Brazil and the IMF
Iraq and the IMF
United States and the IMF
Proposals for a Sovereign Debt Restructuring Mechanism (SDRM) -- A Factsheet
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Press Conference with IMF Managing Director Horst Köhler and
First Deputy Managing Director Anne Krueger|
International Monetary Fund
April 10, 2003
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THOMAS DAWSON, Director of the External Relations Department: Good morning, ladies and gentlemen. Welcome to the traditional press conference preceding the International Monetary and Financial Committee meeting. To my far right is Anne Krueger, First Deputy Managing Director of the IMF, and to my immediate right is Horst Köhler, the Managing Director of the IMF.
The Managing Director will have a brief opening statement, and then we will be happy to take your questions. When we do get to the questions, please do identify yourself and your affiliation.
HORST KÖHLER, IMF MANAGING DIRECTOR: Good morning, ladies and gentlemen. It is good to see you here and to observe your interest, obviously. First, I would like to make a statement and then I stand ready for answering your questions.
The upcoming Spring Meetings of the Fund and the World Bank, which will bring together Ministers and Governors from our 184 member countries, take place certainly at a difficult time. We need to take stock of the state of the world economy and jointly define the way forward. Nobody can estimate still today with any precision the lasting costs of the war in Iraq, but certainly we can assume it will be a short war-and that it is good news-and that also means that the risks of the war for the global economy have remained contained and, in particular, the concerns about sharply rising oil prices have not materialized. The World Economic Outlook's baseline scenario, which Mr. Rogoff presented to you yesterday, sees the economic recovery reasserting itself in the second half of 2003. In my view, this remains the most likely development and represents a realistic basis for the policy discussions of our Governors at the IMFC this Saturday. I, myself, take this baseline scenario with a positive undertone.
Second, the overriding priority of our Spring Meetings must contribute to restoring confidence to consumers and investors worldwide. In a world of economic and political interdependence, this requires the credible demonstration of international cooperation; the need for now, of the hour is cooperation. I see the following three main elements in a cooperative response to restore confidence and growth to the global economy.
First, and foremost, the advanced economies need to gear their policies vigorously toward growth. In the face of near-term uncertainties, macroeconomic policies in the advanced economies should remain supportive of activity, and the international community has to be prepared to take additional action if downside risks to the global economy were to materialize, with monetary policy as the first line of defense. Regarding fiscal policy, automatic stabilizers should be allowed to operate fully, even if that leads to deficits above the 3 percent threshold in Europe.
But, and this is an important but, economic weaknesses in advanced economies predate the current conflict in Iraq, and the war should not be an excuse to further postpone tackling longstanding structural impediments to sustain strong growth; so, this tackling of structural impediments for growth, this is the most important task. Europe and Japan, in particular, must do more to reduce excessive reliance on an economic recovery in the United States.
Recent decisions to reinforce labor market and social security reforms in Europe are encouraging. I also do think, in particular, Chancellor Gerhard Schröder's reform package has the potential, if fully implemented, to provide new momentum to economic recovery in Germany and Europe. But overall the pace of implementation of the Lisbon Agenda, which I feel is a good European economic policy agenda, needs to be accelerated forcefully in Europe.
In Japan, this is not new, but we have to repeat this, policies must aim urgently to arrest deflation, especially through faster aggressive monetary easing. The effectiveness of monetary policy would be enhanced by more vigorous structural reforms in the corporate and banking sectors.
In the United States, the growing concern about the longer-term fiscal prospects needs to be addressed by putting in place a framework that re-establishes a balanced budget over the cycle.
A second element of this, what I call a collaborative strategy to restore confidence and growth, second element, the international community needs to reinforce the collaboration that has served it so well in the past. We should not forget that this cooperation and collaboration created unprecedented wealth after the second world war. Trade is the most important vehicle to boost confidence and also trust between members of the international community, and strengthen also the fight against poverty. Recent slippages in the schedule of global trade negotiations are a source of concern, and call for personal leadership by heads of state and governments to reassure a successful completion of the Doha trade round. I very much hope that Dr. Supachai, Director-General of the WTO, will get the strongest possible support from our Governors when he addresses them during the Spring Meetings.
The third element, the strengthening of the development agenda is the most appropriate antidote to the risk of fragmentation among nations. The implementation of the Monterrey Consensus, which combines self-responsibility in low-income countries with more comprehensive support from the international community, needs to be boosted. In the PRSP process, we have a promising vehicle in the fight against poverty by bringing together developing countries, international finance institutions, bilateral donors, and civil society in a joint effort for development. Chairman Gordon Brown's proposal to increase financing for poor countries through an International Financing Facility could, in my view, be an intelligent way to leverage scarce public resources and tap the vast potential of international capital markets.
Last but not least, in this cooperative strategy to boost confidence and growth, the Fund stands ready to contribute to a broad-based effort to restore, to do its business.
The ambitious reforms initiated by the IMF, and our intensive collaboration with our members in recent years, have contributed to the resilience of the world economy and the international financial system. The focus of the Spring Meetings on crisis prevention and resolution will further carry forward our efforts in this area.
Second, we have within the IMF conducted a detailed analysis of the economic impact on our 184 member countries should downside risks materialize. Even in such a setting, which I don't expect to be probable, but even in such a setting the situation would remain manageable. Many countries have strengthened their economic fundamentals in recent years and are now better equipped to handle external shocks. In addition, our financial position, the IMF's financial position, evidenced by a one-year forward commitment capacity of over $80 billion is strong, and our existing facilities and instruments are sufficiently flexible to deal with most conceivable eventualities. We are prepared to act flexibly and proactively if we know and if we, in our talks with our members, come to the conclusion there is a need to act.
For Iraq, we urge the international community to reach cohesiveness on the necessary framework for the rehabilitation of Iraq. As part of this, the IMF stands ready to contribute in its areas of competence.
My last point, the preparatory work by our Executive Board for the Spring Meetings, and my report to the IMFC on this work show that the spirit of cooperation among the 184 members of the IMF is intact and strong. The greater the uncertainty, the greater the need to collaborate; that is our motto. Now more than ever is the time for the international community to draw on its strong record of cooperation. We have policy options, and we should seize them. The Fund is committed to do its part. Thank you very much.
QUESTIONER: I would like to start from one of your comments about the need for cooperation, particularly in trade. Do you fear that the current resentment between the United States and parts of Europe, because of the war, will poison the climate for a successful round at the Doha Round particularly? I am mostly concerned with agriculture. In less than two years, this Round is supposed to wrap up. If it fails, what would be the consequence, for instance, for a country like Brazil that is moving on the internal front but vitally depends on more open trade in order to end its financial vulnerability?
KÖHLER: Well, my answer to the first question is that I do think that there is enough reason and sense of responsibility and urgency that the situation now will call for cooperation, and that means also for the recognition that trade is the most important demonstration of spirit and concrete meaning of cooperation. Therefore, I expect that leaders of the world will come together and give the Doha talk a new momentum.
Regarding the forecast about what would happen if the time schedule would not be met, we should not speculate. I just think it is possible to do it within the schedule and that we should work in this direction. This is my approach. Clearly, if the Doha Round would not end in two years, this would be a disappointment. The world would not break down but it would be a disappointment, and it would, of course, make life for President Lula even more difficult; but that is not an argument just to wait and see. I am assured and I am quite confident that President Lula and Brazil, the political system, will do their own job and I am confident this will pay off.
QUESTIONER: Could you kindly flesh out the proposed International Financing Facility? Will it be like the IDA, available for all the developing countries? Secondly, will the Economic Impact Report which has been prepared on the effect on individual countries be available to the media?
KÖHLER: To the first question on Gordon Brown's suggestion, the basic idea is that, based on public money as collateral provided for a medium-term time span, capital markets should do their own contribution and leverage public money. I think this is an intelligent idea. It raises a number of questions. I know that there is skepticism, but I do think we should remain open to this suggestion, because we need more financing for development. We know that public budgets are tight and, therefore, we should also look to some creative ideas, and this is one.
Regarding our analysis of the situation, we have informed our Board; I will inform the IMFC, and we will look how, in the appropriate form, we can make it available to the public.
QUESTIONER: Iraq's international obligations are huge, somewhere nearing $400 billion, although clearly I think only a very small fraction to you but, broadly speaking, most people who look at it say this is going to be a tremendous potential roadblock to helping Iraq. Do you have thoughts about how some kinds of debt forgiveness or other mechanisms can be put in place to deal with that?
KÖHLER: Well, I think it is very important that before we speculate, and on the basis of speculation answer what should we do and what is our plan, we should first organize a very careful stocktaking: what is the business situation, what is the debt, what are the liabilities, what are the assets in Iraq. This stocktaking exercise should be the basis for a sound and sustained effort. They have liabilities, that is clear. I am not aware about a $400 billion number; my information is less. I think that we should assess the situation and then ask ourselves what is needed that the Iraqi economy, in favor of the Iraqi people, get on its own feet, and we make it dependent on the stocktaking. It is premature now to speculate.
QUESTIONER: Since it appears that the war is going to be shorter rather than longer, and you said that that is good news particularly with regard to oil prices, can you say or can you elaborate more on what effect this would have on the world economy and how quickly we might see that effect?
KÖHLER: First, I think we should all be relieved that hopefully the war ends rapidly. This cloud hanging over us should fade away. Already now oil prices are below, as you may have seen, our assumption for the World Economic Outlook. We had assumed an average price in the World Economic Outlook for 2003 of $31 a barrel. I don't know where it is today precisely, but it is clearly below. That means this is a concern which has faded away.
I should not speculate about, say, the oil price in one or two years, because at the end I hope that there is a recovery, a strong recovery, after the fact that the war will end earlier than some had feared. I think some concern about downside risks for recovery also have a bit faded away. Still, there are, as I said before, causes for the vulnerabilities which predate the war. I also do not think that we should, at least in our assumptions for policymaking, assume there will be an explosion of growth rates in the next one or two years. There is still too much of an in-built difficulty.
But on the whole I must say I am quite satisfied about the situation. You should not forget that we had to cope in the last 2-3 years with a series of shocks. The most important was the burst of the bubble, that is a bubble of a kind of historical dimension. Then we had September 11; we had the corporate scandals; we have now a war. Nevertheless, the global economy had demonstrated such a resilience. Such resilience is a demonstration that we should not panic, that it is not productive to always assume nightmarish developments. If the forecast of the World Economic Outlook materializes with, on the whole, a good 3 percent of growth this year, 4 percent growth next year, I think this is a good development. Of course, I hope that more will come, that is appreciated, but I think we should keep it in context and that means we should not be complacent, but we also should not be overly pessimistic.
QUESTIONER: I have a question on the international bankruptcy system; the IMF was supposed to submit a report to this meeting, but it seems it is not included in the current agenda. Does it mean that the IMF is abandoning the proposal that has in Ms. Krueger one of the most strongest proponent?
KÖHLER: I think I should also give the floor to Anne Krueger, because she worked with staff on this proposal of the SDRM, sovereign debt restructuring mechanism. I think that this work process on the outcome is a demonstration of the IMF at its best and, therefore, she should also comment.
Let me say this. In my report to the IMFC, of course we have an element reporting about this work process. That was requested by the IMFC in the fall last year, and we are just doing our job. We know that there is not the high support necessary for a statutory change of the Articles. That is reality. I am quite satisfied how far we have come, because the SDRM discussion triggered a broad discussion, including outreach to academics, NGOs, policy process, and we are now much clearer about the issues of unsustainable debt and how to do and what to do in case there is such a situation. I think now it is fair that Anne should comment on that further.
KRUEGER: Well, as the Managing Director said, there is a concrete proposal that is going forward to the IMFC, which was what they requested last fall. The concrete proposal outlines most of the features of what an SDRM would do. It does not go so far as to the absolute specifics on every particular in part because, quite aside from the fact that there is not, as the Managing Director said, the necessary very high level of support to go forward at this stage, there are still a few issues on which consensus has not been reached.
We do believe that the whole problem of sovereign debt restructuring is an important problem that is being addressed. We have now seen two issues of CACs by Mexico, following on a few earlier ones by countries such as Egypt, and so on, who had already used them. I think the international community wants to see how experience with that develops and how much goes that way. Meanwhile, there are a number of substantive issues that are relevant to sovereign debt restructuring without a mechanism, with this mechanism, with CACs, on which work will continue going forward.
QUESTIONER: You have said that the industrialized countries have to gear their policies toward growth, and you mentioned monetary policy and fiscal policy, even if the 3 percent deficit criterion of the European Union is exceeded. How do you evaluate the tax package of President Bush, also in light of the U.S. deficit and the current account deficit?
KÖHLER: Well, let me first say that when I meant that the advanced countries should gear their policy to growth, I first and foremost meant structural policies, that is in Europe in particular, coping with labor market rigidities, with a too high cost situation, and other impediments to growth. I am optimistic that if these issues would be addressed, and then Europe could come up with stronger growth, because we should not forget that U.S. growth may be weaker than we had hoped for one year ago, but it still twice as much as we can expect for Europe this year.
The tax proposal of President Bush, I think, is an initiative to boost growth. I have expressed my concern over medium-term problems if the fiscal deficits would get out of control. In the short term, I don't advise us to dramatize the deficit impact of this proposal, because still we should also see that there is a need with fiscal instruments to support business activity. This tax package is, in my view, then a problem if it would not be seen in the medium term as a challenge how to contain fiscal deficits here, and that means how to keep control over spending in the U.S.
QUESTIONER: Mr. Köhler, you have shown sympathy, even enthusiasm, for the new Brazilian administration in the last few months. I would like to know if you could, if the IMF could translate this enthusiasm in concrete steps, accepting some ideas that are floating in official circles in Brazil, such as accepting that social expenditures could be put aside in the calculations of the fiscal deficit, or a classical stimulus you mentioned already of, in times of slow growth such that Brazil has had in the last 20 years, that the fiscal deficit would be alleviated in a certain way, or the agreement with the IMF is as it is, take it or leave it.
KÖHLER: First, I am enthusiastic; but it is better to say I am deeply impressed by President Lula, indeed, and in particular because I do think he has the credibility which often other leaders lack a bit, and the credibility is that he is serious to work hard to combine growth-oriented policy with social equity. This is the right agenda, the right direction, the right objective for Brazil and, beyond Brazil, in Latin America. So, he has defined the right direction.
Second, I think what the government, under the leadership of President Lula, has demonstrated in its first 100 days of government is also impressive and not just airing intention how they work through the process on this huge agenda of reforms. I understand that pension reform, tax reform is high on the agenda, and this is right.
The third element is that the IMF listens to President Lula and the economic team, and that is our philosophy, of course, beyond Brazil. Listening means that we agree that essential social spending has to be increased, because there are acute problems of hunger, and we support the President's program directly tackling hunger. We, in our discussions with the economic team, had also been flexible regarding social spending.
I don't understand what your suggestion is about social spending not being accounted for in the budget. My advice would be not to use tricks, to suppress liabilities or spending targets. A transparent budget, inclusive of all items which a state spends, is the most important feature to build up credibility in markets, and up to now the government has this line. I have no doubt that they will pursue this line, and I think this line of transparency and honesty will be successful.
QUESTIONER: Mr. Köhler, do you see the need for interest rate cuts by the major central banks in the world, or is the level of interest rates low enough at the moment?
KÖHLER: Well, certainly the level of interest rates is low. I have no doubt that presidents of central banks and central bank councils are monitoring the situation regarding business activity very carefully. If they come to the conclusion that inflation is not a point of concern, and activity is the most important point of concern, I think they will see that there is room for maneuver and they will take decisions for further lowering interest rates. But the decision is theirs. I indicate only that, in case things are getting a bit less good than expected, I think that monetary policy should be the first line of defense.
QUESTIONER: Dr. Köhler, I wonder if you would tell us whether you share the view that the well-being of the Iraqi people is, to a degree, held hostage by the differences within the United Nations Security Council over, first, the war in Iraq and then in its reconstruction. What could the IMF do to quickly bring aid to Iraq and, if it is a concern that there is a lack of unity in the Security Council and, by extension, lack of a green light for IMF activity in Iraq, what could you do to bring about that cooperation, as you put it?
KÖHLER: Well, I also should not speculate on this issue. What I agree with you and in your question is that all who are responsible should think how, in the most rapid manner, there is a system in place which helps the Iraqi people to improve the situation to get new hope, to re-establish an economy, and to reconstruct the country. This is my strong advice, my desire to the international community and its leaders. I should not speculate about the Security Council. I do think we all should tell our leaders they should care about the people in Iraq.
What the IMF can do is that we have, on the one hand, good experience. We have worked in Kosovo, in other countries, together with the World Bank, in kind of phases. The first phase in this difficult post-conflict situation was always, rightly so, taking stock of the situation, fact-finding missions. I think this is the most immediate task which should happen, a fact-finding activity, so that we know what is at stake there. I hope that I can, I am able, with the consent of my Board, as soon as there is physical security, to offer to the international community our expertise in fact-finding missions and possibly also technical assistance.
QUESTIONER: What sort of barriers will you face in fact-finding, given how little outside organizations seem to know of what is actually going on with Iraq's economy? There is a lot of data that the IMF would normally have about a country in a bad situation that you don't have. What is the scope of what we don't know about Iraq?
KÖHLER: Well, I can only say from my experience and the IMF's involvement, our last Article IV consultation about Iraq was in 1980, and the last mission of the IMF was in 1983. This, in a way, is the basis of our also statistical knowledge about Iraq. Maybe there is a bit more, but the reality is that we don't know what is the statistical, say, environment regarding economic and financial issues. We need now to make this opening statement, and this means there should be a team, together with the World Bank, going to look. There had been a central bank; there had been a finance ministry. What is available, what is the kind of reliable data and, on this basis, do a first stock-taking exercise.
QUESTIONER: Mr. Köhler, you repeated time and again about the need for international cooperation. In light of that, do you think there is scope for a change in representation within the IMF so that regions that are not as well represented as the G-7 countries could have a greater voice in the IMF's policymaking body?
KÖHLER: Well, the cooperation works with the existing representation, I must say with all due modesty. It is our culture in this institution that we cooperate and come to decisions in a consensus-building process where, at the end, not the voting share is decisive but the joint, say, work and understanding on what the best possible solution is. Most of our decisions within the Fund are not taken based on voting rights or shares. This should demonstrate to you that, say, the kind of share voting rights, in my view, is not the most decisive element for good cooperation and efficient implementation of IMF policies.
Indeed, we will discuss, and I think this is right and appropriate, a review of representation and we are doing this within the Fund in the context of what we call the Thirteenth Review of our quota situation. We will report to our shareholders at the Annual Meetings about the outcome and, in this context, we will also review representational issues.
QUESTIONER: I would like to know what are the issues that still have not been solved on the SDRM discussion. I would like to know if you will recommend to the IMFC a new schedule to push this agenda ahead.
KRUEGER: Well, among the issues on which further work is called for, for a resolution of debt difficulties regardless of which mechanism is used is the whole question of aggregation, the whole question of the relationship between the official and the private creditor, a whole mess of other questions relating to issues such as standstill. So, there are a lot of things in which, I think, further work needs to be done for CACs. We are supportive of that work. We want to go ahead and look at some of these issues, and in the short run that is going to be the next step.
KÖHLER: I would like to add the following to this. We are also practical people in the IMF. I have already said we have not got the high necessary support for changing the statutes, but we are very satisfied that there is broad agreement now to apply collective action clauses, and Anne Krueger has referred to the Mexican case. We are now also, the IMF, actively engaged to spread out collective action clauses so there is no standstill. We are also committed to working on a Code of Conduct in this context. So, we are improving our framework for crisis resolution and we are working on these issues Anne Krueger has outlined, like aggregation, like how to handle official bilateral debt compared to private debt. These are issues independent from the particular tool you have in mind about debt restructuring.
[Whereupon the press conference ends.]
IMF EXTERNAL RELATIONS DEPARTMENT