Media Kit: Securing the future from financial crisis
Financial crises in recent years sent economic shock waves around the world. Policy makers are considering preventive measures, and discussions at the International Conference on Financing for Development can help to clarify these ideas and build consensus on how to put them into practice.
It was clear by the end of 1998, in the wake of crises in East Asia and the Russian Federation, that the economic liberalization and globalization of the 1990s had outpaced the capacity of the institutional frameworks within and among nations to effectively handle them. The costs of crisis, especially to developing and transition economy countries, were steep. Millions of jobs were lost and the numbers of the poor swelled in countries such as Thailand, Indonesia, the Republic of Korea, Brazil and the Russian Federation. Investment in emerging market economies dipped and has never recovered.
A number of preventive measures have been proposed since the contagions of 1997-1998. These include the strengthening of international surveillance of domestic economies and other early warning systems, and the stockpiling of sufficient short-term credits to put into play once a financial crisis begins. The current situation in Argentina underlines the big challenges as well as the major opportunities facing policy makers.
In preparation for the International Conference on Financing for Development, the United Nations and its Conference partners - especially the International Monetary Fund (IMF), the World Bank and the World Trade Organization - have looked at ways that stakeholders in the international economic system can better deal with such difficulties. Part of this process involves bringing together the specialized policymakers responsible for international trade, financial and development cooperation, in order to achieve greater coherence and consistency. To give one simple example, aid that helps developing countries raise their productive capacity should not be undercut by limits that aid-giving countries place on imports from these countries.
Provision of adequate, timely and reliable information - a cornerstone of a sound financial system - depends on transparency in both the private and public sectors. Although supervision of the financial institutions and markets resides mainly in the hands of national authorities, it is widely agreed that there is a need for more intensive international monitoring of capital flows.
Two ideas that complement the actions that have been taken since 1997-1998 to improve financial surveillance have been promoted by the developing countries in talks at the United Nations' preparation for the Financing for Development meeting in Monterrey, Mexico.
One is that surveillance should be improved over all economies, including and especially those of the major industrialized countries. These countries have a disproportionately high impact on global trends. The argument is that while governments are responsible for their own national policies, the world at large has a legitimate concern when national policies are unsustainable or can have serious adverse international consequences.
The second is that the international and multilateral bodies that set standards for financial systems and provide early warnings of possible crises on the horizon should include a relevant representation of developing countries. International attention since the crisis of the late 1990s has focused primarily on strengthening policies of developing countries. But if they are to be held accountable to standards by the sometimes-merciless forces of the globalized economy, they should participate fully in setting and applying those standards.
Speaking at the January 2002 Financing for Development preparatory meeting, UN Secretary-General Kofi Annan endorsed the need for developing countries to have a bigger say in management of the global economy, and asked the Conference to come up with practical measures to achieve this.
Measures in place
The IMF is the primary agency overseeing the international monetary and financial system. It does so via its annual "Article IV" surveillance of a country's macroeconomic and external payments situation, in the monitoring of negotiated programmes of balance-of-payments adjustments, and in the Financial Sector Assessment Programmes carried out jointly with the World Bank. The IMF also encourages financial transparency of governments through its Special Data Dissemination Standard for countries wishing to access financial markets. It also promotes compliance with various codes of macroeconomic policymaking and financial sector regulations.
By the same token, both the Bank and the Fund have been working to make their own operations more transparent to financial communities and to the public.
More still needs to be done on the matter of transparency, however, especially in regard to private sector disclosure. More internationally comparable indicators and standards of accounting and reporting are needed. Work is underway on the harmonization of accounting standards by the International Accounting Standards Committee, a private body of 142 professional accounting organizations in 101 countries.
Other measures have been adopted to strengthen the rapid reaction capacity of the international system. The IMF has streamlined its emergency facilities: the Supplementary Reserve Facility, designed to lend large sums quickly at high interest rates for relatively short periods to countries in difficulty; and the Contingent Credit Line, which allows pre-approved countries to draw on emergency financing when economic disorders in other countries threaten contagion.
In addition, the World Bank recently agreed to introduce a new mechanism for pre-arranging the quick disbursement of loans on need, in essence opening a credit line, called the "deferred drawdown option".
While the financial tools for fighting individual crises are thus being strengthened, no one has yet answered the question of how many crises the international community should be prepared to fight simultaneously and whether it has access to sufficient resources to do so. Another question is whether public international institutions should even try to mobilize large new loans if they are used mainly to finance capital flight or the withdrawal of foreign creditors who have lost interest in a country once it falls into crisis.
Towards a new international debt workout mechanism
Even given the new preventive policies, it is generally believed that financial crises will continue to arise, albeit hopefully fewer and less severe ones. However the recent case of Argentina shows how deeply a financial crisis can still run, although contagion so far has been averted.
Several proposals have emerged on ways to successfully resolve a country's unsustainable debt problem promptly and in an orderly fashion.
In talks leading up to the Monterrey Conference, the point has been made that in cases of unsustainable debt, the costs of crisis-resolution adjustments need to be shared equitably by all stakeholders, public or private, as well as between debtors, creditors and investors. The question remains, how can this be done?
One aspect of some current debt-workout proposals is to bring a country's private creditors together to reach a collective agreement on restraining demands for immediate repayment. The rationale is that creditors will realize that they all stand a better chance recovering at least some of their loans if they work together rather than against each other. This is a feature of the Chapter 11 bankruptcy mechanism for corporations in the United States, which also allows for the possibility of new credits that can help the reorganized firm recover. While sovereign bankruptcy is a complicated concept, there is increasing interest in rethinking how to handle debt crises with this in mind. In the 1980s debt crises, most of the loans of the heavily indebted countries were issued by a limited number of commercial banks that could be organized into committees for deciding on new lending or restructuring debt-servicing obligations as needed. As more countries have made greater use of bond financing and consequently owe money to a greater number of creditors, the potential value of a collective debt workout mechanism has increased.
A number of hurdles have to be cleared before such proposals can be decided on, let alone implemented. One is obtaining agreement on who gets to decide that a country is eligible for a "debt standstill". If this role is assigned to the IMF, new rules and regulations would need to be written and agreed upon by the international community. If not the IMF, where would the decision be reached and implemented? Governments in their discussions in preparation for Monterrey have not shown strong interest in creating new international institutions.
If a formal mechanism could be put in place, it might offer a number of advantages. First, it would reduce the considerable uncertainty over how debt crisis situations will be treated internationally, which itself is now holding back lending to emerging market economies. It would also strengthen incentives for debtors and creditors to reach agreement on their own accord, escaping long, drawn-out court-like procedures, and thereby limiting the damage. Private institutions would recognize that they would not be bailed out automatically or in full if they take reckless risks, thereby contributing to a more stable international financial environment. Lastly, a procedure would be established for deciding the closeness of the "haircut" to be taken by the different classes of official and private creditors of an emerging market economy in crisis.
Senior government and international organization representatives, as well as the private sector and civil society organizations, are speaking out on the need for a new look at how problem debt is handled. The Monterrey Conference offers an opportunity for open exploratory discussion among all relevant stakeholders in this crucial policy issue.
"We must do everything we can to prevent the tragic experience of Argentina from being repeated elsewhere" Secretary-General Kofi Annan said in January 2002. "There is an emerging consensus that existing methods for resolving sovereign debt crises are unsatisfactory, and that we need to find ways of ensuring that the burden is more equitably shared between the debtor country and its creditors. I hope that at Monterrey, Governments will give the political impulse needed to speed the development of such a new approach."
Development Coordinating Secretariat
Copyrightę 2002 United Nations, 10 February 2003. This is an archived website.