Transcript

Present:
Mr. Stefan Ingves
Director, Monetary and Exchange Affairs Department (MAE)

Mr. Carl-Johan Lindgren
Senior Advisor, MAE

Mr. Tomás José Baliño
Assistant Director, MAE

Mr. Charles A. Enoch
Assistant Director, MAE

Mr. Roberto Brauning
Advisor, External Relations Department

Saturday, September 25, 1999
IMF Headquarters
Washington, D.C.

MR. BRAUNING: Shall we get started? Good morning, ladies and gentlemen. Thanks for coming to this briefing on the paper by the Monetary and Exchange Affairs Department, Financial Sector Crisis and Restructuring: Lessons from Asia.

My name is Roberto Brauning. I'm an advisor in the External Relations Department of the IMF.

To my left is Mr. Charles Enoch, Assistant Director of the Monetary and Exchange Affairs Department. To his left is the Director of the department, Mr. Stefan Ingves. To the left of Mr. Ingves is Mr. Carl-Johan Lindgren, Senior Advisor in the department, and to the left of Mr. Lindgren is Mr. Tomas Baliño, Assistant Director of the department also.

I will come back from that direction now and state what each one's expertise is--Mr. Baliño has been working particularly in the case of Korea; Mr. Lindgren has been working particularly in the case of Thailand; Mr. Ingves has been working on all of them; and Mr. Enoch has been working on Indonesia.

Let me just state at the outset that last night we had a teleconference with Asian newspapers in Singapore and in Hong Kong, and, unfortunately, one of the news agencies, AFP, broke the embargo. So, therefore, there is no longer any embargo in force, and we will state our unhappiness to AFP.

Also, among the many weighty issues being discussed in these meetings is the recent Asian financial crisis and the efforts it has prompted to move forward in reforming the so-called international financial architecture.

One consensus that has emerged strongly is that a key element of crisis prevention and management is the degree of vulnerability of the financial sector in each of the countries. Almost two years since the start of the crisis in Thailand, we can begin to draw some lessons, and this paper is an effort to do just that.

Again, as I said, there is no longer any embargo, but Mr. Ingves will make a short presentation with an overview of the findings and the lessons of the paper, and then we'll open it to your questions.

MR. INGVES: Thank you very much, and thank you for coming here early on a Saturday morning.

Earlier this year, the IMF presented a paper dealing with the Asian crisis, and in that paper we talked basically about the Asian crisis from a macroeconomic point of view. In this paper, we are dealing with the Asian crisis from a financial sector and particularly from a banking sector perspective, and so that's the issue for today.

Having said that, it's also important, I think, to point out that the conclusions that are described in the paper are preliminary, because this is not over yet. So this is what we have learned so far, but over time there are more lessons to come.

We are also mainly dealing with Thailand, Indonesia, and Korea, and not so much with Malaysia and the Philippines, and the reason is very simple: We have been doing on our part most of the work in the three countries I first mentioned.

I'm going to do this in two sections. First, I'm going to describe to you a common theme that holds for all these three countries, and a common theme which holds almost for any economy where you have a problem in the financial sector. So this is a very general thread describing what you end up having to deal with. And, secondly, based on that theme, I'm going to go through some of the lessons that we have learned and the way we look at this as of today. So first, let's start then with the common theme.

When these things happen, they happen fast, and sometimes they are quite surprising. But when you look at it after, you almost always find that in one way or another there is too much leverage in the economy. Whatever the reason, you build up a bubble. People have borrowed too much, either within the country or abroad; or you have borrowed a lot from both places.

With too much leverage, there's lack of equity. When prices start to fall, the equity is quickly wiped out. You end up with bank runs in one form or another. First because people want to get the money out of the banking system, particularly those who have lent to the banks from abroad;and ultimately you end up having lines outside the banks where depositors want to get the money out of the banks.

In order to stem the runs, the central banks end up putting massive liquidity support into the system, and in these three countries, that liquidity support was not enough to stem the tide. So at the end, during the height of the crisis, in all three cases the governments felt that they had to come up with a blanket guarantee in order to stabilize the situation.

Once you have done that, what also happens in these situations is that if you start with massive liquidity support, you basically create money, and then you need to mop up that money one way or another. So you need to sterilize the liquidity support. And when you have done these things, the next step is to get down to business and really try to deal with the difficulties, and that is what we have chosen to call the stabilization phase.

What does it really mean to stabilize the system? Well, the guarantee stabilizes the system in the sense that it gives the government some time to do these things. And you need to decide the tools. You need to have the legal tools. You need to have the financial tools, the financial muscle in the end to do this. And you need to have the proper institutions to make this happen. And you need to recognize the losses in the banks. Sometimes there is actually sort of a denial phase before people really accept that the price level that you thought was there is not there anymore. When prices drop from 100 to 45 in six months, it takes some time for people to realize that and start dealing with it.

You need to design a restructuring strategy. You need to think about what sort of a banking sector or, more broadly, what sort of a financial sector do you expect to come out of the system at the end of the day, and then you recapitalize-you recapitalize the banks, you improve prudential supervision and regulation, you do a whole host of different things in order to improve the capability of the financial system.

And once this is done, you come to the recovery phase, which means that you reprivatize banks, you restructure corporate debt, you sell bad assets, and at the end of the day, when the whole system has been recapitalized and is normal again, you revoke the blanket guarantee. And at the end of such a cycle, when you do that, it ought to be a non-event because everybody is fully convinced that you have completed the whole cycle.

But it takes a number of years to do this, so these things do not happen in a six-month period. In all countries--and I'm not talking about the Asian countries only; I'm also talking about a number of other countries--it actually takes a number of years to make these things happen.

Now, if you look at this from a financial sector perspective in these three countries, starting with Indonesia, the broad picture is the same. You've reduced the number of institutions in the business. Indonesia is a good case. They started with 160 private domestic banks, roughly half the banking sector, and today they are down to 82 private banks. So half of them have disappeared.

And, secondly, whether you like it or not, usually the government ends up owning a substantial part of the banking sector, if they did not do that before the crisis.

If you look at Korea, this is also exactly the same thing. You had 26 commercial banks in Korea when the thing started, and now they are down to 12 commercial banks, and they had practically no government ownership in the banking sector at all, and today they have five state-controlled banks.

And in Thailand, the picture is exactly the same, if you look at the pie charts.

And since this is not when the whole cycle has been completed, it ought to be possible some years down the line to draw these pie charts again, and when we show them at that moment in time, the state ownership part of the pie should have shrunk. So this is really showing that we are sort of somewhere--whether we are in the middle of the process or not, it's too early to tell, but somewhere on our way. But it has not been completed.

Now, then, based on this cycle that I'm talking about, what have we learned? What comes out of all of this?

First lesson: Take prompt and decisive action to deal with banking problems, including preemptive restructuring actions. Don't wait for the situation to reverse itself. Fast restructuring has advantages over a slow approach. Basically what we are saying is get down and start to deal with it, don't sit around, because if you have a problem, it's highly likely that it is not going to go away all by itself, even if you wish that it would. But you really need to deal with this.

Based on this, we have also come to the conclusion that systemic bank restructuring is a complex, multi-year, microeconomic process with major macroeconomic effects. Many nice words. Basically what this means is that when you clean up a banking system, at the end of the day you deal with individual institutions and you deal ultimately with individuals.

Many banks have many employees, and just to clean up one bank with, let's say, 15,000 people working there, takes some time to do. And you need to have the proper management, and you need to have the proper routines and controls to make all of this happen.

At the same time, it's very clear that when you do these things, they have macroeconomic implications. So the two go actually hand in hand. One is dependent on the other.

Another lesson is that in a systemic crisis of this magnitude, the advantages of a blanket guarantee, if it is implemented properly, can outweigh the disadvantages because the blanket guarantee stabilizes the system, it stops excessive central bank credit to insolvent institutions, and it prevents capital flight, and it gives you actually some time to start dealing with these individual institutions that I just mentioned.

This, of course, always comes at a cost because, given that you produce a guarantee of this type, you also end up with a substantial financial obligation on the government's side, so it doesn't come for free.

Now, also, given the magnitude of the problem, the conclusion is that national authorities should have full ownership of all the aspects of their restructuring effort. And when you do this, the restructuring must take into account legal, institutional, and human resource constraints in each country.

There is no one-size-fits-all in this business. You have to understand what is going on in each individual country; otherwise, you simply end up getting it wrong. And since you need so many thousands of people involved in the process, it has to be a process which is owned by the national authorities; otherwise, you simply can't handle it.

Another lesson is that transparency in government actions is needed to make restructuring credible and successful. The government should announce the different steps and actions to the public at large. And this is not really all that surprising because at the height of the crisis, there is very much uncertainty in the system. And if nobody tells what is going on, it's hard for the markets and also hard for the depositors to fully understand what is going on.

If you are able to tell a credible story and if you down the road deliver what you have told you are going to do, then you reduce uncertainty in the system. And that's why there is such a need to be transparent when you're doing these things.

Also, whether you like it or not, it's clear that a deep and widespread systemic banking crisis has a significant fiscal impact, and this also holds in these countries with a relatively sound fiscal position, and the medium-term fiscal sustainability is affected when you do these things.

However, once the crisis is open, the cost is there; the cost is in the system in one way or another, so you have to deal with it. There is no way around that.

Having said this, I think it's also proper to point out that we are talking about costs, and the way the costs have been described in the paper, we're basically listing how much money the governments have put into the system. This operation is, in reality, spread over time, so all of this does not come overnight. And, secondly, when we are describing the costs, at this stage very little of the money has come back because in most cases the governments have not really started privatizing institutions all that much yet, and neither have they started selling off a lot of bad assets.

So, normally, you'll find that in countries where they have had to go through a cycle like this, the net cost at the end of the day, if this is properly handled, can be far lower than the gross cost, than the money you end up paying out in the early stages of the process.

Now, when you do these things, you need to evaluate the assets. And no matter how hard you try, there's no way to avoid this. There are valuation things that you end up dealing with during all stages of the process. You need to think about how to evaluate assets and loan portfolios of individual banks because that's how you figure out their losses. You need to deal with valuation issues when you sell bad assets to an AMC, and ultimately when the AMCs are selling their assets, you need to think about what the price ought to be so that you also in the end of the day get some money back.

This is a hard thing to do, given that, unfortunately, during a financial crisis we have to live with the fact that markets tend to function the worst when we need them the most. But still you have to deal with it. There is no way around it.

Also, what has become clear in this process is that solving banking and corporate sector crisis must go hand in hand. Banks normally lend money to corporations, and if the corporations have a problem, the banks have a problem, too. So if the corporate sector restructuring lags behind, banking reform will be hampered. These two are dependent on each other. In most cases, you'll find that the bank restructuring has started a little bit ahead of the corporate restructuring, which is not all that surprising since you have to start somewhere. But at the end of the day, you need to deal with both. And dealing with both actually in most cases means that you need to turn loan portfolios actually into equity, because the heart of the problem is that there is a lack of equity when you end up with all of these problems. And corporate restructuring very often means turning loans into equity in one form or another.

Another lesson is that in good times financial institutions should build up a cushion of capital, and supervisory authorities, they should encourage this, and basically it's just saying that if you have more money in the system compared to having less money, you can afford to make some losses in bad times. And that really helps you.

Also, what is clear from going through this whole episode is that it really pays to strengthen supervision in one form or another. But having said that, even if your supervision is excellent, you can still create a systemic crisis. So it helps, but it's not going to take away every thinkable problem. But when you do this, we strongly believe that it really helps to adopt international best practices. It really helps to be transparent about what you are doing. And it really helps to make sure that you have an autonomous supervisory function.

All of this and all the intense work that we have been involved with over the past years has also affected IMF programs, and it's clear today that IMF programs increasingly include structural reforms of financial sectors as a core element. And the lesson is that macroeconomic measures alone are insufficient when there are deep systemic problems. Let me give you an example.

If the banking system is not functioning properly, it is very difficult to technically conduct monetary policy. You need a banking system to have a counterpart when the central bank conducts monetary policy. And if the banking system is a mess, it's hard to conduct monetary policy.

Another lesson is that specific and unique circumstances require quick and innovative responses to the unfolding situations. When you do these things, when you deal with the financial crisis, you are basically dealing with the unknown. You cannot know in advance exactly how the thing is going to unfold. If you knew, you probably wouldn't have had a financial crisis in the first place at all. But once it happens, you have to deal with the unknown.

Finally, the role and the work of the IMF is changing in the face of a systemic banking crisis. We end up dealing with financial sector issues, and we do it very intensively these days in a number of countries.

Thank you very much for listening.

MR. BRAUNING: Very well. We'll open it to questions.

A QUESTIONER: You said one lesson is that one size doesn't fit all, but the IMF has been criticized exactly for that. So my question is: Where do your programs in handling crises diverge, in the very beginning of the crisis or later on when you deal with microeconomic problems?

MR. INGVES: If you look at the microeconomic aspects of this and the different things that have been done in the different countries, you find that the common theme how to go through a cycle like this is the same. But what you do in the individual cases actually can differ quite a lot. And the reason for it is simple. Since the financial sectors differ between countries, you cannot say ex ante exactly how the thing is going to play out, and also since the laws are different and the institutional setting differs between countries.

So one way of describing it is to say that what we tell you about in the paper is how you use a tool box, but it doesn't not say that you use exactly the same monkey wrench every time you need to fix something. Sometimes you might need a screwdriver instead. That is what we tried to describe.

A QUESTIONER: You talked about preemptive moves and fast restructuring as opposed to slow. In that view, do you regret having not shut out--made preemptive moves in '97, say, with Thailand, et cetera, before everything went out of control? Does the Fund regret that?

MR. INGVES: Everything is always easy once you know what happened, but we have certainly done our best and worked very, very hard to make these things happen as quickly as possible. But you can perhaps have some additional comment on Thailand since you have been so deeply involved there.

MR. LINDGREN: Is the question whether this could have been prevented? Is that what you're saying?

QUESTIONER: Partly, but also whether the Fund admits that perhaps it wasn't as well prepared as it should have been and perhaps not having the tool box ready in time or not having a tool box. That's all.

MR. LINDGREN: Well, we can discuss to what extent all these events could have been foreseen. I think once they started to unfold, we certainly were prepared to deal with it. We did it from day one when we were in discussions with the authorities.

What has been described here is actually sort of a set of, a sequence of events and an approach that we have been developing over several years by studying previous cases. This is sort of a--this is work in progress where we have studied the best, sort of the experiences of a number of previous crises, and we are trying to build on that. All the experience that we now have developed in Asia clearly build into programs that we have elsewhere. So it's sort of an ongoing process.

Were we fully prepared for this? I don't think anybody at the time that this happened could have quite--nobody foresaw the speed and the intensity of the crisis that we were facing. When it started in Thailand, it was a one-country case. It quickly became a regional case. You need to then adapt the tools to the circumstances.

A QUESTIONER: If I could have a follow-up question there? So, in light of the lessons that we've learned, China is also attempting to restructure its banks through asset management companies such as Singa [ph], I think. Do you think that the pace which China is doing it is sufficient, for example, to avert a crisis? Or do you think that its deliberate slow pace is adequate?

MR. INGVES: I think that if you look at also what has happened in other countries, it actually takes some time to set up (asset management) companies of various kinds since you have such massive managerial type tasks to deal with.

You'll always find arguments about whether it's going too fast or too slowly, but it's a fact that it takes a number of years to go through these cycles. But what one definitely should avoid is to just stop doing things completely before you have completed the cycle. That is very, very important. You need to understand when the cycle ends, and you need to keep working at it until you are at the end of the cycle.

MR. BRAUNING: Yes, sir? Come up to the microphone. Thanks.

A QUESTIONER: My name is Ram Etwareea. I am from Le Temps newspaper in Geneva. I have a couple of questions for you.

When you're talking about the steps you have to bring forward when there's a crisis, these steps you have put forward in Indonesia, Thailand, and Korea. This is how you work there. So what are you comments about Malaysia? Did you do the same thing?

MR. INGVES: If you look at the steps in Malaysia and if you use this very general description that I started out with, the steps are, broadly speaking, the same. But there's one major difference between Malaysia and these other countries, and that is, if you look at the numbers, they started out with much more equity in the system. So, in that sense, they were in a better position when the whole thing started.

A QUESTIONER: I can go on to my next question. You talk about the changing role of the IMF in the restructuring program. Are you thinking about how to put it into this charter?

MR. INGVES: Well, what we are doing these days is that increasingly we are dealing with financial sector matters in a very large number of countries, and we have also just recently started a project we call financial sector stability assessments. And what that means is that, in addition to a team going to a country dealing with the macroeconomic aspects of the economy, we have started sending teams with up to ten people, financial sector experts, dealing with the financial sector only. And we do this together with the World Bank, we do this with hired experts from various central banks all over the world. And this is clearly showing that there is a lot of focus on the financial sector these days.

And also as part of this process, we are doing a lot of work dealing with standards of various kinds, best practices. We go to countries and, for example, look at how they are dealing with supervision. And by now we have done--I think it's roughly 24--in 24 to 25 countries, we have checked the Basel core principles, for example, which is a standard describing what supervision should look like as a kind of a best practice checklist, what you ought to do.

So there are a number of financial sector initiatives, and in that respect, we deal with the plumbing.

MR. LINDGREN: This is, of course, preventive. This means that these are teams that go out to check vulnerabilities and look at the robustness of financial sectors in countries trying to bring policies, correct policies in place before we have this sort of crisis.

This paper, of course, talks about what do you do when the crisis has hit. But we are certainly moving on both fronts and there is a very, very major effort, as Mr. Ingves is saying, to do this preventive type, as a part of the normal surveillance work of the IMF.

A QUESTIONER: The other day Mr. Camdessus said about widening the mandate of the International Monetary Fund, talking of controlling capital flows and this is what Malaysia has done to get rid of the problem, their way to try to solve the problem. What do you think about it?

MR. INGVES: Well, that is a completely different issue. Today, we are talking about the banking sector. So, it's another press briefing.

A QUESTIONER: I am sorry, I mean if you reply this way then I can also tell you that you cannot say that this is a different issue and you cannot talk about it. We are talking about the banking sector and the crisis and capital controlled flows is an issue in this subject. You cannot just say that we don't need to talk about it.

MR. BRAUNING: I think what Mr. Ingves was saying is that there are two separate sets of issues, and we are discussing this paper and financial sector restructuring and technically capital controls is very different from this. So, if we can move on.

A QUESTIONER: I hope my questions will fit. I have got two questions. One is to Mr. Ingves. What lessons, what conclusions Poland can draw from the Asian crisis? I mean, because you have said that other countries can draw the lessons. And did you have your mission in Poland as well and were you trying to check our banking system? This is the first question.

And the second is to Mr. Baliño, which is, you have mentioned how important corporate restructuring is and, of course, I know you are not a fortune teller but can you tell me what are your projections for Daewoo in Korea?

I mean it is extremely important for Poland because they are major investor in Poland. So, do you think enough was done to repair the financial situation of Daewoo?

Thank you.

MR. INGVES: It is a little bit hard for me to answer when it comes to--

A QUESTIONER: But my questions fit, right?

MR. INGVES: Sure, sure.

[Laughter.]

MR. INGVES: No, no, no. I am not complaining about that, not at all, it is just that I just have been working for 7 months for the Fund but maybe some of my colleagues know more exactly what has been done in Poland, because I do know that a number of missions have gone to Poland.

Generally speaking, what I think is very important in all countries is that stable macroeconomic conditions really reduces the probability of creating bubbles and having a situation where it gets out of hand.

Good supervision matters, stable and good capital base, a proper capital adequacy in the banking sector really helps. And it also helps to think about what sort of a financial sector do you want to evolve in the economy, what markets do you want to develop in the economy. And how does your economy, how does your financial sector relate to other major financial centers that are relatively close by. Because given that we are living in an increasingly open world with free capital flows, there is a need to clearly understand how your banks and your financial institutions connect to all the other institutions that you have around.

I also think that it is increasingly important in all countries to be transparent. Because in the end it is quite simple. If you use other people's money, those other people want to know what is going on. And if things go wrong, people want to get their money back.

Most people actually accept that things do not always turn out the way that you expected from the beginning. But then you have to be able to tell them how you are going to correct the situation, that they are going to get their money back anyway, or perhaps somewhat later.

So, if you do it like that in a transparent way, that really helps.

MR. ENOCH: Just to add on some of the specifics, just on Poland, to what you are saying. I mean the International Monetary Fund was involved earlier on at the beginning of the decade when Poland had banking problems there and there was an adjustment and Poland came out of it at the time. And the IMF, this department was very much involved at that time, and also the lessons from there fed into.

As Mr. Lindgren said, we've been working through the decade on the lessons from past experiences and feeding it from that and from lessons from Poland into how one was able to handle the banking crisis and the response of the Polish authorities.

And more recently, another development which has been mentioned is that the Article IV missions, which go into countries each year, traditionally have had macro-economists looking at the macro side. In the case of Poland this year, there were actually two members of this department, Monetary and Exchange Affairs Department, specifically looking at the banking side because it is an integral part of the overall study of a country. And, so, again that is a reflection of lessons from Asia, really, is the interrelationship between the macro and the banking side.

And in Poland, it is part of the IMF surveillance that now includes people from this department in the general assessment of the country.

MR. INGVES: Now, as to Daewoo.

MR. BALIÑO: Thank you.

I guess the Daewoo issue, in a way, fits in very nicely with the overall discussion we have here. The linkage is between corporate and financial sector restructuring, and, as Mr. Ingves was saying before, this process will take some years to be finished. In a way, I guess, what happened in Daewoo was something that was, I wouldn't say for that specific case, but it was something that was expected from the beginning. And we were pleased that the Korean Government in this case took the decision to deal frontally with the problem of the chaebol, which is that some of its units are unprofitable and it needs a massive restructuring rather than what used to be the practice up to 1997, at least, where probably money would have been thrown at the problem and the chaebol would have been allowed to continue in operation.

As you know, the big problem with the chaebol system in Korea is that some of the units of a chaebol are profitable, but they cross-subsidize others which are not. And, in the past, the banking system was asked or directed to support the whole conglomerate.

Now, in this case, what the Korean Government has done is, it has asked the creditors of the individual units of the chaebols to look in-depth into the problems of each of these units, the viability of them. They use international advisors for many of them to figure out what is the future of each of them.

In terms of what would happen for the future it is perhaps a bit too early to imagine which units will be surviving. But the general impression is that many of them will. It is not that we are dealing with a lot of loss-making units, but there are some that will have to be restructured. We believe many of them will survive with perhaps a different structure than they have now.

But this is a process. The Korean Government wants to expedite it as much as possible and they are talking of trying to sort out at least the outlines of the solution for the Daewoo problems during the course of this year. But we have to be aware that these chaebols are massive institutions, and there are billions of dollars at stake. So, it will take some time.

A QUESTIONER: Just one more. Can you name the divisions which might survive?

MR. BALIÑO: I wish I could but I don't think I can. At the Fund we are not involved that deeply in corporate restructuring. Mostly our colleagues at the World Bank are. But I don't think at this point many people will be able to tell you which ones will survive.

As I say, we don't envision that there will be a wholesale close-down of entities. And if you look at the measures that the Korean Government has taken, even providing temporary support, it is because the general view of the creditors is that many of these entities will be surviving as it is not in their interest to liquidate them at this point.

A QUESTIONER: Just at the end of your opening remarks, you mentioned that as economies in Asia recover, the commitment to restructuring may flag. How can you ensure that you move through all those subsequent phases to get to the point where the system is stabilized and you can remove the blanket guarantee?

MR. INGVES: What happens toward the end of a process like this is that you recapitalize the banks and then if the government has ended up, whether it likes it or not, owning a number of banks, you need to reprivatize those banks. When you do that, you need to have a vision of what the banking sector is supposed to look like at the end of the process, and you need to make sure that that happens.

Because I think that you will find that in most countries and in most cases the intention is not to have a banking sector which is owned by the state, let's say, up to 80/85 percent, which is the case in Indonesia presently. And that clearly is an extreme case, and it is not supposed to stay like that.

The other part of the process is how to deal with the bad assets. How to reorganize the assets you end up holding. How to reorganize the companies you end up owning and gradually sell them or gradually repackage the assets in such a way that ultimately, at the end of the day, you can close the AMC and sort of close the books after the whole episode. And that you need to keep doing, and keep doing, and keep doing until you actually close the books.

And if you look at, for example, the Scandinavian countries, all three of them went through a major financial crisis in the early 1990s, that is exactly what has happened. Today, well, all of them have basically almost completely closed the books after that episode and it is just gone and over with and the companies have changed hands, and the governments are pretty much out of it completely. And, here, the process is exactly the same. But we are not there yet.

I mean given the number of institutions that we are talking about, it is going to take some time to sell the banks and sell some of the bad assets. And I am not surprised that there is a debate in the newspapers about whether a bank was sold too quickly or whether it is taking too much time or whether the price is right or the price is wrong. This is what you would expect at this stage of this process.

A QUESTIONER: But in terms of all the other aspects that you are talking about, the selling of bad loans and privatizing the banks, and the other aspects so the crisis doesn't repeat itself, create more transparency.

MR. INGVES: Okay. More transparency, more supervision, change supervision, in many cases, changing a number of laws. Broadly speaking, looking through the whole financial infrastructure of the country. And the need is to think hard about what it looks like at the end and how that infrastructure relates to something you could call international best practice.

And then you think hard about that and think about where you need to improve. And this is a quite a package in the sense that some of the issues are dealing with corporate finance, because it is buying, selling, privatizing, doing all of this.

But on the other hand, the whole other set of issues are basically dealing with what do you do on the public sector side? How do you organize the legal framework? Where do you put the supervision? Should it be within the central bank, outside the central bank? How many supervisors do you need? What payment system do you have? A number of issues like that.

So, you end up with a whole list of quite disparate things that you need to do. And this is, by the way, exactly the issues that we cover when we do these financial sector stability assessments.

So, that is one way of producing a what-to-do-list, and then it is up to the countries to make sure that these things happen.

A QUESTIONER: I would like to ask a question about Daewoo. Obviously, the restructuring process is still ongoing and there is still huge potential risks. There is billions of debt maturing in November that Daewoo has to repay. I mean in light of this, do you think it is still endangering the banking system in Korea and how do you think that is going to impact economic growth, say, the full year of 1999? What is the Bank's view on this?

And secondly, some of the foreign creditors of Daewoo have been asking for government guarantees on extending new debt? Do you think that is the right approach to take that the government should guarantee debt in these extreme circumstances?

MR. INGVES: Well, what happened in Korea and what has happened in other places is going through this whole cycle, and I am not surprised that you always end up with discussions about individual cases. But it is not really my role to comment on how the Korean Government chooses to deal with an individual case. And that you will find investors in other parts of the world asking for government guarantees, that is not really surprising.

But in the end, you have go to through all these restructuring measures to deal with the issue and in one form or another, at the end of the day, you have to come up with enough equity capital to deal with the situation.

A QUESTIONER: But what about the economic growth aspects and how they all are important?

MR. INGVES: On economic growth, the counter-factual path would be to do nothing, to allow the banking sector in a country to disintegrate completely. The whole argument for the government getting involved in this business in the first place, is to make sure that that does not happen.

So, having said that, my belief is that you end up with higher growth in the economy, doing all these things that we describe in the cycle that we talk about, compared to doing nothing. Because doing nothing would have meant losing the banking sector, and it is our belief that having a banking sector has certain public good aspects to it.

We know very, very well that in extreme cases if you destroy the banking sector completely so that you basically end up with using cash money only, you are unable to make payments from A-to-B or even and in the more extreme cases, when you also destroy the value of money, you end up with barter, and we do know what happens with growth in those cases.

And these are the things that you would like to avoid and that is why governments tend to be involved so deeply in these issues.

A QUESTIONER: I am not quite sure whether this is outside your brief, but to what extent will you be involved in developing capital markets as a means of raising finance in some of these countries as opposed to the banking sector?

Because one aspect that was highlighted by the crisis was the unsophisticated and undeveloped nature of domestic capital markets. Is that one aspect of the work that you will be doing with these countries?

MR. INGVES: Well, that certainly is a very, very interesting issue and one aspect of having a scenario for what do you want to come out of this. And it is my belief that it is a good thing to have a capital market domestically compared to not having a capital market. Because basically that is saying that it is better not to put all the eggs in one basket, and having everything passing through the banking sector.

And I can give you Indonesia, as an example. It is highly likely that over time in Indonesia they are going to develop a local bond market because they have to finance the hole in the banking sector.

But when they do that, they need to issue bonds; they have not had a local bond market in Indonesia since the 1960s, and and it is my belief that it is a good thing for the Indonesians to develop this.

Now, you can always argue that it would have been better to have done it under less dire circumstances, but given the way it has happened, I do think it is a good thing to let this market evolve and I am pretty sure that it is going to do so.

And that is a good structural change that needs to take place, because then on top of that, if you get a government bond market going and it functions properly, the second step after that would be to try to develop a market for corporate bonds.

And if you have a corporate bond market then everything does not have to go through the banking sector and that is, broadly speaking, probably good for the system as a whole.

MR. LINDGREN: It should be added that in all these countries there are major efforts underway to set the grounds for having more dynamic bond markets and stock markets. Because clearly in all these cases, there was enough, perhaps with the exception of Malaysia, there was enough of a concentration of all financing through the banking system. And, so, this is work in progress.

When the pickup comes, it is certainly part of the medium term strategy that a lot of the financing, a lot of the intermediation for the future growth would be coming through these markets.

There are other institutions, such as the World Bank and the Asian Development Bank, who are more involved in this side than we are, on these particular aspects. But this is certainly not an aspect that is being left out.

A QUESTIONER: So, how can we best encourage development of bond markets? Because I understand that actually Indonesia was probably one of the most lively domestic bond markets before the financial crisis broke out. So, in light of this, you know, what moves can we encourage to further develop the bond market in Asia?

MR. INGVES: Well, in the individual countries you need to put in place the rules and the regulations, you need to develop the market and you also have to have the financial infrastructure. And in many cases, you will find that you also need to think through what sort of a legal structure you have.

Just let me mention one issue which always comes back again and again. And that is what sort of laws do you have in place if you want to dematerialize the bonds so that you have everything in a computer?

That is one example of something that looks like a small tiny technical detail, but in practice when you really want to do these things, it is not. Because without really having the proper laws in place, you simply do not know how you issue a bond. So, you need to have the sort of legal capability of creating the instruments.

And you can actually write up quite long sort of technical list when it comes to doing these things. So, what it very much is all about is that you need to think through what do the nuts and bolts look like in a project like that and how do you make it happen?

MR. ENOCH: Just on the specifics of Indonesia, where there are expectations, as Mr. Ingves said, of a large domestic government bond market starting, which would really underpin a revival of the domestic bond markets, there is a lot of institutional work going on, getting the legal structure going and on the computer software.

One of the things which sound very technical is to make sure that you have book entry systems for the government bonds, to have coordination between the different agencies which are involved. And in this, I think, for instance, the capital markets authority in Indonesia has been directly involved in the discussions. It must be recognized that you need to have the market participants, or the potential practitioners involved on their side, so, as the bonds come to be issued, it's really going to be feeding into the market demand to, again, sustain a rebirth of the domestic bond market. So, it is important that the prospective participants have been involved from the start in building up these institutions.

MR. BRAUNING: Thank you very much. I am afraid we have run out of time. If you still have further questions, please, talk to me or to Mr. Shastry in the back of the room; and on capital account issues, Sir, we may be able to put you together with the proper staff in the Fund. So, if you are interested talk to Mr. Shastry or to me, and we will arrange it.

Thank you very much.

[Whereupon, at 11:00 a.m., the press conference was concluded.]