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IMF Press Conference|
of Mr. J. Boorman
Strengthening the Architecture of the
International Monetary System
October 3, 1998
MR. ANJARIA: Good afternoon, ladies and gentlemen. Thank you for coming. The architecture of the international monetary system is a favorite topic of discussion everywhere these days and you'll be hearing more about it I'm sure, in the days to come. The Fund has been doing some work in this area, and we thought it would be useful if Mr. Boorman, the Director of the Policy Development and Review Department, could share with you a little bit of the context in which this work has taken place in the IMF, how it relates to work elsewhere that's going on, and where we actually are with it. To the left of Mr. Boorman is Mr. John Hicklin, Assistant Director, also in the same department, Policy Development and Review Department. A summary fact sheet has been prepared and hopefully is available to you. I would now like to ask Mr. Boorman if he'd like to make some introductory comments and then we will take questions. This briefing is on the record. Mr. Boorman.
MR. BOORMAN: Thank you, Shail. If I'm sitting up here squinting, it's not from the pain of the prospect of the questions you're going to ask. It's because I can't see under these lights.
Let me talk a little bit about where we're coming from in this area that has been given this somewhat difficult name of "Architecture of the International Monetary System." It involves really any number of areas that we have been working on within the Fund, and of course that are being worked on elsewhere as well, over the last number of years.
These issues were given quite a forceful push because of the Mexican crisis in 1994-95, and they have been given additional impulse because of the events of the past year. And I would say the screen of issues that are out there has been broadened as a result of the events of the past year.
Mexico raised questions about transparency in data. For example, there were debates about whether people really knew what was going on regarding the short-term exposure of Mexico, the famous tesobonos. It raised questions, as well, about the strength and robustness of financial systems. The kind of problems that arose in Mexico and arose in a number of other countries around the world was part of the motivation for the Managing Director's statement--I think, it was at the annual meetings in '95--that the next crisis would be a crisis in banking systems. That was a rather good projection of the kind of problems that, in fact, arose in the end in Asia.
But as a result of those episodes, certainly we in the Fund began to intensify efforts in areas such as the provision of data and the development of standards for data that resulted in the creation of the Special Data Dissemination Standard and then the bulletin board--on which country data is accessible, but more importantly on which you see a reflection of the underlying statistical systems to which countries are working. It also resulted in strong intensification of our work in the Fund on trying to assist countries in strengthening their financial systems. This, of course, involved not just us. It involved very importantly the BIS and the Basle Committee. They are the ones who came up with core principles for strengthening financial systems and banking systems. We in the Fund bring those principles to countries in the context of our Article IV surveillance exercise and, of course, through technical assistance as well.
All of these issues, as I said, have received much intensified attention since the crisis began in Asia last July. We have looked back, for example, at the SDDS and asked ourselves was it enough, is it enough, what else has to be done? We've asked ourselves what is it that's reported to the Fund by countries on a routine basis? Is it enough? Is it strong enough? Are data disclosed frequently enough and so forth? But we've gone well beyond that because as with the SDDS, one is concerned not just to get information but to get information that you know has content and substance to it. It's one thing to call for disclosure, but you have to know what you see.
There were, for example, in the case of Thailand problem loan statistics, but in the end they didn't tell you very much because the criteria that the Thai authorities used to develop their problem loan statistics did not match the criteria that you would typically assume underlay such a statistic. And so when you looked at those numbers, you could easily be misled as to what the situation in the Thai banking system had been. So besides disclosure, you also need disclosure to some kind of a benchmark, and this has raised all the questions about developing better accounting standards. It's also taken us into the area of codes of conduct for disclosure and for the setting of standards. We've developed now a code of fiscal transparency which is essentially a set of guidelines for authorities about the way in which to keep accounts in the fiscal sector, but also how to disclose what responsibility they have to the publics in terms of opening the books, consolidating all accounts into comprehensive fiscal accounts and presentations and so forth.
It's also raised questions about our own transparency. We're calling on governments to be more transparent. We're calling on the private sector to be more transparent, all under these standards that are being developed. But we also have an obligation to greater transparency and we are doing that through much more frequent release of information on our own activities. HIPC papers, for example, now are released on a routine basis. We have put on the Web our external evaluations of ESAF. We are engaged now in an external evaluation of surveillance by the Fund and so forth. There is a lot of activity in this area.
It goes beyond that though, beyond transparency, beyond accountability, beyond all these efforts to strengthen financial systems, to broader questions of how to improve the integration, if you want, of international financial markets. This includes the work that we have been doing for some time now towards an amendment of the Articles of Agreement to give the Fund jurisdiction on capital account transactions in the same way that we have jurisdiction and have had since the beginning of the Fund over current account transactions.
But the newest element I suppose and the one which is most in play in terms of ideas being thrown on the table--but as yet really no concrete moves to implement specific proposals is in this general area of involving the private sector more both in the prevention of crises and then also in the resolution of crises.
You know in some of the previous areas I touched on like the SDDS, like the release of information by the Fund, like more transparency from country authorities on their reserve positions, all of that has resulted to a certain extent in concrete proposals. Some of those proposals have been adopted; some are still under discussion. But there is a great deal of specific content to them. In this latter area of involving the private sector, it's a little bit less concrete partly because it's such a complex area and partly because there are parties involved well beyond us, i.e., the private financial system, which has got to be involved.
But this goes to questions again about transparency and accountability of all the actors in the markets. It goes to questions about regulation and supervision. It goes to questions about mechanisms by which at moments of stress the private sector can be kept exposed in countries rather than run for the exits at the first sign of trouble. And it goes to the very difficult questions of what to do in the context of countries that, in fact, face crises and whether or not it is possible, to use the jargon, to bail in the private sector instead of having the official community bail them out.
So that's the profile. The Fund Board has been working on these issues for quite some time in their various bits and pieces. We have provided to the Interim Committee what amounts to a status report on the state of play of the discussions, decisions that have been taken, additional issues that need to be addressed in the context of all these various areas, and that will be background to the discussion that the ministers and the Interim Committee will be having at their meeting tomorrow.
It's a big agenda. It is, as I say, simply a work in progress and so there will be a good deal more for the Executive Board of the Fund to do when we get guidance from the ministers on this.
This is not a monopoly of the IMF by any stretch of the imagination. What is involved here involves all kinds of institutions and agencies. If you think just about the setting of standards, we don't set standards in very many areas. We establish the Special Data Dissemination Standard and we establish a code of fiscal transparency, but when you get to issues about disclosure, about accounting standards, about bankruptcy laws and so forth, that's well beyond this institution--out into IOSCO and BIS and the UN and so forth. So there are many, many players that have to be involved in this. There are also a good number of fora where these same issues are being discussed. The International Institute of Finance has been discussing these issues and I understand is going to be putting out some views on some of these matters in the next days. Or perhaps they're out already. I haven't seem them yet. And the G-22, the so-called Willard Group, has as well been discussing these issues intensively and will also be putting out its views and perhaps making proposals for the international community in these areas as well.
Why don't I stop there? I'll be happy to discuss any of these issues.
MR. ANJARIA: Thank you, Jack. Just as a footnote to that, the World Economic Outlook, which has been released, has a box on page 29 which also talks about architecture and goes into some detail about identifying the different organizations and institutions that are involved in this area including on banking supervision, securities regulation, insurance supervision, bankruptcy, payment systems, et cetera. So you might want to refer to that for an additional elaboration on Mr. Boorman's last point.
QUESTION: Is it possible to state what is exactly new that we will be doing in the architecture which has not been done already?
MR. BOORMAN: In terms of the Fund's own operations, decisions have been taken to be more forceful in encouraging countries to issue these public information notices at the conclusion of Article IV consultations, for example. It has also been agreed that the Fund will issue this kind of document, call it a PIN, in the context of discussions on its own policy issues. For example, were we to be doing the HIPC initiative in the future rather than two years ago, I presume the implication of this would be that there would have been a process of the release of something like these public information notices in the process of discussing a policy issue like the HIPC.
Again looking to the operations of the Fund itself, there has been the release on the Web of the external evaluation that was done on ESAF, as well as of the internal evaluation. We have asked for comments from people outside the Fund, whoever wants to comment on the recommendations and the conclusions of those two evaluations of ESAF. So it's begun a dialogue I think in a way that we haven't always dialogued with the outside world.
On other aspects of it, the SDDS is set to be modified in various ways--perhaps my colleague John Hicklin can talk a little bit about that--particularly to bring in much more extensive information on country reserve positions. As I said, a code of fiscal transparency has been approved by the Board and will be employed by Fund staff in encouraging countries to follow this code of good practice in their fiscal accounting and fiscal presentation. We have convened an interagency task force again on the issue of data and information to identify what is it that we know about the external debt of countries and what is it that we do not know and how can we, as the group of institutions and agencies that produce and monitor data in this area, how can we get a much better picture.
Just by way of example, the fact of the matter is I would say that virtually no one, or perhaps I could remove the word "virtually," knew the external debt situation of the corporations in Indonesia and certainly knew nothing about the maturity profile of those obligations, the extent to which they were hedged or not hedged and so forth. The remit, if you want, of this interagency task force, is basically to get together the Fund, the BIS, all the other agencies that report and monitor accounts on the external debt side, to say what is it that we all do. Collectively what does it add up to. Where are the gaps? Where are the inconsistencies? What needs to be done to put a fully comprehensive picture together on a timely basis of the external debt situation of a country, not just the government, not just the public sector, but more generally, as I say, going to questions about the exposure of the private sector that arose in Indonesia, in particular?
Not an easy task because what's presented now does not form a good, comprehensive, cohesive whole when you try to put together the external debt situation of a country. And, in fact, many countries don't have much good information about the external situation of their corporations. So that's by way of example of a number of the things where decisions have already been taken or are well under way. And the reserve data question, I would ask John Hicklin to say a word because it's a particularly important one.
MR. HICKLIN: Thank you very much. The question was what's new in the area of the reserves and particularly the components within the Special Data Dissemination Standard which the Fund first set up in 1996. It had been decided before the present round of financial crises that certain components of the SDDS would be strengthened before the end of the transition phase, that is, before the SDDS is fully operational at the end of this year. Specifically, certain proposals would be brought forward to strengthen at least a couple of categories of the SDDS: the reserve category and the external debt category.
And it's in those two areas where a lot of thinking is being done both in the Fund and outside on how those areas can be strengthened. On reserves, the issues come down to coverage as well as timeliness of the data itself and the frequency with which the data appears. The initial prescription under the SDDS indicates that gross reserve data would be made available on a timely basis, but it's well known that having the gross reserve data is only one part of the story and it can indeed be quite misleading if you don't have related information on reserve-related liabilities or contingent liabilities or derivative positions of the central banks of the monetary authorities more generally.
So we've been trying to look at how you draw the line as to the relevant assets and liabilities to look at the broadened reserve position. And for that there's been a consultation process which has been made public--it's been on the Internet--to ask information from compilers and users. And, of course, it's been discussed in other fora. So that is new. And the heightened awareness of it has certainly increased this year with the various crises that have occurred.
QUESTION: How important is the data? I mean a country like Russia's economy was pretty obviously unsustainable before the IMF package and the IMF was probably forced into that by its political masters. My question really is that you can have the data, but if you are being made to lend to countries which are going to collapse anyway, what use is it? And will this problem still exist if we do see the setting up of a large emergency fund under IMF auspices?
MR. BOORMAN: As one of those involved in the discussions about do we or do we go ahead in the context of the July package for Russia, I would dispute your initial proposition. That was a decision of the senior staff and management of the International Monetary Fund to recommend to the Board to go ahead with that package. It was not an easy decision, and I'm not going to go through here all the ins and outs of that decision. It was not an easy decision, but many of the decisions we take at a particular moment in deciding whether or not to go ahead with support for a particular country are not easy. You are always in a position of weighing an enormous number of pros and cons and strengths and weaknesses.
The better informed everyone is, the more likely it is you will not reach the worst situations that require those kinds of decisions. There are genuine questions as to whether or not the Thai authorities, for example, would have been able to walk themselves as close to the edge as they did in protecting the baht by entering into forward transactions if those forward transactions were transparent and if people knew on a timely basis the exposure that they were taking on for themselves.
I think it's similarly true--I can't imagine that the person or institution who put in the 70th billionth dollar of exposure to Indonesian corporations would have done so if he or she or they knew that there were $70 billion in line ahead of them. They did not know that. I similarly wonder whether some of the things in the Korean banking system would have happened if there had been better information on exactly what the reserve position of the Korean authorities was on a timely basis. And the proposition here--and I'm not saying these things to point fingers or find blame--the point is markets can have a very unofficial disciplining impact on country policies. They will have that impact if they pay attention, but they can pay attention only if they have the ability to know what's going on and react to it on a timely basis. And if markets react early to losses of reserves and the authorities can react to that situation and take the kind of measures that are necessary early on to restore market confidence, it can change the way in which some of these situations develop.
So I don't take either of your propositions. One is that we were forced in through our political masters, I think is the phrase you used. And I do believe that better information can make a difference to the way in which country authorities run their policies and the way markets react to those policies. Let me be clear, though. Transparency and better data is by no means a magic silver bullet. In and of itself, it is not going to change the world and change the way financial markets work. But those of us who are working on this issue certainly do believe that it can make a difference.
QUESTION: Obviously the whole idea of financial architecture changing the system has mushroomed since the crisis. We seem to have as many proposed solutions as there are members of the IMF. Do you expect anything more concrete in the way of firming up some of these ideas that are coming out of member countries to come out of this meeting? Do you think that by the time we all go home on Thursday, we'll actually have a better idea of what will be happening?
And then just a second question. I see three things that you say that the Executive Board agreed in July and September on releasing PINs and encouraging the release of PINs, on informing the public when members Article IV consultations are taking place. I don't remember you actually informing us that you decided that.
MR. BOORMAN: I think in the fact sheet there is indication of what is ongoing and what has been already decided. The PINs remain voluntary, if I can say that. Members are strongly encouraged by the institution and by other members of the institution to issue or have issued a PIN, which gives the view of the IMF on the country's policy situation at the time of the Article IV. There is also discussion about release going beyond that to release of the Article IV reports themselves. But that is something that the board has not yet agreed to so many of these things are in a state of discussion and I would say a state of transition.
The attitude of many country authorities in the world has changed dramatically in the last couple of years and we see that very much in the Fund Board. It was a struggle to get to a position where countries agreed that there could be release of these summings up giving the Fund's views on country policy situations. They did so. They did so on one proposition: that countries wouldn't be pressured to do that. And the fact of the matter is I think most of us involved in that knew that even though there was a voluntary process of release of PINs, there would be pressure because once you see one country doing that, the markets expect other countries to do the same. And the fact of the matter is it has taken hold and it has expanded to most of the membership. So there is a process and it's a process that, as I say, I see in each of the discussions we have quite a lot more movement in the direction of more transparency and more openness.
You asked first what specific is going to come out of these meetings? Well, the Interim Committee, you know, doesn't sit down and say yea and nay to a series of 28 proposals, particularly not in an area like that. That has been done or is under way in the Executive Board. So what we are doing is reporting to the committee essentially what the state of play is in the context of this broad discussion on architecture. We would hope to get endorsement from the committee of the kinds of things that have been done and also an indication from the committee of where they want to see priorities and where they want to see action in the future.
That's not a matter, however, of just going back to the Executive Board, because as I say many of the issues that arise under this broad rubric of the architecture of the international monetary system go far beyond the IMF. But I can imagine that there will be push to make sure that there is the contact amongst all the institutions that are touched by these issues. I can imagine that there will be a push that we find the kind of fora that may be necessary to discuss some of these issues that touch more intimately the private sector--for example, in the context of the discussions of orderly workouts of the debt situation of countries that get themselves into difficulty.
One of the fears in the context of those situations is that there are no good mechanisms for organizing bondholders of the country, of the country's creditors. And there have been suggestions now on the table for some time that bond contracts ought to have sharing clauses, majority voting clauses and so forth. What's the attitude of the community? Will ministers speaking as ministers, as regulators and authorities in the financial sector of their countries encourage us to, in fact, go and talk to the private sector and see what can be done faster and better to change the way in which debt contracts are written to permit some of the things that have been suggested?
So it won't be a series of decisions. The Interim Committee is not a decision-making body. It's a matter of getting guidance from them, getting priorities from them and getting a sense from them that the kinds of things we're doing in the right direction should be probably speeded up.
QUESTION: My question is to the Willard Group, the Group of 22. Is this a think tank or is it a political power from outside incompatible with the structure of the IMF? What is your opinion about this group and the future of this group? Will this be a parallel organization to the IMF in competition?
MR. BOORMAN: I think you're making a leap well beyond anything that anyone has in mind for the G-22. The International Monetary Fund is an institution established by international treaty under the Articles of Agreement. We are a funded organization. We have the power to lend money to countries. We have more importantly the power to survey the policies of all member countries and so forth. The G-22 is a group that was convened in the wake of the events of last year to bring together a group of authorities from a group of countries that really were in one sense intimately touched by the events of that period and also who had experience such as Mexico and Argentina from the events of '94 and '95 and to get officials together who had lived intimately through that experience to share some of that experience.
That is the nature of the G-22 and that is what they have done. As you know, following the ministerial meeting of the G-22 in April, three groups were formed--these were very much technical groups--to look, in fact, at the same issues that we are looking at here. We participated in those groups. I participated in one of them. Mr. Hicklin participated in another. We were simultaneously writing papers to our Board in the Fund to discuss these issues. Those papers were on the table when the G-22 discussed these same issues. But they bring a certain different perspective, as I say, partly because of their intimate involvement in these issues.
If you ask, for example, in the context of the group that I was in, is it useful to have ex ante credit lines established with banks such that in a moment of stress you can draw from the private banking community? Well, to discuss that, it's useful to have the Mexican authorities or officials, the Argentine officials, there because they have been negotiating these kinds of arrangements with the banks. So they bring a perspective and they bring an expertise to the subject that's been useful.
I don't see it in any way, shape or form as something that is competitive as an institution. It simply is not an institution. It's a group of officials who have gotten together to discuss issues that they are familiar with to bring some additional wisdom to those discussions and they will be, as I understand it, putting out their reports in the next days as part of this broad discussion that's taking place.
QUESTION: Returning to the question of private sector involvement in rescues of one kind and another. I recall when the question involving the Bank more fully in the East Asian crisis and its resolution was raised here last April. One of your colleagues characterized such an approach as being like asking the icebergs to help rescue the Titanic, which seems to me quite reasonable. What is really needed surely is some kind of rule-based structure where the voluntary action is not required--a bankruptcy proceeding for sovereign bankruptcies in effect. And I would like to raise here the proposal must recently put forward by UNCTAD of a Chapter 11 international system where, in fact, there could be some kind of legal system or legal regulation of standstill on debt repayments and capital outflow and that kind of thing. Is that actually being pursued by you or anybody else?
MR. BOORMAN: People have looked at this issue of international bankruptcy. Academics have looked at it. The G-10 in the context of the report that they put out in 1995 or 1996 raised this issue. Similarly, people like Barry Eichengreen and Richard Portes have written as much as anybody else, I suppose, on the subject.
Both on the academic side, Eichengreen and Portes, and also on the official side, I think it's fair to say that people have walked up to this issue of international bankruptcy and seen problems with a kind of extension of Chapter 11-type mechanism. If you look at Europe, Europe has been working for years to try to harmonize their bankruptcy regimes and they haven't yet succeeded in doing so. If you look at the bankruptcy regimes of the United States, on the one hand, and let's say the United Kingdom on the other, there are significant differences in terms of approach--almost culture--that underlie those regimes. And so the idea that there is a bankruptcy regime that somehow or other is ready-made or could relatively quickly be ready-made to serve an international purpose is probably not realistic.
On the other hand, we have in the Fund--maybe this is an announcement; I don't know--we have in the Fund in the Board extended the policy which we had put in place in 1989 which permitted the Fund to lend into a situation where a country was in arrears to its commercial bank creditors. This was part of what was necessary for the role we were going to play in the Brady Plan. So if a country was in arrears to its commercial bank creditors, we could begin lending operations to support an adjustment program for the country while it entered into negotiations with its commercial banks which in the end resulted in these various Brady deals. The question that's been put on the table since then is what do you do in a world where most of the debt, external debt of a country, is not held by commercial banks? I.e., what are the implications of the securitization of international debt that has taken place in the last years where a country's debt is at least as likely to be held in the form of bonds as it is in the form of syndicated loans from commercial banks? The reason why some of these operations worked in the 1980s, in the context of the Brady Plan, is because you can get the big commercial banks around the table in somebody's office and you can talk to them. You also in most of these situations have contracts that are written with sharing clauses which means that if one bank gets paid, that bank has to share the receipt with all other participants in the syndicate. This significantly lowers the incentive for any one creditor to sue and to cause disruptive action vis-a-vis the country.
Those are the clauses that don't exist in international bonds for the most part. And so it is in the interest of a bondholder perhaps to sue, partly because he doesn't have to share the proceeds of that and also because most bonds have acceleration clauses which means the entire face value of the debt becomes due and payable. So what the Fund has now done is to basically say, all right, in this more complicated world, even with bonded indebtedness, securitized debt outstanding, if a country falls into a situation where the international community agrees it cannot for the minute service its debt and it begins to fall into arrears on some of the claims against it, the Fund will be able to decide if it so thinks is appropriate to the country situation to lend to that country even though those arrears exist as long as the country is engaged in good faith negotiation with its creditors to try to deal with the situation.
That is, in a sense, halfway down the road to where your question leads. If you face a situation like that and if we're lending to the country and the country is engaged in a process of economic reform and adjustment, and if the country is dealing in good faith and the creditors are dealing in good faith with the country in negotiations to find a resolution to the problem, then fine. And that resolution may be a stretching out of the maturities. We don't know what it might be. It needs to be a solution that promises to put the country in a sustainable external situation. The question that leads to your question is will that work or is it possible that you will end up in a litigious situation where the creditors begin to sue the country (if it's the country debt that is at issue) or corporations in the country if, in fact, it's like the Indonesian situation?
And the question on the mind has to be if that situation arises, can the country, in fact, implement an adjustment program? Will its exporters be able to export or will the proceeds be attached? Will the government's own reserves be protected or could they potentially be attached? These are extraordinarily complex issues, both economically and legally, which is why I said in the beginning that at that end of the discussion, really just ideas have been thrown up in the air.
Is there a way to deal with that? There is. There is a provision in the Articles of Agreement of the Fund which permits the Fund to approve restrictions on current account transactions. One possible way of dealing with this, at least conceptually, is to consider extending that amendment to cover also capital account transactions. If the Fund, qua-Fund, under the international treaty were to approve the restrictions that led to the non-repayment of debt, it's possible that that would be adhered to in the courts of the creditor countries so that creditors would effectively face a stay on their claims.
Now, please don't misunderstand me. We are a long way from that, but that is one of the ideas that's on the table. As I say, it's extremely complex and runs into questions about the cohesiveness/consistency of domestic law with what would then be an international treaty. It involves, as all international treaties do, a certain cession of sovereignty. So it goes very deeply to basic issues in international law.
One last point on that. Sorry to be taking so long. There is a basic question there as to whether or not you need it. There is a position that says the probability/likelihood of creditors suing and creating chaos, if you want, for the country's external situation is very limited because the creditors know that they're better off if the country takes the policy actions that are needed for it to adjust and gets itself back on its feet. And in that view, then the likelihood of litigation is small. That is an empirical question that none of us know the answer to at this minute.
QUESTION: Mr. Boorman, when you talk about architecture, that sounds all very reasonable and solid, professional. If we as journalists try to explain this to our readers, the following problems come up. First, there are these people who think when they hear Clinton or the British Prime Minister talking about a new Bretton Woods, they get totally misled about the frame of this enterprise. Second, they have heard since Halifax, since Mexico, so many initiatives. I'm referring, for instance, to this G-10 very good study on financial stability and more supervision. I mean there is the issue; what are the follow-ups? But then they get very confused about when we talk architecture in the sense you are presenting here. They immediately ask: does it make sense to talk about architecture when the basement is breaking in like the U.S. with the biggest share isn't coming up with its quota? And the GAB donor countries like Netherlands or Switzerland, they are facing G-22, and basically they come up as donors and have no rights, what the whole thing is about, what happens to their money?
The other issue is in looking forward, we are talking now about this architecture thing when we had one year $400 billion inflows to emerging markets, now we have zero. We are talking about it when basically the whole thing is in shambles. And when I look forward, I must say I think the IMF gets a big bum rap. I think I disagree with you on Indonesia, in a sense, that when you look at the seminars we had on like ADB, they were talking about maybe 100 billion for Indonesia, or they were talking about 50 billion for Thailand a year earlier. But they were not listening, the actors, I think if we had the cleanest architecture like you and the IMF would devise, there is a problem that the investment banks, the banks don't care, because they are all part of a herd instinct. They cannot operate otherwise, led by competition, and go down as they went down now.
MR. BOORMAN: Is that a question?
My reaction is on several different levels. There is no question that there are problems out there in the way big institutions in the international financial market operate. What you, I think, gather together under the heading of herd instinct. I mean there are basic questions about who gets paid what in these institutions and what incentives does it create, and the fact of the matter is the guys or women who cut deals are the ones who get paid a lot more than the people who do the analysis and raise the yellow flags or sometimes the red flags. There is an in-built bias, I think, in the system that if you are an investment manager, if you miss the boat and you're the only one who didn't get in, and that boat takes off and produces great returns, you're out of here. If on the other hand, you get in and the thing goes belly up, then everybody suffers. You didn't do any worse than anybody else. That's a problem, I think, in the system. And the institutions themselves need to come to grips with some of these questions. But I find it hard to accept the idea that people will not work better with better information.
Yes, you have numbers like 50 billion for Thailand or 100 billion for Indonesia and so forth, but they have no credibility to them unless they are based in some kind of reasonable reporting system that convinces people that, yes, it is there. I have this naive hope perhaps that if you did have these reporting systems and the kind of numbers that turned out to be reality in the context of a case like Indonesia had been published, people would have had a better incentive to go and ask themselves, well, okay, yeah, it really is $70 billion.
Now, next question: is it hedged? What's its maturity? And I think you build the set of questioning once you have the systems sufficient that can bring better information, and hopefully then better investment decisions, to the table.
Your first comment about what in the world can people out there think is going on in light of all the discussion about architecture and issues of that kind? Two comments. One is we're doing two very different things at the same time. We are trying to deal with the crisis that exists in the world economy: Asia, Russia, threats to Latin America and so forth. This is the daily bread and butter, as the managing director's phrase puts it, of institution and the staff of the institution. But we also think that you cannot delay learning the lessons for two reasons.
One is you learn the lessons best when you're fully engaged and you see and have in mind on a day-to-day basis the issues that need to be addressed to avoid some of the problems that you're dealing with on that particular day. The other is the reality that people move on these issues when they're seized with crisis. And so it's important to try to learn lessons and change the architecture as soon as you can.
The other aspect of it is, as I tried to give a flavor of in my opening remarks, that there are some things that are basic, maybe pedestrian. On these data issues, for example, like just getting countries to release and produce better information on their reserve position. There are much more difficult issues that will be ongoing issues: how do we bring better principles about financial sector management to countries in the process of Fund surveillance?
Well, we need the principles. Now we have them from the BIS. We need other standards. That will be an ongoing process. But then there are these bigger issues of how to deal with crises and how to bring the private sector into these issues. And then there are even bigger questions, concerning the structure of the institutions themselves. Mr. Blair, the Prime Minister, is talking about bringing the Fund and the Bank together in various ways. Other people like George Shultz are saying just get rid of the Fund. Other people are saying let's have more financial discussions in the context of the U.N. Security Council because that would make it all more internationally democratic and so forth. That's a very, very big set of issues.
So I think as you write them about them, if you could layer them somehow or other in this way for your audience, maybe they would be able to understand a little bit the way in which they touch each other.
QUESTION: Rather than busying itself with crisis management, a lot of people agree that the Fund should be engaged in prevention, crisis prevention. And part and parcel of crisis prevention obviously is surveillance, and surveillance you can only do if the IMF has teeth. Now, what in your mind are sort of the salient achievements over the past year that you had that sort of sharpened those teeth?
MR. BOORMAN: I think the public information notice is an important part of that. Also, I think, the way in which we have modified a bit the way we do business internally to bring even more continuity to the surveillance process, which means essentially surveying countries clearly on a continuous basis which goes again to the questions of data but goes also to the capacity of the staff of the institution to be able to stay on top of country situations and market developments affecting countries literally on a day-to-day basis.
You know it's fair to say that the world has changed dramatically in the last seven or eight years in terms of the way international financial markets work. Fund staff which are predominantly economists have had to adapt to this new world. When I was a desk economist in the Fund, I didn't come in the morning and look at Bloomberg. Bloomberg didn't exist. And debt of countries wasn't trading the way it's trading now. Well, it's a different world. And we have to do our business in a different way than we did before. I think that's part of it.
The kind of surveillance that goes on at the level of the Board as well is absolutely critical. The attention that the Board gives to countries on an ongoing basis, the staff's ability to bring to the Board emerging developments, particularly threatening developments in particular countries, or developments that can affect particular countries are part of that. As I say, we have established mechanisms within the institution to try to do that better than we have in the past.
QUESTION: You made the point that so far the various aspects of the transparency debate, data standards, PINs, et cetera, they've had to be on a voluntary basis to get agreement so far. With the sort of proposal that President Clinton is outlining, presumably this implies a slightly different view of conditionality. Rather than the Fund providing money provided that a set of policies are carried out, and dribbling the money out over time if they are, we're now looking at a situation where the international community might offer a credit line to a country which is perceived to have had good behavior in the past without a Fund program. Does that mean that as part of that you need to start placing more compulsion on these things like publishing PINs, satisfying the data standards, et cetera, so that you have some sort of formalized benchmarks for who might be eligible to receive this preemptive support, so as to avoid the suspicion that if a country is actually allowed access to this preemptive credit line, it's just for political reasons, for example, because, you know, it happens to be of danger to the U.S. if it goes under?
MR. BOORMAN: A new idea that has been put forward is perhaps an amalgam of a number of things that have been in the air for some time. As you recall, last December we created something called the supplemental reserve facility, which gave us the ability to go into a country that was faced with an adverse shift in investor sentiment and either was seeing a loss of access to markets or even a reversal of flows in markets. We used this facility in the context of Korea, and I think it was quite an appropriate use.
In fact, Korea was back out in the markets by March and was borrowing again through bond issues. That facility is there, remains for use. We also have the capacity through the SRF but also through our regular facilities to provide countries with precautionary arrangements. Argentina, for example, has a precautionary arrangement which means a certain amount of money is committed. The understanding is that unless the country situation worsens in some way, they probably won't be drawing the resources available to it under the facility.
We also had a discussion in 1994, which is probably in your file of Fund papers, on the short-term financing facility--I think that was the label that was given to it--which had this concept that upon certification of the country's policies in the context of an Article IV consultation, perhaps the Fund would commit a line of credit to the country on which it could draw. That discussion never got very far because it has a lot of difficulties in it in terms of how long do you let a credit line run. Situations and policies can change dramatically in weeks and months.
Is it good for the Fund to have a list of countries that have these credit lines and what does it mean for other countries? If you put a country on a credit line like this, how do you get it off the credit line without providing the wrong signal to markets and so forth? I raise this because these are things that, as I think of an amalgam of these various ideas, will have to be examined as the proposal that has been put forth by the United States is explored further.
IMF EXTERNAL RELATIONS DEPARTMENT