the delineation of work of the Fund and the Bank staff on the financial sector in individual
country cases and to help optimize the use of staff and experts in both institutions. Among its
functions will be to facilitate the dissemination of good practices and standards, and harmonize
views on recommendations and approaches regarding financial sector
issues.
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The Fund’s Progress in Developing Standards
9. Progress is under way on developing and refining standards in the Fund’s core
areas:
- On data, events in Asia illustrate the difficulties in early detection and
management of crises, and the resulting costs—in terms of output and employment
losses—to which inadequate data have contributed. Deficiencies in policies are harder to
recognize, and slower to be addressed, if data are unavailable, misleading or disseminated with
limited frequency and delayed timeliness. Similarly, investments based on inaccurate data are
unlikely to reflect the most appropriate use of scarce resources. The Fund has developed
standards to guide members in the provision of data to the public.8 Since the onset of
the Asian crisis, the main priority has been on improving data on international reserves and
external debt (Box 2).9
- A preliminary draft manual on fiscal transparency to assist members in
implementing the "Code of Good Practices on Fiscal Transparency-Declaration on
Principles" has been considered by the Board and public comment is to be invited.10
- Fund staff have been provided with operational guidance on the monitoring of
financial systems to provide a framework for financial sector surveillance and a broad
guide for analyzing banking sector issues under Article IV surveillance.
- Later this year, the Board will explore the scope for a code of good practices with respect to
monetary and financial policies.
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Box 2. Efforts to Improve Reserves and External Debt
Data |
| The Executive Board has addressed the need for better information
regarding countries’ international reserves and external debt positions on three fronts:
Data Availability
Directors agreed that:
- There were serious limitations to existing data on reserves and external debt in many
countries.
- The concepts of reserve assets, reserve-related liabilities, supplementary items and the
treatment of financial derivative activities, need clarification. The Fund will take the lead role in
developing guidelines for standardized reserve-related data, for which international agreement
would be sought in the coming year.
- Improvements in the compilation of external debt data will be given high priority, with the
Inter-Agency Task Force on Finance Statistics, recently reconvened by the Fund, expected to
play a lead role in coordinating the activities of various international bodies in improving
compilation and providing technical assistance.
Modifications of the Special Data Dissemination Standard (SDDS)
- It was agreed to strengthen the SDDS category for international reserves and associated
components of central government debt by prescribing comprehensive coverage of
reserve-related liabilities and financial derivative positions, and substantially improving
periodicity and timeliness. It was agreed to aim at reporting weekly data with a maximum
one-week lag. However, the sequence of steps to achieve this will need to be further
elaborated.
- Specific decisions on these modifications will be taken at the time of the Second Review of
the SDDS in December 1998. It is envisaged that a transitional period, likely to be at least 12
months, will be needed to enable SDDS subscribers to come into observance with the
modifications in the Standard.
- While recognizing the complexities involved, and the resource implications for national
authorities and international agencies, consultations are to begin on a two-stage process to
improve external debt statistics, in the framework of the SDDS.
- Preliminary work on indicators of financial soundness is underway in the context of the
Basle Committee on Banking Supervision. Clarification is needed inter alia on the
definitions of non-performing loans and other macro prudential data before soundness indicators
could be considered for inclusion in the SDDS.
Provision of data to the Fund
- There is general support for a minimum standard - of weekly data with a maximum one
week lag - for the periodicity and timeliness for which data on international reserves and related
items need to be provided to the Fund by members. Notwithstanding the imperfect status of
current data systems, immediate efforts are underway to improve the timeliness and
comprehensiveness of external debt data to improve the monitoring of capital flows.
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Measures to Increase Transparency and Accountability
10. Better transparency, in both economic policy and in data on economic and financial
developments, can strengthen the markets’ ability to undertake appropriate credit risk
assessment and so reduce the likelihood of crises and mitigate their severity when they do occur.
Information must be suitable for use by financial markets, and used effectively to discriminate
between potential borrowers.
- Transparency provides a means to foster better economic performance, in part by
encouraging more widespread discussion and analysis of member’s policies by the
broader community.
- Transparency on the part of the Fund—greater openness and clarity on its own policies
and on the advice it provides to members—can also contribute to a better understanding of
its role and operations.
11. The Executive Board has adopted a series of concrete measures to improve the transparency
of members’ policies and data, and to enhance the transparency of the Fund’s own
policies and operations (
Box 3).
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Box 3. Efforts to Improve Transparency |
| The Executive Board has agreed to:
- actively encourage members to consent to the release of Public Information Notices
(PINs) following Article IV consultations and to take steps to accelerate their release. PINs will
also be used to inform the public of the Board’s conclusions following policy and regional
surveillance discussions in addition to following Article IV consultations;
- more clearly calibrate the Fund’s expressions of concern over a member’s
policies to help improve the effectiveness of the Fund’s surveillance. The current practice
of conveying concerns already resembles a system of tiered response, but this is to be
strengthened by ensuring the early involvement of the Board and the use of special and
supplemental consultations in selected cases. Publication by the Fund of a report expressing its
concerns should remain a last resort;
- strongly encourage members to publish Letters of Intent and Policy Framework Papers
underpinning Fund-supported programs;1
- release HIPC documents and the internal and external evaluations of the ESAF - these
documents are already on the Fund’s website - and solicit public comments on the
tentative conclusions of those reviews;
- conduct an external review on Fund surveillance in the coming year (work is already
underway); and
- publish information on the Fund’s liquidity position.
The Board also considered a number of issues where it concluded that further deliberation and
analysis were necessary before decisions could be reached, notably:
- whether to release staff reports, on a voluntary and case-by-case basis, and how to
balance the Fund’s responsibility to oversee the international monetary system with its
role as a confidential advisor to its members;
- the extent to which PINs could be issued following the approval and review of the use of
Fund resources;
- whether further information could be released regarding the analytic underpinnings of
individual Fund-supported programs;2 and
- whether the waiting period for access to the Fund’s archives should be reduced, and
whether the Board’s work program should be released.
1Program documents were published
in almost 40 percent of all Fund-supported programs in place at August 31, 1998.
2Reviews of the design of programs and the experience of member countries
under Fund-supported programs are already published in the context of ESAF reviews and the
Reviews of Programs under Standby and Extended Arrangements.
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III. Strengthening Financial
Systems
12. The Asian crisis and the banking sector problems faced by a large number of Fund members
have highlighted the critical importance of concerted action to strengthen financial systems.
Building on initiatives taken following the Mexican crisis in 1994–95, the Fund has
intensified its financial sector surveillance activities, improved its internal capacity to provide
technical assistance on banking sector and related issues, and contributed extensively to the
financial sector restructuring and reform programs in Asia. The Fund’s efforts have
involved stepped-up collaboration with other international bodies and groupings, notably the
World Bank.
13. Efforts to promote strong financial sectors have been intensified in all member countries.
During the past few years, the Fund, World Bank, other key international groupings, and
financial supervisors from various regions have identified key ingredients of sound financial
systems in both mature and emerging markets (Box 4), and established a
framework for financial stability, in part by distilling international principles and good practices
for sound banking.11 The Fund, together
with national supervisors, regulators, and other members of the international community, is now
in the process of disseminating and refining these international principles and good practices.
- In light of recent experience, the private sector, national authorities in both mature and
emerging markets, and international organizations need to understand better the activities of
large institutional investors, including the financing of highly leveraged operations, and their
impact on financial markets. In this context, there is an urgent need to assess the adequacy and
availability of data on the exposures of investment banks, hedge funds, and other institutional
investors.
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Box 4: Key Elements of a Sound Financial System |
| The main characteristics of a sound and well-supervised financial
system are:
- an adequately capitalized, well-functioning banking system, supported by an
environment in which market discipline promotes high quality bank governance, strong liquidity
and currency risk management, effective internal controls, and an appropriate balance between
risk and return;
- a well-defined exit or restructuring policy for under-capitalized, weak, or insolvent
institutions;
- a financial safety net that promotes confidence in the financial system while limiting public
sector distortions and moral hazard that can arise, for instance, in some deposit insurance
arrangements and from the improper use of lender-of-last resort facilities;
- an autonomous regulatory and supervisory structure with the necessary levels of expertise
and resources to enhance the stability of financial institutions through the use of prudential
regulations such as capital requirements, the authority to conduct on-site inspections, or to
delegate this authority to competent external auditors, and the ability to intervene early in cases
of unsound practices or emergency situations; and
- a well-functioning underlying financial infrastructure, including an effective payments
system, an effective legal structure for contract enforcement and bankruptcy proceedings, and
rules governing transparency and disclosure of information for effective corporate
governance.
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14. Fund staff, in close collaboration with the World Bank, has also strengthened its capability to
provide advice and expertise to countries working to develop strong and sound financial systems.
Within the context of Fund work with individual member countries, bilateral surveillance and
technical assistance have been refocused to address the challenges.
- More attention is being given to the linkages between macroeconomic policies and banking
system soundness, as well as to the problems created by an unsound banking system for policy
choices. The health of the banking system is now commonly discussed in the context of Article
IV consultations and is considered in the Fund’s design of stabilization programs.
- The Fund’s multilateral financial surveillance has been deepened and broadened and
better integrated with country work. Increasingly the topics covered in the annual International
Capital Markets Report, the semiannual World Economic Outlook, and the more frequent
informal Board discussions on World Economic and Market Developments, emphasize systemic
financial risks and vulnerabilities in global financial markets.
- The Fund is strengthening its capacity to analyze financial sector topics. Fund staff will
explore an extension to an existing arrangement with cooperating central banks to draw on
financial system experts from central banks and other national and international institutions to
collaborate with staff in assessing the financial systems of selected member countries, including
in the context of Article IV consultations.
- A series of workshops to provide training programs for supervisors have been developed on
a range of specific subjects, including bank licensing, credit assessment and loan loss
provisioning, off-site supervision, on-site examination, dealing with problem banks, systemic
bank restructuring, monetary and foreign exchange operations and market development, central
bank accounting and audit, and payments system issues.
- Technical assistance is being provided in a wide range of areas.
IV. Promoting Orderly Integration
of International Financial Markets12
15. The Executive Board has considered a number of issues related to the globalization of
financial markets since the last Interim Committee meeting and has reaffirmed the conclusion
that
financial integration, including capital account liberalization, brings substantial benefits by:
- facilitating an efficient global allocation of savings and directing resources toward their
most productive uses;
- creating opportunities for portfolio diversification, risk sharing, and intertemporal trade;
and
- allowing the global economy to reap the benefits of efficient specialization and trade in the
financial services.
16. Nevertheless, capital account liberalization carries risks and needs to be carefully managed.
Sound macroeconomic policies consistent with the attainment and maintenance of financial
stability are necessary, but not sufficient, for successful liberalization. Macroeconomic stability
must be firmly supported by strong financial and banking systems endowed with adequate
prudential and supervisory regulations; and the pace of capital account liberalization must take
into account the ability of financial intermediaries and other market participants to manage risk.
Recent crises, in particular, have highlighted the problems associated with short-term debt
inflows and their volatility, especially in the presence of weak domestic financial sectors.
17. The current crisis has given rise to the temptation, in some countries, to consider the
reimposition of controls. While there is a need to carefully evaluate the experience of countries
during the crisis to distill lessons for the future, what appears clear is that unilateral measures
could carry a considerable cost for the country involved, both in terms of domestic economic
activity and—very likely—for future access to international capital markets.
Moreover, such unilateral actions, through their effects on investor attitudes and confidence, have
clearly imposed significant risks and costs on other members of the international community.
18. The Executive Board has reached agreement on a number of key conclusions regarding the
pace and scope of capital account liberalization.
- A cautious approach to capital account liberalization is desirable. In addition, there are
likely to be considerable differences in the speed at which member countries can safely liberalize
capital account transactions due to different circumstances.
- Particular attention needs to be paid to the state of domestic banking systems and to ensuring
that major problems in the domestic financial system have been addressed before the removal of
certain restrictions on capital account transactions.
- Foreign direct investment is generally one of the most stable forms of capital—with
attendant benefits in augmenting domestic savings and transfers of technology and management
skills—followed by equities and long-term debt instruments. Particular caution is needed
with respect to opening up the economy to short-term debt-creating capital inflows.
19. Prudential controls are critical in managing and containing the risks associated with an open
capital account. The imposition of capital, liquidity, reserve, and open-position requirements
governing the composition of the balance sheets of banks are key risk management instruments.
While such measures are directed toward banks, short-term foreign currency borrowing by
nonbank firms can also give rise to systemic risk and need to be better monitored. More
generally, experience suggests that the risks associated with short-term inflows can be reduced
by prudent borrowing by the sovereign, sound management and regulation of the financial
system, and incentives for corporate borrowers to manage risks appropriately. A number of
countries have allowed greater exchange rate flexibility to help adjust to large swings in capital
flows and to encourage the appropriate hedging of foreign currency borrowing.
20. A number of Fund members have adopted prudential capital controls to discourage undue
reliance on short-term capital inflows to reduce external vulnerability. When these controls are
not a pretext for delaying reforms, they may be viewed as contributing to an orderly
liberalization process. Their desirability needs to be considered on a case-by-case basis and there
is a presumption in favor of market-based rather than administrative measures. Capital controls,
however, tend to lose their effectiveness over time and cannot be a substitute for rapid progress
toward strong fundamental and financial sector reforms.
21. As regards capital outflows, a distinction needs to be made between the maintenance of
controls on certain capital outflows as part of an orderly liberalization process and the sudden
reimposition of controls in periods of market turbulence. While the maintenance of existing
controls does not raise new issues, the sudden reimposition of controls by a country that has
already substantially liberalized capital outflows is likely to impose large costs, including
through reduced access to international capital markets. There is also the risk that the uncertainty
generated will cause contagion to other countries under similar pressures. The reimposition of
controls is generally undesirable, and should be considered only in the most extreme
circumstances and in close consultation with the Fund. The commitment of the membership to
maintain the degree of financial market integration that they have achieved is evident by the fact
that so few countries have reimposed controls during the recent unsettled conditions in
international financial markets.
22. Further efforts will be made in the period ahead to ensure that the Fund’s surveillance
focuses on the appropriate sequencing of capital account liberalization, that effective safeguards
are in place to help ensure the resilience of the economy, particularly the financial sector, to
possible shocks, and to review promptly the experience of countries with controls on capital
inflows and outflows. Work to improve the reporting and monitoring of capital flows will also
continue. The Executive Board has discussed the issue of an amendment to the Articles of
Agreement to address liberalization of capital movements. Future consideration of possible
proposals to amend the Articles of Agreement would have to take account of recent
experience.
V. Involving the Private Sector in Resolving and
Forestalling Crises
23. It is of critical importance that ways be found to better involve the private sector in
forestalling and resolving financial sector crises. The Executive Board and other fora have been
giving active consideration to how this might be done, with the recent crises providing a number
of lessons. Different mechanisms have been employed in Korea, Thailand and Indonesia, with
varying degrees of success, in an attempt to achieve the voluntary and cooperative participation
of the private sector in providing relief to unsustainable debt positions. The Board has reached
agreement on some guiding elements that should underlie measures to involve the private
sector.
Preventing Crises
24. Prevention must continue to be the first line of defense against crises. In addition to measures
to improve transparency and to adopt commonly accepted standards, crisis prevention depends
critically on a range of other measures intended to improve the efficiency of domestic and
international capital markets. The Board has agreed that key in this respect are:
- consistent macroeconomic and regulatory policies to avoid the over-exposure of
countries and their financial systems to foreign liabilities, especially at shorter maturities;
- effective oversight of the domestic financial system to avoid the emergence of, or to quickly
redress, weaknesses in financial systems;
- the orderly sequencing of capital account liberalization as countries begin to participate in
global capital markets; and
- limiting implicit or explicit guarantees to the private sector in order to force a clearer
recognition of the risks involved in particular actions.13
25. Nevertheless, members will continue on occasion to experience balance of payments
difficulties stemming from changes in capital flows. Consideration is being given to a range of
mechanisms that could be designed ahead of time to ensure the timely involvement of the private
sector in resolving difficulties while also reducing moral hazard. Such
ex ante measures
would be agreed between creditors and debtors in normal times with the aim of providing
liquidity support from private creditors in times of stress. The challenge now is to reach
consensus on the most practical measures from the menu of proposals that is emerging. The
Executive Board will continue its discussion of various options, including:
- whether it is practicable and effective to contract credit and swap
facilities
with groups of foreign commercial banks, such as those currently in place with Argentina and
Mexico; and
- the feasibility of embedding call options in certain short-term credit
instruments to provide for the automatic extension of maturities by debtors in times of
crisis.
Resolving Crises
26. The Fund has a central role in helping members confront pressures that develop in the
financial markets and correct balance of payments imbalances without resorting to measures
destructive of national and international prosperity. In this context, the involvement of the private
sector can often be secured through the Fund’s traditional catalytic role and its support for
the authorities’ policies aimed at restoring stability and rebuilding confidence.
Uncertainties at the start of an arrangement concerning member’s access to capital
markets can put official resources at risk. There may be a temporary reduction in the exposure of
private creditors during Fund arrangements associated with delays in restoring or deepening
access to international capital markets. Nevertheless, these risks must be taken, within carefully
considered limits, to help countries resume market access through means that limit, as much as
possible, interference with the workings of markets. Some of the ex ante measures under
consideration would be consistent with this objective and help ensure an early involvement of the
private sector.
27. However, the international community is not prepared to provide official resources, beyond
certain limits, that may serve to bail out private sector lenders. Accordingly, in cases of severe
balance of payments difficulties it may be necessary for the country, in the context of an early
approach to the Fund, to approach its private creditors—perhaps using the good offices of
the Fund—for a concerted restructuring of foreign and, in some cases, local debts so as to
provide breathing room while corrective policies take hold. In such circumstances:
- it is critically important that creditors should be approached at an early stage before the
emergence of widespread distressed debt, but with due regard to the effect such an approach can
have on capital withdrawals in the country and, through contagion, elsewhere;
- the debtor country should seek cooperative market–based debt restructurings, to the
fullest extent possible; and.
- countries should aim for comparable treatment of all holders of any debt instruments subject
to restructuring.
The agreements to restructure debt reached in the cases of Korea and Indonesia suggest a number
of lessons regarding the timing of contact with creditors to help develop an understanding of
what needs to be achieved, and the consequences of offering sovereign guarantees.
14 These experiences need to be further
evaluated.
28. The Executive Board has agreed that mechanisms to help coordinate debtor-creditor
relations could be instrumental in resolving crises and that many of these could be implemented
ahead of time. Further analysis and discussion in relevant fora are required to carry forward
various options, including:
- The modification of the terms of sovereign bond contracts to include
sharing
clauses, majority voting rules, and collective representation provisions to facilitate collective
action in addressing distressed debt.
- A possible role for creditor councils as fora for discussions between
debtors and creditors. In normal times these could facilitate an exchange of information; in crisis
periods they could serve as the forum for negotiations for restructuring distressed debt.
- Whether there should be representatives of the private financial community
to provide points of contact in a crisis and a channel for communicating with a wide spectrum of
financial institutions. A meeting with such representatives could allow the debtor country and the
Fund to explain Fund arrangements, assess the availability of external financing and, on
occasion, provide a forum to renegotiate debt.
The potential for such creditor groups to serve as fora for renegotiating debt contracts in the
context of a given country case would depend on their composition. More generally, issues
regarding selectivity and privileged access to information would also need to be considered.
29. In extreme situations, where pressures on the exchange rate and reserves reach extraordinary
levels and it is not possible to reach agreement on a voluntary debt restructuring, countries may
find it necessary to put in place a moratorium on sovereign and/or nonsovereign debt service
payments. A moratorium on servicing nonsovereign debt would likely entail the imposition of
exchange controls. An early approach to the Fund would be critical in the event that countries
found themselves confronting such an extreme situation. The Executive Board has agreed
that:
- Debt moratoria should only be used in exceptional situations, as they are likely to inflict
severe collateral damage on the member concerned, in terms of triggering capital flight and
setting back the prospects for regaining access to capital markets.
- Moreover, there is some risk that following a default, some creditors might eschew
collaborative approaches to renegotiation and seek redress through litigation in foreign
jurisdictions, which could be intended both to obtain settlement through the attachment of assets,
and to apply pressure in the context of a negotiated settlement.
- Furthermore, debt moratoria may have severe adverse consequences for the international
monetary system more generally through contagion to a range of other borrowers.
The recent experience of Russia demonstrates the high price likely to be paid by a unilateral
declaration of a moratorium—not only by the subject country but by others through
contagion effects in international markets.
30. Against this background, and in circumstances where all other possible alternatives have
been exhausted, it would be critically important for the authorities to move expeditiously
following the imposition of a moratorium to adopt a collaborative market-based approach to debt
restructuring, while exercising extreme caution regarding the assumption by the government of
commercial risks on nonsovereign obligations.
31. The Executive Board has agreed that the Fund should be willing, under carefully designed
conditions and on a case-by-case basis, to consider extending the 1989 decision on lending into
arrears in order to provide support for members with sovereign arrears to private creditors
(including bond holders), and members with nonsovereign arrears to private creditors stemming
from the imposition of exchange controls. In both cases, Fund support would need to be
considered essential for the successful implementation of the member’s adjustment
program, and the member would need to be making good faith efforts to reach or facilitate a
cooperative resolution of the arrears situation. Drawings under a Fund arrangement supporting
the member’s program should be made subject to financing reviews to provide an
opportunity to bring developments in the member’s relations with its creditors to the
attention of the Executive Board.
32. Both of the cases discussed above assume that negotiations will lead to a satisfactory
outcome that avoids disruptions to the financing of a member’s program. However, with
limited experience of debt standstills in recent years, there are important uncertainties regarding
how debtor/creditor relations would unfold. Some consider that, in line with experience during
the 1980s debt crisis, creditor litigation is unlikely to give rise to significant difficulties. Others,
however, consider that there is risk that with the shift toward securitized debt instruments and
away from syndicated bank loans, creditor litigation and its possible disruptive effect on trade
and financing may play a more prominent role following either a sovereign default, or a
nonsovereign default stemming from the imposition of exchange controls. Widespread creditor
litigation that undermined the external financing of a program would make the resolution of a
crisis more difficult. In this context, the Executive Board has given preliminary consideration to
the official sanctioning of a stay on creditor litigation, so as to facilitate agreement on a
collaborative debt restructuring. One potential mechanism for imposing such a stay would be
through an amendment of Article VIII, Section 2(b) of the Fund’s Articles of Agreement.
At the current stage of the debate, some Executive Directors consider that such an amendment
could provide a clear and effective response to the threat of disruptive litigation, while others
consider that it would be unnecessary or damaging.
33. Extreme measures for extreme circumstances are not to be entered into lightly. In considering
the issues laid out above, the international community and, most importantly, the Executive
Board of the Fund must give the highest priority to the design of preventative measures to
forestall crises, and ex ante measures to assure as orderly a process of resolution as
possible in the event that pressures develop and a crisis occurs. We must be continually vigilant
in order to detect and correct the pressures that, if unattended, can lead to crises. But we must
also be ready with the needed tools in hand to deal with the crises that will inevitably occur.
ATTACHMENT
Statement of the Interim Committee on the Liberalization of
Capital Movements Under an Amendment of the Articles
Hong Kong SAR
September 21, 1997
1. It is time to add a new chapter to the Bretton Woods agreement. Private capital flows have
become much more important to the international monetary system, and an increasingly open and
liberal system has proved to be highly beneficial to the world economy. By facilitating the flow
of savings to their most productive uses, capital movements increase investment, growth, and
prosperity. Provided it is introduced in an orderly manner, and backed both by adequate national
policies and a solid multilateral system for surveillance and financial support, the liberalization
of capital flows is an essential element of an efficient international monetary system in this age
of globalization. The IMF’s central role in the international monetary system, and its near
universal membership, make it uniquely placed to help this process. The Committee sees the
Fund’s proposed new mandate as bold in its vision, but cautious in implementation.
2. International capital flows are highly sensitive, inter alia, to the stability of the international
monetary system, the quality of macroeconomic policies, and the soundness of domestic
financial systems. The recent turmoil in financial markets has demonstrated again the importance
of underpinning liberalization with a broad range of structural measures, especially in the
monetary and financial sector, and within the framework of a solid mix of macroeconomic and
exchange rate policies. Particular importance will need to be attached to establishing an
environment conducive to the efficient utilization of capital and to building sound financial
systems solid enough to cope with fluctuations in capital flows. This phased but comprehensive
approach will tailor capital account liberalization to the circumstances of individual countries,
thereby maximizing the chances of success, not only for each country but also for the
international monetary system.
3. These efforts should lead to the establishment of a multilateral and nondiscriminatory system
to promote the liberalization of capital movements. The Fund will have the task of assisting in
the establishment of such a system and stands ready to support members’ efforts in this
regard. Its role is also key to the adoption of policies that would facilitate properly sequenced
liberalization and reduce the likelihood of financial and balance of payments crises.
4. In light of the foregoing, the Committee invites the Executive Board to complete its work on a
proposed amendment of the Fund’s Articles that would make the liberalization of capital
movements one of the purposes of the Fund, and extend, as needed, the Fund’s
jurisdiction through the establishment of carefully-defined and consistently applied obligations
regarding the liberalization of such movements. Safeguards and transitional arrangements are
necessary for the success of this major endeavor. Flexible approval policies will have to be
adopted. In both the preparation of an amendment to its Articles and in its implementation,
the members’ obligations under other international agreements will be respected. In
pursuing this work, the Committee expects the IMF and other institutions to cooperate
closely.
5. Sound liberalization and expanded access to capital markets should reduce the frequency of
recourse to Fund resources and other exceptional financing. Nevertheless, the Committee
recognizes that, in some circumstances, there could be a large need for financing from the Fund
and other sources. The Fund will continue to play a critical role in helping to mobilize financial
support for members’ adjustment programs. In such endeavors, the Fund will continue its
central catalytic role while minimizing moral hazard.
6. In view of the importance of moving decisively towards this new worldwide regime of
liberalized capital movements, and welcoming the very broad consensus of the membership on
these basic guidelines, the Committee invites the Executive Board to give a high priority to the
completion of the required amendment of the Fund’s Articles of Agreement.
1"Communique of the Interim Committee of the Board of
Governors of the International Monetary Fund " (Press Release No. 98/14, 4/16/98).
2The summings up from the relevant Executive Board meetings
are being circulated separately to the Interim Committee.
3The Executive Board will examine the
experience of Fund-supported programs in the Asian crisis countries following the Annual
Meetings.
4The term "standards " is used to cover a broad range of
concepts, from very
specific requirements for actual practices to broad guiding principles or good practices, which are
less prescriptive and require judgmental consideration to assess observance.
5For example, regulators of major financial centers could raise
the capital adequacy requirements on banks' lending to institutions or to countries that have not
adopted certain international standards, while securities regulators could require that information
on compliance be included in any prospectus. However, such measures need to be carefully
designed to be effective and to avoid giving regulators a false sense of security or leaving
investors with the perception that they are less exposed than is actually the case.
6Bank-Fund collaboration will be taken up as a separate agenda
item for discussion by the Interim Committee.
7The difficulties with monitoring standards should not be
underestimated—it will require detailed knowledge of both the standard and the
professional practices to which it is relevant, but also detailed understanding of actual country
practices.
8The Special Data Dissemination Standard, aimed at
market-borrowing countries, and the General Data Dissemination System, the broader tier of the
Fund's data dissemination standards, are both intended to enhance the availability of timely and
comprehensive statistics.
9The Bank for International Settlements (BIS) is
actively working to improve the collection of short-term debt and other financial sector data from
central banks with a view to the provision of more timely and comprehensive data on external
debt. In addition, consideration is being given to having central banks (coordinated through the
BIS) collect and publish aggregate data based on the consolidated books of major global
derivative dealers.
10In addition, a draft questionnaire has been designed to allow
members to assess how their fiscal management practices compare to those in the Code. The
draft manual and questionnaire are to be posted on the Fund's website to seek feedback from
country authorities and others.
11Much of this framework is articulated in the Fund's
Toward a Framework for Financial Stability, the Basle Committee on Banking
Supervision's Core Principles for Effective Banking Supervision, and a G-10 Working
Party paper Financial Stability in Emerging Market Economies.
12The Statement of the Interim Committee on the
Liberalization of Capital Movements Under an Amendment of the Articles, issued in Hong Kong
SAR on September 21, 1997, is attached.
13Pegged exchange rate arrangements have,
in some cases, been perceived as a kind of guarantee of official support. Some argue this has
contributed to recent crises. Others, however, have noted that the adoption of more flexible
exchange rate regimes provides no panacea.
14In the case of Korea, both the authorities and the private
creditors recognized the need to roll over interbank lines of credit in order to restructure the
maturity profile of that part of Korea's outstanding foreign debt. In late 1997, Korea offered a
sovereign guarantee as an inducement to private creditors to accept the restructuring of their
claims. While the granting of government guarantees results in the socialization of private sector
debt, it may be warranted where it is used to obtain a quid pro quo in terms of pricing, maturity
or other terms. However, it is difficult to judge the effect of the Korean authorities' guarantee on
the restructuring as an unspecified guarantee had been announced earlier in the year.
