Transcript

September 21, 1998, 10:00 a.m.
Meeting Hall B
IMF Headquarters
Washington DC

MR. HOLE: Good morning, ladies and gentlemen. Welcome to this briefing on the IMF staff's 1998 International Capital Markets Report.

This is a substantial exercise of the staff, and I am glad that this morning we have three of the team leaders here at the table. On my right is Charles Adams, Assistant Director of the Research Department. On his right is Gary Schinasi, Chief of the International Capital Markets and Financial Studies Division, and Don Mathieson, Chief of the Emerging Markets Studies Division, both also of the Research Department.

The briefing is on the record. Its content and the contents of the report itself are embargoed until one p.m. today.

Let me now turn the microphone over to Mr. Adams for introductory remarks, and then we will take your questions.

MR. ADAMS: Thank you, Peter.

Before turning the floor over for questions, I thought I would make a few introductory remarks about the Capital Markets Report.

First of all, we are very pleased to be here for the occasion of the release of the 1998 International Capital Markets Report. As I am sure some of you will be aware, the Capital Markets Report together with the World Economic Outlook exercise are the two major elements of the Fund's multilateral surveillance activities. The International Capital Markets Report is prepared on the basis of discussions with a very wide range of market participants on the basis of our contacts with the official sectors in member countries, and we put together each year this analysis of what we see as the key issues, the key prospects, in the international capital markets.

Like the World Economic Outlook, which will be discussed in a subsequent press conference, the views of the Capital Market Report are ultimately the views of the Fund staff. The report is discussed by our Board, and it incorporates their views, but it is ultimately a staff document.

This year's Capital Markets Report was prepared on the basis of information available through July of this year. As such, it was prepared before the most recent crisis in Russia and the difficulties in Latin America. Given the time frame covered by the report, we have spent a great deal of time on the Asian financial crisis, but also because this is a review of global capital markets, we have covered as well some issues in the mature markets as well as some broader issues in the emerging market economies.

The report at the time of writing referred to a number of risks that we saw in the international capital markets. These were risks that we saw as of early July, before we went to our Board. Several of the risks that we have identified in this report have subsequently materialized, and of course, we are now looking at a broader crisis in the emerging markets than we were looking at only a couple of months ago. And we are starting to see some of the ramifications for several of the mature markets.

Let me just underscore three messages which I think come out of the report in terms of the Asian crisis which I think have more general applicability as we think about the current difficulties in the international capital markets.

The first, and I think a key message from the Asian crisis, is the importance of strong financial sectors, in particular of strong and sound banking systems. In a world in which we are having increasing amounts of capital intermediated through the private markets, there is a key role in terms of having a strong and sound financial system.

The second message is a message I think about opportunities and risks. It is a message about opportunities in the sense of the very large potential benefits that come from global capital markets; it is also a message about some of the risks associated with the high degree of volatility in capital flows and the critical importance of countries having the preconditions in place before they open their capital accounts and the critical importance of getting an orderly sequencing of liberalization.

The challenge, if you like, is to reap the benefits of these markets while at the same time, trying to minimize the risks. A key element here, of course, is the importance with private capital flows of strong financial sectors.

Finally, I think there is a general message that comes out of the report in terms of the role of information and transparency, the role of information in helping markets price risks correctly, in helping markets intermediate capital flows to their most efficient uses. There is a general message, I think, out of this report of the importance of information for markets to function effectively.

So, we are here to cover this year's report. I should say in terms of the more global issues that are being raised at the moment, and which are covered in the report, that you will have the opportunity soon to discuss the staff's World Economic Outlook exercise, which contains updated projections.

Thank you.

QUESTION: Blair Pethel, Bridge News.

On the first page of the Overview, you talk about mature markets having benefitted from a flight to quality, and you talk about "but this continued favorable outlook is not assured," and you give some bases on which you make that projection. Those bases have come true in the time since the report was made, and you said "the consequences for the capital markets of these risks unfolding," which they have, "could be severe."

Could you talk a bit about those consequences and what you see their impact on capital markets being?

MR. ADAMS: As I indicated at the beginning, yes, you are right--many or several of the risks that we flagged in this report in early July to do with the spreading of the crisis and to do with the impact on some of the mature markets have in fact materialized, and the situation now, of course, is more serious than the one we were looking at before.

What we have been seeing in the last few weeks, particularly as regards the emerging markets and looking at the numbers we have for financing, is a quite sizeable and sharp drying up of financing for many emerging market economies. We have seen a very large increase in spreads, and what we are seeing--we can call it contagion or spillovers--is that the problems, number one, have been transmitted and are being felt in other regions of the world--one thinks of Russia, and one thinks of Latin America as well. At the same time, in terms of the mature markets, we are seeing the consequences of a reassessment of risk that is going on. Already, at the time at which we prepared the report, several of these markets were being affected by a flight to quality. They were benefitting to some extent from movements in commodity prices in terms of the impact in inflation, and some terms of trade effects as well.

When we referred in the report to the consequences being severe, in terms of the emerging markets, I think we were looking at a situation similar to that that has now come about, which is clearly much more serious in terms of access to new financing, and which will impose adjustment costs on several of these countries.

At the same time, I think one has to recognize that some of the current pressures we are seeing in terms of financing for emerging markets have in the past--with the appropriate policies sometimes eased back, and the levels of spreads after spiking have tended to retract somewhat. It is still too early to know what will happen in the current circumstances, but when we referred to the risks or the consequences being severe, we were in fact thinking of the possibility of this spreading to the emerging markets and the possible implications for some of the mature markets.

QUESTION: Janet Guttsman with Reuters.

You seem to be recommending to a certain extent the Chilean model of certain curbs on short-term capital inflows. Are you worried the countries starting with that would then be tempted to go further and go for something that Malaysia or Russia may or may not be doing?

And then a second question--you talk about a risk of a large correction in currently high valuations in the U.S. equity market. Has that happened?

MR. ADAMS: Let me address the first question to do with the Chilean capital controls. Let me begin by saying that the primary emphasis we have placed in the report when thinking about the volatility in capital flows in the Asian crisis has been on what we call the fundamentals in terms of strengthening domestic financial systems, in terms of moving to more transparent, market-based systems which are more resilient to some of the swings we see. That is where the primary emphasis lies in terms of the message that we have been sending.

We have recognized--and this actually goes back to the Capital Markets Report in 1995, after the Mexican crisis--that it will take some countries quite a bit of time to strengthen their domestic financial systems to get the financial infrastructure in place to be able to take advantage of the benefits of open capital accounts.

In those circumstances, we have placed a lot of emphasis, as in 1995, on the strengthening of prudential regulations; we have placed a lot of emphasis on the vulnerabilities that come about when a large amount of capital is intermediated through the banking system, and we have put a general message in terms of what we call the strengthening of financial infrastructures.

Now, against that background, certain of our members including Chile have adopted taxes which hit particularly hard on short-term capital, and they have seen these as a useful complement to the underlying strengthening of some of the fundamental conditions. What we have recognized in this report is that there may be circumstances in which some members may and in fact do find it useful to have these sorts of short-term taxes.

We are very mindful of the message that might come from that. We do not view these types of taxes or controls, as we say in the report, as a substitute for the improvements in the fundamental financial infrastructure.

We also have some concerns, concerns that vary in degree across different people in terms of reading the evidence. We have concerns about how long these sorts of controls can be effective, and we certainly would not want to send a message that these types of controls were in any sense a substitute for the fundamental improvements.

Turning to the stock market correction, we were thinking at the time we wrote the report, based on various indicators of price-earnings ratios, that some of the mature markets, not just in the U.S. but also in Europe, looked like they had valuations that were out of line with historical experience and valuations that we could not fully rationalize in terms of looking at the prospects for earnings and the like. So we alluded to the possibility that some of these markets might be subject to correction.

Now, I think in the case of the U.S. and several of these other mature markets, we have, as you have noted, seen some corrections, some fallbacks, in terms of these valuations. These fallbacks have, one suspects, been related to reassessments of earnings and, more generally, perhaps, or more immediately, to some assessments of some of the fallout from what is happening in the emerging markets.

But we certainly were thinking that these high valuations were difficult to rationalize and that there was indeed a possibility, but the message we sent in the report was a message in terms of the U.S. market, number one, that we thought that the financial infrastructure in the market, its ability to handle large trades, its ability to handle large corrections, was there in terms of improvements that had been made subsequent to the 1987 correction; and number two, in terms of our assessment of the impact on the U.S. economy, we noted the strong economic conditions, the fact that certainly at the time we wrote the report, the balance of risks in the U.S. economy was clearly, I think, still on the up side in terms of the risks, given high rates of resource use, of inflation picking up, and it was possible to conceive that this correction might at the margin make some contribution through its impact on wealth and consumption to slowing the U.S. economy somewhat from the hectic rate of growth and taking perhaps some of the pressure off resources.

QUESTION: Daniel Moss, Bloomberg News.

Just a follow-up to the preceding question, and you may have answered this indirectly, but I just want to clarify. Do you still see the risk of a correction in the U.S. equity markets, or do you think the correction which you foresaw two months ago has been and gone?

MR. ADAMS: Well, it is going to be up to the markets to digest the information. If you look at the numbers we had in the report--price-earnings ratios, for example--and mechanically compared some of those numbers with historical averages, you could reach conclusions about the extent to which there may or may not be a correction.

I don't think it would be appropriate for me to speak to the specifics of whether I think a further correction is in store. I would simply note that subsequent to the release of our report, there has been information on earnings which has clearly impacted on stock market valuations. At the same time, I think even prior to this information, some of the valuations were at levels which were not entirely easy to justify on the basis of historical relationships. Now, to go from that to saying the market is therefore overvalued is actually a long jump. One needs to look at how the system has changed, one needs to look at the particular valuations. But it was our judgment at that time that this market, in terms of its valuations, did not seem to be easy to rationalize. Whether there will or will not be a subsequent correction, I wouldn't like to comment on.

QUESTION: Kristi Bahrenburg from Dow Jones.

You mentioned something about the sequencing of capital account liberalization, and I wanted to ask if you could elaborate on that, because there are a lot of statistics in this report about private capital flows, and at the same time, you also talk about problems with the data, particularly in Box 2.2.

So I was wondering, if there are so many problems with the data, then how can you really say for sure that it is clearer that you open the capital accounts to longer-term types of investment like FDI, when the data that you rely on to make that conclusion is faulty?

MR. ADAMS: I think that's a good question. In terms of the sequencing, at a conceptual level, the case the Fund has been making for several years now has been in terms of, as I said, the need for countries to have certain conditions in place before they open their capital accounts.

In terms of the sequencing, at least at a conceptual level, it does rest on the ability to in some sense differentiate and distinguish between different types of capital flows. And at least at the conceptual level, as I said, we have typically regarded flows such as foreign direct investment as tending to be somewhat more stable and as conferring a range of benefits, for example, to do with technology transfer, and in that sense have leaned somewhat toward the idea that in the early stages of liberalization, liberalizing foreign direct investment flows, number one, offers potentially large benefits and, number two, may be less susceptible to some of the vagaries and risks with some of the more short-term, volatile capital flows.

The data is not that good on some of these flows. In a world in which many countries have gotten rid of capital controls, there are obviously problems to do with measuring the total volume of private debt that might be outstanding, and there are also conceptual and data problems distinguishing between different types of capital flows.

I would be the first to acknowledge, one, that some of the conceptual distinctions we have are in practice more difficult to make. Some of the definitions of what is FDI and what is not FDA are certainly hard to make. And it is certainly also the case that there is a degree of complementarity between different flows. One may see FDI flows into a country, and those FDI flows may take place and be accompanied by short-term flows to hedge positions and the like, so there may be a package element to these flows. So there certainly is some blurring of the distinction conceptually, and some of the data we have is not always very helpful to make clear and sharp distinctions

Having said that, I think there is a sense in which particularly some of the very short-term flows do raise some rather special issues, and I think there are also issues about which agents in the economy are actually the key agents in the intermediation of flows. One of the things we saw in the Asian crisis was the role of domestic banks in intermediating large volumes of the capital inflows. This created a rather unique set of issues in terms of the crisis, because it is typically very difficult for any country when major banks are involved in the process--it is difficult for these governments to stand back when these flows are sharply withdrawn. So one of our messages has been not only about the types of capital flows, but trying to see that these capital flows are not concentrated in, for example, the banking system, that they are correctly priced.

In some of the countries in Asia, remaining controls on capital inflows may have in fact contributed to the large role that the banks played. So getting rid of some of those controls would maybe help.

But as a general sum-up on the issue of the types of capital flows, yes, it is blurry, but I think there are still some short-term flows which present greater issues, and I think there is also the issue about where in the system the flows are being intermediated. And I think on both counts there is a need for prudential regulation to be appropriate, both in terms of managing the associated foreign currency risks and in managing the liquidity risks. It was in these areas that we saw some shortcomings in the Asian economies that increased vulnerability.

The bottom line, again to go back to my earlier point, is that I don't think there is any substitute for the improvements in the financial infrastructure that can make economies and financial systems stronger, able to withstand some of these large swings. We have seen amazing changes and developments in the mature markets to increase the resilience of these financial systems. That is I think a clear message.

QUESTION: Barry Wood, Voice of America.

Would you please delineate the most common forms of capital controls, and would you characterize the controls that exist in China?

MR. ADAMS: I don't know if my colleagues could on the spur of the moment speak to the specifics of the most common forms of capital controls. Let me make a couple of general points and then address the China issue.

As you know, many of the mature industrial countries have over the last 10, 15, 20 years substantially eliminated the bulk of their capital controls, and we have also seen in many emerging markets a substantial cutting back of capital controls.

In terms of the situation in the Asian crisis countries, I think there are different elements across some of the countries involved. Korea, for example, at the time of the crisis, still had a heavily regulated capital account by most measures. What it also had, though, were liberalization measures that had been taken in such a way as to encourage some of the capital inflow to go in through the banking system rather than outside the banking system. And to some extent, some of the capital liberalization that had taken place in that country was tending to favor short-term flows over long-term flows because the capital liberalization had left some of the longer-term restrictions in place.

In the case of China, which has been following its economic reforms since the late 1970s, they have followed a generally prudent and careful approach to liberalizing their capital account. There has been a lot of emphasis in the first stages to the liberalization of foreign direct investment flows, and such flows into China in terms of the recorded numbers have been averaging perhaps $30 to $40 billion a year for the last 3 or 4 years. So their liberalization, in terms of the earlier conceptual point I was making, has in fact tended to be geared very much toward liberalizing but not completely freeing up foreign direct investment and in fact maintaining, at least in terms of the regulatory structure, quite strong controls on many other forms of inflows and, I should say, outflows. The sequencing there matches that earlier conceptual model.

But to refer back to another question, certainly in the case of China, there have been concerns about whether the data on the FDI flows in fact is truly capturing foreign direct investment. There are incentives created, when you liberalize one flow versus another, for certain types of flows to be disguised. So it is quite possible, and in fact, I think we have an estimate in the report, that some fraction of what in China is labeled as FDI may not in fact be foreign direct investment.

But in terms of the general state of capital restrictions across our members, our Monetary and Exchange Affairs Department issues a report each year on exchange restrictions which has the details of the particular measures that are still in effect in individual member countries.

QUESTION: Marty Crutsinger with the Associated Press. One of the main criticisms of the IMF in this whole Asian crisis has been a failure of the institution to sound warnings early enough. I just wonder if you could discuss how you see this report, a report that reflects discussions that you were having in July and has rather mild comments about what might happen and has already essentially been overtaken by events. Do you think that this type of report gives ammunition for the critics? And, also, as a second part of that, could you just talk about what you see is the greatest risk now, in particular the possible devaluation of the Chinese currency?

MR. ADAMS: Okay. Let me respond to those questions in turn.

First of all, I guess it's a question of how one reads the report. I thought in terms of the risks we had outlined in the report as of early July I think were fairly blunt, and I think the message, which someone had referred to earlier, about the consequences of some of these risks materializing being severe, was a fairly blunt statement. We have there an elaboration of what we saw as the major risks.

You asked me about what we would see as the major risks at the moment. I would like to turn that into a constructive statement in terms of saying that we would attach very high priority at the moment to movements in Japan to address the weaknesses in the financial sector there. We think that is important not just for Japan's own interest in terms of getting the growth process starting; we think it's critical in terms of the emerging markets in Asia and in terms of the global situation. That risk is flagged very, very clearly, I think, in the report and, unfortunately, we are now a couple of months later, and I think this still remains a key message of the report, and it remains as relevant as ever in terms of a key priority.

You mentioned the criticism the Fund has come under in terms of not giving blunter, more open warnings. Let me make two points.

This is a published document, and I think we are and we did in this document try to articulate the risks. In terms of our bilateral relations with our membership, as I think our Managing Director has said on several occasions, warnings were given in several instances to the authorities in Thailand concerning the evolving situation. Those warnings were made directly to the authorities. There was also some general sounding about some of the risks.

I think as an institution we face a clear issue in terms of how public we are to go with our warnings. There are risks, if one goes too public with warnings, that one might trigger pressures that might otherwise not be there. One has to think very carefully of that.

But this, the Capital Markets Report, is a vehicle in which we do have the opportunity to put out what, as I said at the beginning, are the staff rather than the institution's views, and we do use this vehicle to elaborate the risks. In this case, several of the risks noted have materialized. I think the message in terms of the priorities, though, remains the same. Japan is clearly an important priority.

On whether the Chinese will devalue the renminbi, the Chinese authorities have been quite unequivocal in their statements about their intention for the foreseeable future to maintain the value of the renminbi stable. And I think that's been a repeated statement.

I think when one looks at the situation in Asia, one sees that any country in the Asia Region is in varying degrees affected by the regional turmoil. China is certainly being affected. But the authorities have continued to reiterate this clear statement.

QUESTION: Mike Phillips from the Wall Street Journal. Since you brought up Japan, can you tell us whether you think that they've managed to reduce their risks to their banking system with their most recent initiatives last week?

MR. ADAMS: I think on the question of the situation in Japan, it's a little premature in terms of forming a judgment because we don't have all the details at this stage. But I think the central message remains the same. The Japanese authorities clearly, for their own interest and for the interest of the region, need to move and adopt a decisive plan to restructure their financial system. Exactly how one does that, the details, are decisions that the Japanese authorities will make, and at one level I think the precise details are far less important than actually tackling in a decisive way the problems that are there--recognizing the bad loan problem, that public funds will be required, ensuring that one moves towards a system in which one does not have a lot of excess capacity in the banking sector, addressing the current weaknesses, and at the same time on a more macroeconomic level ensuring through appropriate fiscal measures that domestic demand is kept up.

Those are the key elements, and I think we'll perhaps see this week what some of the details are. But I think the message on the urgency remains.

QUESTION: Flavia Sekles, Jornal do Brasil. You have a pretty detailed description here about what happened to Brazil in October and how the authorities implemented all the measures and then finally were able to restore investor confidence when they took the fiscal measures.

Right now it seems that the same thing is happening all over again to Brazil, except that we're running against an electoral wall as far as implementing the fiscal reforms.

If you could comment, make a comparison between then and now, if lessons were not learned or what happens when reports such as these don't come out fast enough because things have been sped up so much. And also, if you could talk about the ideal level of reserves that a country should have today.

MR. ADAMS: First of all, on Brazil, the reference in the report is to last October--and, of course, to the pressures that Brazil came under, particularly after the spreading of the Asian crisis to Hong Kong and to Korea--not to the events now. As we note in the report, and as you've noted in your question, in addition to intervening in the exchange markets, the authorities moved decisively in terms of interest rates and on the fiscal front. What is different now to then?

I think in a sense you've to some degree answered the question in terms of the circumstances you mentioned. One would believe perhaps that, given the election, that has had some impact on how rapidly the authorities moved. But having said that, the authorities, as I understand it, are starting to move more rapidly in terms of dealing with the pressures that are being faced. And the response is I think in some sense the traditional response in terms of increasing interest rates sharply to raise the cost of people taking positions, and in terms of trying to deal with some of the fundamental concerns are regarding the fiscal position, with measures being taken there to offset to some degree the implications of higher interest rates on the deficit. At the same time I think the Brazilian authorities and, more generally, many of the Latin American governments when they visited Washington a couple of weeks ago for a regional surveillance meeting, have made clear their commitment to keeping their systems open and to pursuing the appropriate policies.

You asked about an optimal level of reserves. I'm afraid I can't give you a single answer in terms of a conceptual or point estimate. I think we've very clearly moved away from the days way back when we used to think in terms of reserves covering a certain number of months of imports. With open capital markets, with large volumes of funds that can move, one has to think of a broader situation. One also needs, of course, to recognize that some governments have access to stand-by lines of credit. We need also, with private capital flows, to think about the assets that the private sector is holding.

We also need, of course, to think about the exchange rate regime, the extent to which a government faced with pressures will allow the exchange rate to adjust versus the extent to which under a pegged rate system or a currency board the adjustment would come in reserves.

So I don't think there can be a simple "one size fits all" answer across this range of circumstances. One needs to look at exchange rate regimes. One needs to look at the country's dependence on private versus official financing. One needs to look at the availability of credit lines. And one puts these together. But there is no single conceptual or numeric answer in terms of the optimal level of reserves.

QUESTION: Rich Millar with USA Today. Do you have any independent assessment of the size of the bad loan problem in Japan? I notice you cite market estimates and, in so doing, seem to cast some skepticism on the official estimate. But do you have any independent estimate at the Fund?

MR. ADAMS: Well, let me just make a general point. It is actually very hard to estimate bad loans in any economy, and particularly in an economy which in the context of the current situation in Japan is currently weakening. One also has to ask what is a bad loan. Is it the nonperforming loans? Does it include loans over which there is a question mark? There's a range of definitions there.

We cite market estimates at the time of our discussions. We talk with private market participants. We talk with credit rating agencies. And what we report here are some of the range of estimates there.

Now, as you're aware, there have recently been some estimates suggesting a higher number, perhaps above a trillion. I think one needs to look at the definition, one needs to look at the circumstances.

I think the key point is that the number is a very large number, that this is a problem that needs to be addressed promptly. That's the key message.

In terms of the bilateral work that the staff does on Japan, they have, like us, talked to a variety of players in the market. They have spoken with the authorities, and they would be trying to reach an informed judgment as best they can about the size of the problem.

But the exact number in this range is probably much less important than the fact that it is a sizable problem that will need to be addressed, and that in addressing that problem one needs to think about the other elements of financial reform in Japan, the big bang reforms, the development of alternatives to banking, the development of capital markets.

QUESTION: Robert Lyle, Radio Free Europe. Can you give us an assessment of what's happened in Russia since your report? There, virtually everything has collapsed. Today you have printing of new rubles, lowering of reserve requirements for the banks, new credits being extended to these banks. How do you assess this whole thing?

MR. ADAMS: Well, we have clearly seen since the time of the report a dramatic deterioration of the situation in Russia. It would take me too long to go into the details of what's happening or what's happened there and the current measures being taken. But, clearly, we have seen a major deterioration in terms of the financial sector and in terms of the financial markets. This will be an area that we will be looking at in next year's Capital Markets Report.

The key elements, I think, have been widely reported in the press. The key issue is how one addresses and stabilizes that situation. That's where the focus I think properly has to be.

QUESTION: Still on Russia. You say that you're going to talk about it in a year's time. I would like to hear a little bit more now about what you think of what the Russian Government has announced and what the possible impact of that could be.

MR. ADAMS: In the World Economic Outlook, which is coming out very shortly, there's a lot of detail on the Russian situation. The Fund is working very intensively on the situation in Russia at the moment.

My remark about the Capital Markets Report was an attempt to make the point that we've covered in this report a certain period of time which we think is an important period in terms of understanding what's going on now. We will in the report next year go into some detail on the developments there.

QUESTION: Are you not prepared to comment now?

MR. ADAMS: Well, if one were to go back to the situation after the time of the Fund program, I think the Managing Director has spoken quite clearly in terms of the Fund's reaction to the domestic debt restructuring that was undertaken. We stressed the importance of cooperative solutions to the sorts of problems Russia faced. We are also recognizing within the internal debates about the architecture of the international monetary system the difficulties that countries confront in certain situations, and we're trying to look at that architecture. But I think we have spoken unequivocally on how we feel about this unilateral-type debt restructuring.

On the policy requirements at this time, I think we have also spoken quite clearly to the importance, notwithstanding the pressures Russia is facing, of macroeconomic stability, the importance of avoiding situations where there is any monetization of the arrears and the like in the system, the importance, if you like, of restoring stability very quickly, the importance of not moving backwards on reforms.

So that is where I would go in terms of the message we've sent. In terms of the outlook, that will be covered in the World Economic Outlook exercise. And I'm sure that during our forthcoming Annual Meetings there will be plenty of opportunities to talk about the situation. I would just make those two points very clear, macro stability and the concern about this involuntary debt restructuring.

QUESTION: Marty Crutsinger with AP again. In a speech today in New York, the British Prime Minister is making a variety of recommendations on what the IMF and the World Bank should do as far as reform, and one of them is a partial merger of the IMF and World Bank. Do you have any comments, reactions, on how you're going to handle those suggestions and your thoughts on them? In particular, one suggestion was fuller disclosure of these giant hedge funds, their holdings in particular countries. If you could speak on that specifically?

MR. ADAMS: Well, let me say, first, that we are not privy to the specific suggestions that will be made in this forthcoming speech, so it's hard for me to address those. All I can speak to, as I think you're speaking to in your question, are some of the things that have been suggested in the press.

Of the two particular things mentioned in press reports, there was first a reference to a partial merger of the World Bank and the Fund. At the present time, in the areas in which we cover common issues and where there are important synergies, our two institutions are clearly enhancing collaboration. The financial sector is one of those very important areas.

On the second point, about disclosure, you probably know that we completed a study of hedge funds earlier this year. We looked at the evidence available at that time on the activities and operations of hedge funds and discussed their possible role in the Asian crisis.

One of the important conclusions of that study was that while hedge funds did appear in the case of certain countries--for example, Thailand--to have been shorting the currency, in other cases like Indonesia, they appear to have been on the other side. While hedge funds did play some role, there are many other players in this system, including proprietary trading desks of the major investment banks.

In that report, we looked at issues to do with whether concerns about the hedge funds should lead to greater regulation. I would make two points there. First is on disclosure requirements. I think you need to recognize that the hedge funds operating, for example, in the U.S. are already subject to disclosure requirements. The offshore funds would escape some of those disclosure requirements. There may be an issue there, as we said in the report. But I think more generally--and this is perhaps something that was raised in connection with at least the Financial Times report on the U.K. proposals--we're dealing with players in a system that are highly leveraged. Hedge funds are highly leveraged. There are other leveraged players in this system as well. There may be some issues that come up with the amount of leverage in the system. In terms of our initial hedge fund study, we discuss some of these issues, some of the options for dealing with them.

I indicated in one of my earlier answers that one of the lessons from the Asian crisis concerned the role of transparency in information. I think that's a general point: markets work best when there's information there on which they can price and make the appropriate decisions.

But in terms of the general issue about the hedge funds, I'm not sure whether it's always productive just to focus on one player and possible controls there. You need to look at all the players in the system. You also need to recognize that if you were to control one subset of players, another subset might emerge.

QUESTION: Daniel Moss from Bloomberg again. I have a question relating to page 150 of the report. It's the second-last page in the conclusions chapter. I think it's the fourth-last paragraph. There's a discussion about transparency in information. There was one sentence there which intrigued me. It's in the top right-hand corner of page 150, where you say, "It remains to be seen in practice to what degree large swings in capital flows will be significantly reduced by making better information available to investors."

I was curious about this. One of the big themes from the multilateral lenders in the past 12 months has been the need for greater transparency. I wonder, are you qualifying this at all?

MR. ADAMS: Well, I think one can read that sentence in two ways. One is a frank, a very frank, statement that one clearly needs to see what happens. The other, and I think the way you read it, is there's perhaps a certain degree of skepticism. But the key point that we're making, I think, is the following:

We know markets have trouble working and pricing risk when the information is not there. And I certainly think that making more information available will help to get a better system in place in terms of pricing risk, particularly in terms of cross-border lending.

Now, is this a sufficient condition? With the information there, are we never going to have swings in flows? Are we never going to have problems of lack of differentiation? I think history speaks a lot. One goes back. Financial markets in general, cross-border flows in particular, are subject to swings. There are circumstances, situations in which new information arrives in which there are abrupt changes in prices.

I would think that the emphasis we're putting on transparency is critically important in terms of trying to address one of the factors that may lead to excessive volatility, but it's not going to be the complete answer. And that largely underlies the other message in the report, which is a message about the need to build strong financial infrastructures. You need to have economies, you need to have financial markets that can withstand these large swings. To say that is, I think, to acknowledge that one is going to see the swings. But one does want to make as much information available as possible, to allow for the correct pricing, to allow for differentiation. I think these things will certainly help.

And I should also say that when we're talking about information and transparency, we're talking now just about markets having access to this information in terms of their pricing. We're also talking in terms of the experience in Asia as an official institution which comes in after a crisis and tries to provide assistance. Having information about usable reserves, levels of debt, et cetera, is very helpful. It's also critically important, I think, for national authorities.

One of the consequences of many countries moving away from capital controls is that quite a few countries simply don't monitor closely short-term private debt, international debt. So there are holes in information. Having that information I think is critically important as countries operate in the system in terms of knowing their exposures and vulnerabilities.

So, in short, information is important. Making it more transparent and systematic will have enormous benefits, but I don't think one should presume that these problems are going to go away.

QUESTION: How do you analyze the intervention by the Hong Kong Monetary Authority? Are there risks or dangers, particularly in the restrictions on the derivatives market?

MR. ADAMS: Let me say that I think would certainly see risks in the interventions by the Hong Kong Monetary Authority in the same way as I think they themselves have acknowledged the risks. The risks are twofold: one, Hong Kong has a very clear, established reputation as a free center in terms of free markets, so there's a risk that these measures may be interpreted as inconsistent with that; and, secondly, in terms of the particular interventions, they themselves raise risks.

The things I would have mentioned would actually have been in terms of the direct interventions in the stock market in terms of stock purchases and the like, because there's a clear risk there in terms of accumulating those claims.

In terms of measures that have been taken in the futures markets to do with margin requirements and the like, these are some of the things that other countries have followed. Some of the measures in terms of regulations to do with the sale of forward positions, some of those are actually similar to what some other exchanges have taken. And those, of course, are measures not from the Hong Kong Monetary Authority but from their securities regulators.

I think there are clear risks which the authorities acknowledge in terms of this approach they've taken. But I think that the HKMA has established itself with a long track record. The currency board system in Hong Kong, China, was established at a time of great turmoil. It's withstood a lot of pressures. It's a strong system. There are clearly risks in this approach, but I think they are recognized by the authorities.

[Edited transcript]