Remarks at Bretton Woods Committee Annual International Council Meeting by Agustín Carstens, Deputy Managing Director, IMF

September 18, 2006

By Agustín Carstens, Deputy Managing Director
International Monetary Fund
Mandarin Oriental Hotel—Atrium Suite (Lobby)
September 18, 2006

1. Good afternoon, ladies and gentlemen. Let me first thank Bretton Woods Committee Co-Chairs E. Gerald Corrigan, Bill Frenzel, and Executive Committee Chair Richard Debs for kindly inviting me to take part in the Committee's Annual International Council Meeting. I am delighted to be here.

2. When I last spoke to you in May, I highlighted the IMF's main priorities under our Medium-Term Strategy, which the International Monetary and Financial Committee (IMFC) welcomed in its Spring Meetings in April. In crafting the strategy last year, we felt we needed to take a fresh look at how we achieve our mandate, given the emergence of new economic powers, more integrated financial markets, and the unprecedented scale of capital flows. I am happy to report that we have made progress on a broad front.

Quotas and Voice

3. First, it is important that all our members have fair voice and representation. Our Executive Board has recommended to the IMF's Board of Governors a package of measures to revise the structure of Fund quotas. Quotas essentially determine member countries' voting power in the Fund, and they influence the amount that a member country can borrow from the organization. One element of the package is an ad hoc increase in quotas for four countries that are clearly underrepresented—China, Korea, Mexico, and Turkey. While this is a first step, of greater significance is a broader process of reform that would take place over the next two years. It would involve a new formula designed to capture member countries' weight in the global economy in a simpler and more transparent manner, and further quota increases for a broader range of members. It would also enhance the voice of low-income countries through an increase in the "basic votes" that are allocated to all members regardless of size, and safeguard the share of basic votes in total voting power.


4. We also want to make our surveillance of the international monetary system and of the global economy, more effective. As the world economy becomes more integrated, it becomes more important than ever for countries to think about the effects of their policies on others—and indirectly back on themselves. And so the code of conduct for policies embodied in Article IV of our Articles of Agreement has never been more important.

5. As you know, the IMF traditionally holds annual consultations with members, focusing on their macroeconomic and financial policies, developments in their balance of payments and external debt, and the regional and international implications of their policies. We are taking a number of initiatives to make these consultations more effective—reviewing the Board Decision that constitutes, alongside Article IV, the major foundation for surveillance; streamlining processes and strengthening the setting of priorities; strengthening and better integrating financial sector analysis; working towards a more global perspective; and engaging in more active outreach.

6. As part of this effort, we are now also complementing these bilateral policy discussions by multilateral consultations, which allow us to take up issues comprehensively and collectively with several members. The aim is to provide a means of analysis and consensus-building, and a framework that helps our members overcome some of the hurdles of individual action by emphasizing the benefits of joint action for all.

7. The first multilateral consultation is focusing on narrowing global imbalances while maintaining robust global growth. Our staff have already held constructive bilateral discussions with the participants in the consultation—China, the Euro area, Japan, Saudi Arabia, and the United States. We shall continue discussions over the next few months in a multilateral format. We expect the consultation to produce a shared analysis of the nature and consequences of global imbalances, and a common understanding on policies designed to make things happen in several countries together. We also hope that it will result in better understanding of the role the IMF can play as a forum for implementing the common approach. We expect our Executive Board to discuss the consultation late this year or early next year.

Crisis Prevention and Resolution

8. Another important priority is our role in preventing and resolving crises. In recent years, many emerging market countries have improved their economic management. They have used the benign global environment to improve debt structures and reduce vulnerabilities. However, past episodes of financial market turbulence serve as a reminder that the benign financial market conditions may not last indefinitely. Investor sentiment can change and emerging market countries are not immune to the adverse effects of sharp withdrawals of capital. The IMF, therefore, needs to have the ability to lend in substantial amounts, under appropriate safeguards, to help its members mitigate the risks associated with large and volatile capital flows.

9. In this respect, we want to ensure that we offer services that are useful to our members when they seek our support. Several members—including those from emerging markets—have asked us for a Fund liquidity facility specifically designed for crisis prevention. It would provide high access financing to countries that are active in international capital markets and that have good macroeconomic policies, but which remain vulnerable to shocks. Such a financing mechanism would complement existing facilities and help address the special needs of strong performing members that are making progress in dealing with remaining vulnerabilities. This instrument would also provide a signaling vehicle and commitment device for members and could thereby reinforce policy momentum. It would also provide strong assurances that Fund financing is available on a large scale if needed.

10. Our Executive Board recently discussed these issues, and directors particularly welcomed various aspects of the proposed facility. They saw the example of a "Reserve Augmentation Line" as a good starting point for a balanced design. Here, a member that requests and qualifies for an arrangement under selective criteria could draw a single tranche if capital account-related balance of payments pressures emerged, so long as policies have been consistent with the member's own program. We are giving careful consideration to the facility's design to ensure that it meets members' needs and garners broad support. Design aspects that we are looking at closely include the scale of access, the length of the arrangement, and how qualification and monitoring frameworks should be shaped.

11. We are also focusing attention on how we deal with the complications of debt restructuring and sovereign arrears.Cooperative interaction with creditors offers countries the best chance to reach agreement on restructuring terms that can attract a critical mass of creditors and restore access to international capital markets on a timely basis. In this context, two principles have guided the Fund. The first is to promote a system free of arrears on sovereign debt or those arising from official action. The second is that where debt restructuring is unavoidable, to support strong adjustment and promote speedy and collaborative restructuring. These principles remain appropriate.

12. But recent debt restructuring experience raises practical questions. One is what the Fund's role should be in supporting adjustment programs in debt restructuring cases. Our sense is that the Fund should express a view on the resources the member country can and should make available for debt service. Failure to do so could hamper progress on an appropriate restructuring by leading to disputes over the feasible set of adjustment policies.

13. A second question has to do with what constitutes a good faith effort to resolve sovereign arrears. Here, our aim is to provide the right incentives for a collaborative and predictable process for debt restructuring. After the Annual Meetings, we shall review the Fund's lending into arrears policy to determine how to best accommodate an environment of increasing importance of bond financing for emerging markets; the growing diversity in the investor base; and the changing documentation of bonds—which to an increasing extent now include collective action clauses.

14. The joint efforts of the private and official sectors in the definition of Principles for Stable Capital Flows and Fair Debt Restructuring are an important and welcome contribution to the debate. Further efforts are, however, needed to broaden the consensus on the Principles.

15. As you see, we have a large agenda before us. I look forward to hearing your views and to discussing this further with you in the ensuing question and answer session.

16. Thank you.


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