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IMF PRESS BRIEFING
"TRANSPARENCY, STANDARDS, AND CCL"
BY
JACK BOORMAN, DIRECTOR,
POLICY DEVELOPMENT AND REVIEW DEPARTMENT

Monday, April 26, 1999
2:30 p.m.
IMF Headquarters, B-702
Washington DC

MR. ANJARIA: Good afternoon, ladies and gentlemen. I would like to welcome you to a press briefing by Mr. Jack Boorman, Director of the Policy Development and Review Department of the IMF, and to his right, Mr. John Hicklin of the same department.

This briefing is on the record, and I would like to start by saying that I apologize for having to postpone the briefing on standards and transparency that was scheduled originally for last Thursday. I am glad, however, that we could find time on Mr. Boorman's schedule to be able to reschedule that for today.

As you know, a document called "Experimental Case Studies on Transparency Practices" has been made available to you and posted on the Fund's external web site. Since then, the Executive Board has completed its discussion on Contingent Credit Lines (CCL), about which you heard an announcement from Mr. Ciampi and the Managing Director yesterday.

The details of the CCL have also been made available to you, and so we would like to take advantage of these subjects and ask Mr. Boorman to give an overview and then be available to answer any questions that you might have in these areas.

MR. BOORMAN: Thank you, Shail.

My apologies as well for canceling at short notice that press conference last week, but we were busy completing work on the CCL in the Board on that day.

Shail has mentioned two things that have been released. One is this book on experimental case studies on transparency reports, and the other is the press release put out after Mr. Ciampi's and the Managing Director's announcement yesterday on the CCL. Some time last week, a press information notice was put out on transparency issues as well, and I am happy to speak to any of the issues that are involved in the three documents.

What we are seeing here is architecture in action, I guess. Everything that we are talking about here has been the subject of the architecture discussion. These are the various elements that you see, and they begin to come together. Transparency is one element of the architecture, but that affects the others as well.

Two weeks ago, for example, we put out the papers that were done on involving the private sector in forestalling or resolving crises, and we put out as well in the same pamphlet the summing-up from the Board discussion which was held on that issue. So, as these issues go forward, including transparency, they begin to intersect and affect each other.

You will see more of this in the days ahead. I hope that after the Interim Committee discussion tomorrow, it will be possible to put out a fact sheet of sorts that will try to give a comprehensive picture of all of these various elements that are being discussed under the rubric of architecture and where they stand; and by that, I mean a fairly comprehensive one across all the elements, not just those that touch the Fund directly, but the areas that go to the work of the other institutions as well.

Let me just make a few remarks on each of these three documents that you have. On transparency, the Public Information Notice (PIN) that was put out last week basically reports on the decisions that were taken by the Board to press this issue a bit forward, and there are two aspects of it. One is transparency in our own operations, and that is what you are seeing in the release of this standards report. That is what you saw in the release of the private sector paper, and then there is transparency as well regarding the Fund's views about the policies of member countries.

The Board's decisions in this area are the following. They decided to continue with the policy of releasing PINs on Article IV Consultation discussions. This is something that has now been under way for some period of time--I think since May of 1997. In fact, it is an initiative that has taken flight, if I can say. Something on the order of 70 percent or so of Article IV Consultations now in fact end up with the release of a PIN.

They are going one significant step beyond this for the next 18 months in a project that will involve on a voluntary basis the release of the staff reports that are prepared as background to the Board's discussion for an Article IV Consultation. This will be done by countries that want to opt into this, and it is being done this way to try to get a bit of information about the issues that it raises, the kinds of problems that it may raise, and whether or not it is something that the institution should continue with.

It is also agreed that if a staff report is put out, and presumably a Public Information Notice summing up the Board discussion, the authorities may want to put out a statement in response to the discussion that took place.

Beyond that, in the context of the use of Fund resources, the Board has also decided that it should be presumed that when a country has an arrangement with the Fund, the country itself will release to the public, to the markets, the letter of intent, the memorandum of economic financial policies, the policy framework paper, whatever it is. The presumption basically will be an expectation that if it is not done, the member in requesting those resources ought to explain to the Board at the time of the discussion about the arrangement why it thinks it cannot release those documents. So it will put quite a lot of incentive into the system for such release. At the same time, there will be a release of something that will be called a Chairman's concluding remarks from discussions by the Board in the context of these use-of-Fund-resource discussions.

Lastly, of course, it is agreed that the Board could continue to release public information notices on policy issues, together and in most cases with the staff papers prepared for policy discussions--as you have seen in the last weeks.

So much for transparency.

Let me now say a few words about the work on standards, which has filled this volume that has been given to you. This work goes well beyond just the work of the IMF, but the Fund has been asked--originally in the report of one of those subgroups of the G-22--to prepare transparency reports for member countries. This is a request to the Fund because of the mandate of the Fund in surveillance. It fits with the responsibilities of the institution.

The issue, of course, is what is a transparency report. That is something that, as you will see from this document, is an experimental process which is now under way.

A basic issue we confronted originally was do you simply assess the extent to which a country is transparent; for example, accounting. Is the question, does the company, does the bank, does the finance ministry, does the relevant institution follow accepted international accounting standards? Do you answer that question by simply saying it does not produce a balance sheet and a profit-and-loss statement, for example, or do you have to go deeper? Do you have to ask what accounting standards do they claim to be following? Do you have to go even deeper than that and say what are the processes by which you are assured that they are following those standards? So it goes beyond and deeper than the word "transparency" itself. This is an issue that is going to be resolved, how deep one goes in these areas only over time.

Similarly, there is a question of what standards do you assess, and for us, we have a tight connection to four of the standards and codes that people are looking for information about.

The SDDS, for example, the data standard which has been developed over the last number of years in the Fund, that is clearly our standard. We are the ones who encourage countries to adopt the standard. We are the ones who assess the extent to which countries may or may not be in compliance with the standard.

Similarly, on the code of conduct on fiscal policies and the code which is being developed on monetary and financial policies. We also have a tight connection to the Basle Core principles. They were developed in the Basle Committee on Banking Supervision, but it is the Fund that really brings those standards, those principles, to countries in the context, again, of the Article IV surveillance process. Because of that connection, it is seen that that, along with the other three standards, as being in what we call the core areas of the Fund's responsibility.

The unanswered question is what about all the other standards one wants to look to, accounting standards, auditing standards, corporate governance, bankruptcy, and so forth, and that is an unanswered question.

You will see in the reports that have been prepared for the countries that we have worked with so far different approaches to these issues and different degrees of coverage. In the next wave of experimental transparency reports we have to find ways, test ways to bring others into this process. Now, there is a problem there. Many of the standards which exist, such as accounting standards, are put out by bodies that do not do monitoring. They do not do assessing, and so there really is no one and there is no institution out there that one can turn to to do this task. We are going to have to work with the standard-setting bodies themselves in order to be able to see how best to proceed in this area.

The other major question is how much of this is self-assessment, how much of this is done by, let's say, the country itself in proclaiming the extent to which it adopts, implements, and assists on performance on the standards, and how much of it should be done by an independent body like the IMF. How do we marry in a constructive way the two sides of this self-assessment and independent assessment. You will see different approaches to that in the book that has been released. One approach by the Australian authorities was to do a very extensive self-assessment in which Fund staff participated, but then we also provided commentary on that assessment. The experiments with the U.K. and with Argentina were of a different nature. We have got to find our way through this process with a greater set of experiments.

The third topic is the CCL, the contingent credit line, which was decided on by the Board on Friday evening and became effective today. As Mr. Anjaria said, the MD and Mr. Ciampi announced this yesterday, and immediately the press release, the decision of the Board, and this summing-up of the Board discussion, were released to the public.

Let me just say this is potentially a fundamental change in the way the Fund operates in the support of member countries.

You may recall, those of you who have been keeping a watching brief on the institution for a while, that there were discussions in 1994 on something called a possible short-term financing facility. The germ of that idea was basically to have a line of credit available to a member. But that discussion never went very far. It got derailed by an inability to answer a number of questions that had to be addressed in the context of developing a facility like this.

I think the difference between then and now is that obviously we have seen the crisis and we have seen contagion. We understand it better. We understand the threat of it better. There is more anxiety, I would say, about it, and there is a desire to be able to do something to protect member countries from contagion, which hits countries not because of actions or policies of their own doing, but because of pressure that develops in capital markets in other countries or because of developments in other parts of the world.

I think we understand this kind of mechanism better than we did before. We understand the prerequisites in domestic financial systems of opening to global capital markets. We can see the needs and requirements therein better than before. I think we see debt management from a different perspective than we might have seen it before the crisis, and in a more detailed way and with a better handle, I hope, on the innovations and the new instruments that have been put in place in capital markets.

There is all this work on standards which ought to go to better performance of member countries, better transparency of member countries and their policies.

There is the issue of private-sector relations, again, on which a lot of work has been done in the wake of the crisis of the last couple of years.

All of these different elements of architecture in some sense come together in the CCL. They are the eligibility criteria for the CCL.

So what we are saying basically to members now is that if you can show adherence to these criteria that are defined in the decision and in the summing-up that has been distributed to you, the Fund will be willing to commit resources to protect the country, to help in the event that it should be hit by a bout of contagion in the capital markets. The quid pro quo for that is the insistence on good policies, on adherence to standards, on relations with private sector in debt management, and on all the other matters that are listed there. So it becomes a rather comprehensive view of how to be in a position to help member countries if they face these kinds of problems.

QUESTION: First Deputy Managing Director Stanley Fischer talked a little bit about the CCL this morning and how some of the industrial nations may not even qualify under certain data standards. I am wondering if you can elaborate on that as to what countries do and do not live up to many of these transparency requirements and data provision standards.

MR. BOORMAN: If we had a transparency report for each country in a way that is envisaged by some, I would be able to answer that question. We cannot answer it in terribly good detail right now, at least not across the whole array of standards areas that are being looked to here.

Some of the standards are new, the Code on Fiscal Policy, for example, and the Code on Monetary and Financial Policies which is just nearing completion. These are new standards. They are being brought to the membership, and the membership is reacting in a way to put these kinds of standards into practice.

The SDDS, of course, has now been with us for a number of years. There are 47 countries, I believe, that now subscribe to the SDDS. The transition period, which was until the end of last year for the SDDS, has passed, and the Statistics Department in the IMF does an ongoing monitoring of certain aspects of countries' adherence to the standards that are laid out in the SDDS.

Similarly, Fund missions in the context of Article IV Consultations look at the countries' compliance with adherence to the Basle Core Principles. So there is a variety of information available there.

When we get into some of the other areas, like accounting standards, auditing standards, bankruptcy, in some cases we are talking about standards yet to be developed, bankruptcy being one area. In another, we are talking about areas where standards have been developed, but there may not be a universally accepted international standard. Accounting is an area like that. The standard in the United States is not the same as the accounting standards accepted in a number of other countries.

So there is going to have to be a feeling of one's way through this. I hope that what we can do, to a certain extent, is marry these experiments on transparency reports with prospective countries that might be interested in a CCL, so that we and the country can inform ourselves better on just where they stand in that process.

QUESTION: I understand you have limitations on saying who is going to be a candidate for the CCL, but the rumor is big outside that Argentina is among--it seems to be among the first candidates. Could you please comment on that?

Also, how much money could a country like Argentina receive on the CCL, and could that be enough to really avoid contagion? What if it fails?

MR. BOORMAN: The decision in the summing-up that you have before you lays out the eligibility criteria for the CCL in rather clear detail. It is a matter now if countries want to avail themselves of this facility for them to request, and for them and us together to assess the extent to which they meet those eligibility criteria.

It is no surprise, I do not think, that Argentina's name would come up as a possible candidate for this. It is well known that Argentina has had an arrangement with the Fund under which performance has been quite good for some time. It is being used only in a precautionary fashion, which is one of the thoughts behind eligibility for this facility. It is also well known that Argentina has made a lot of progress over the last number of years in reforming its banking system, which again is one of the reasons Argentina is one of the first three case studies that was done in the context of the transparency reports. All of that is obviously to the positive, and I think that is why Argentina's name surfaces.

How much could Argentina get, or how much could any country get? Again, the decision in the summing-up says there are no access limits, as is the case for the supplemental reserve facility, but there is an expectation that the normal range of access to the Fund's resources provided under the CCL will be between 300 and 500 percent of quota. But it is an indicative guideline. It is not a hard limit.

Is that enough to avoid contagion? That is, needless to say, a difficult question. If you look to some of the eligibility criteria, though, what one is doing is trying to limit what would be the impact of contagion by limiting the risk that the country exposes itself to. How does it do that? It does it by managing its debt, and I would say all debt, domestic debt and external debt, in a way so as to limit its vulnerabilities. It does it by holding an appropriate level of reserves. It does it by limiting short-term debt, which could be a claim on those reserves. It does it by the way it develops its relationships with private creditors, and in fact the kinds of instruments that it puts in place. Again, why does Argentina's name come up? Because it has these new Contingent Credit Lines with the private sector in place.

The more emphasis that is placed on that, obviously and hopefully, the lower level of risk to a given situation of contagion. It is important that the structure of the debt be such that the vulnerability is seen to be limited, and that mechanisms are either in place or being sought, which would help to bring the private sector in, to maintain its exposure or maybe increase its exposure at a moment of contagion.

QUESTION: Could I ask about the rationale for having a two-stage process to activate this commitment? Doesn't this mean that you are not actually going to be sending a signal to the financial speculators not to attack a country with one of these credit lines? It seems almost like sort of sending somebody out with a gun to defend themselves against a robber, but not giving them permission to fire it.

MR. BOORMAN: They have to come back and request bullets, which are the resources that will be provided in the context of this activation review.

Why is it done that way? There are always two things that lay behind the operations of the Fund. One is to assist the country with its balance payments problems. The other is to protect the resources of the Fund. That is the whole nature of conditionality, and what the Board and the institution is trying to do in this case is to find a way to apply the eligibility criteria by the standards, by the demands that are put on the country in order to qualify for this facility--to take the expectations and prospects for the country's performance out where you begin to worry less about conditionality in the sense of something that is laid down at a moment of stress and crisis on a forward-looking basis, and you put more weight and reliance on the track record of the country, the way in which the country has managed its policies, the way in which the country accepts standards that are being laid down by the international community.

So you shift the balance a little bit. But there is not a disposition at this stage, even on the basis of a good track record, to simply say fine, here is 300 to 500 percent of quota, come and get it when you want. The international community in the form of the Board wants to have a check on that. But if you look through the summing-up, you are going to find language in there about how the Board should act speedily to review the situation of the country, if the country requests the use of resources under the facility, that they should bring to the Board expeditiously consideration of this review and so forth.

So a combination of the prerequisites which the country will have satisfied with what I think is a commitment on the part of the institution to deal as expeditiously as possible when a situation of contagion hits is an indication of the way in which the institution intends to respond to a country that finds itself in that situation.

QUESTION: Could you perhaps tell me, wouldn't your work on transparency be immeasurably helped if the G7 nations, without exception, agreed to join the Voluntary Code and publish all the necessary data to your standards now?

And secondly, if this is a lull in the global economic situation, wouldn't it help if the idea was given more credence that banks were made to look way beyond their initial investment, as you said with countries, as a matter of depth, going right to the end so that they can assure their main regulator that they know what risk there is to their investment?

MR. BOORMAN: The first of your questions. We have one of the major industrial countries, the UK, in this book. The UK volunteered early on because of its role in propagating the benefits of transparency, and the major changes it has brought about in a number of its systems, the fiscal system, announcements of discussions that take place between the Chancellor and the Governor of the Bank of England and so forth. The UK has moved enormously in a number of years in this direction, and so it was willing to volunteer as one of the first countries to be judged, if you want, in this experimental process.

And it is interesting that it did not wait until the idea of transparency reports. We have been moving in this direction of talking to countries about these issues and examining them in the context of Article IV consultations, and this was done in the discussions with the UK for the Article IV consultation, which were held, I think, in December.

And so when the idea came up of doing a transparency report, in fact, the staff that had done the Article IV consultation had been through many of these issues with the UK. And so I think that is evidence of the fact that they are, in fact, signing on to this and signing on in a way that they are welcoming presentations by themselves of the extent to which they meet these standards and also some assessment outside, and we intend to push that further.

We have volunteers for the second wave of transparency reports. Countries have been indicating their willingness to partake in this experiment, and some of them are, in fact, amongst the other G-7 countries.

I am not sure I understood your second question. We are in a lull. I hope it is not just a lull. I hope it has more staying power than that, but can you rephrase it?

QUESTION: It was an idea that was floated in October that apparently what had arisen out of the crisis was a lot of banks, let alone countries, did not know when they made an investment in, say, a hedge fund, just how much exposure they did have not only to their own bank, but to the whole fund as a whole. There was an idea that you could not just say I have made the investment and log it. You would have to know exactly the extent of indebtedness within the fund or the risk exposure. You had to know much more about the investment.

MR. BOORMAN: Maybe there are two aspects to this. I think one is, as you know, there is a lot of debate going on as to whether hedge funds or other similar institutions ought to be subject to more regulation or at least to more disclosure. I think there is agreement in the various fora that have been discussing this issue that there is little question that they should be subject to greater disclosure. So that anyone lending money to a hedge fund ought to know what the situation is, into which it is placing its own credit.

There is less agreement yet, and I am not sure myself which tack this is going to take in the future about the extent to which there might be greater regulation of these institutions. I think there is a sense that part of the problem that developed, and Long-Term Capital Management was, of course, the bellwether of this, was, as you put it, I think lending, and heavy-duty lending, by a large number of banks perhaps not knowing the activities of other people who were doing the same thing. Disclosure would help that.

But the banks themselves, in their operations, are also sometimes highly leveraged institutions. And I think the initial focus on hedge funds has broadened to a bigger class of institutions, all of whom need to be more transparent on this.

The second aspect goes to what some people think is a certain bias in the way institutions operate, a bias in the sense of asking the extent to which the analyst, the credit risk assessors' and the others' input decisions. Who has the last word; is it the men and women who make the deals or is it the men and women who do the research and the credit assessment? And a lot of people that I have spoken to, certainly in the private community, agree that there needs to be perhaps a rebalancing of the influence of those two sides of the coin when credit decisions are taken in these institutions.

QUESTION: Two questions. First of all, Mr. Camdessus made clear yesterday that Brazil would not have qualified for the CCL back in September or October last year. Can you envision any country that actually would have, A gone to the facility and, B, got it?

Second, how worried are you? This time last year you were worried about running out of money, running out of resources. What is the risk that exposure to countries taking up contingency lines? Will it mean you will have to come back to your shareholders and ask for more money?

MR. BOORMAN: The backward-looking question that you are asking is a tough one. You are asking, basically, a hypothetical question about the possible qualification of a country in the past for a facility that did not exist. It is even harder than that to answer because of what I said about why we can do this now, and there was a certain shying away from doing something similar to this in 1994, when the question about a short-term financing facility was raised. And I think the reason we can do it now is because a lot of the things that we have been able to build into this, like questions about transparency, adherence to standards, debt structures and so forth, are things we do know more about. And I think we have the capacity to examine and explore, in individual country situations, in ways that we did not before.

I think, also, the crisis has genuinely frightened people and frightened policymakers, and I think there is a difference in the attitudes that policymakers take when looking to the exposures that they are taking on, whether on domestic debt or foreign debt. I hope that is the case, not that they are frightened, but that this has been in the nature of an alarm that leads policymakers to effectively operate in a way that might be a little bit different than it was before.

So I am not going to speculate on who could have done what in the past with something that, as I say, did not exist.

On the financial side of it, as you know, in recent months we have gotten final agreement on the quota increase, increasing the regular resources of the Fund, on the New Arrangements to Borrow, and the GAB. Those resources provide a good deal of additional liquidity to the Fund. The liquidity ratio of the Fund is at a comfortable level these days as compared to what it was before the quota increase and before the NAB provided additional useable resources.

It is very hard to estimate the use that is going to be made of this facility and the actual drain that it might represent on Fund resources. I think the Managing Director might have said that, in the best of all possible worlds, this would never be used, and by that he did not mean not committed to countries. He meant that, in committing it to countries, it would serve its purpose of warding off contagion from attacking individual countries. And if that was the case, the country would not need to draw.

There are people who have said if you don't have this and countries get into trouble, they will come to the Fund for the supplemental reserve facility. And you have to look a little bit at the two of these together. If countries come, ahead of time, qualified for a CCL and if it does its job, it may well reduce the demand for Fund resources, as compared to a situation where a facility like this did not exist, contagion strikes and countries then do come and requests the use of SRF resources. And, frankly, I do not know where that balance stands.

QUESTION: To make it a bit less abstract, this question of standards and transparency reports, there are many observations on quality in the report, for example, of Argentina: on fiscal data from the provinces and the municipalities, observations about the supervision of the banks and the lack of independence--financial independence--of the supervisor, comments on the frequency of the data, etc. So my question is, would the conditions that you describe in the report for Argentina be enough for Argentina to qualify for the CCL? Is there a minimum grade for a country? I mean, on a scale of one to ten, in these standards, usually what would be the minimum grade? For example, in the case of Argentina what is the grade?

And the second question is if the Fund will use these CCLs to try to gain more leverage in terms of policy requirements; for example, flexibility of labor markets or policy conditions that the country follows.

MR. BOORMAN: Two points on the first question that you asked.

We, I believe, will shy away from a report-card approach on standards, a grading between, say, zero and ten on each of the eight or ten standards that will be assessed. It is far too difficult, and it is far too nuanced, I think, to be able to do anything like that.

The kind of judgments that will have to be offered on the different standards will differ one from the other. You can have a binomial yes/no answer to the question of is the country releasing quarterly GDP statistics. You cannot have that kind of an answer once you get beyond the simple question of release and begin to ask questions about quality. The same with accounting standards. Does the company put out a balance sheet and a profit-and-loss statement once a quarter? Yes or no? Is it worth anything is really the question one wants to ask, and that goes to the extent to which the company actually does use generally accepted accounting principles and the extent to which there's an auditing process to see that those principles are being followed. So I think on that we will be in the world of making qualitative judgments.

It goes to a second aspect of this, and that is there was a lot of discussion in the Board about really your question. When you look at these four criteria for eligibility about the policy stance of the country, about its adherence to standards, about the kind of relations it has with the private sector, about the steps it has taken to reduce the vulnerability of its debt structure and all of these things, there was a debate about whether you could have these, in some sense, as absolute standards.

And the conclusion, again, which I think you will see in the language of the summing up, was that that would not be the way these things would be judged. You have got to look to a critical mass within each of these eligibility criteria qualitatively: how close does the country come to something like the ideal one would like to see because no country in all of these areas or probably in any area satisfies the ideal. So it will always be a matter of judgment.

That goes a little bit, I think, to your second question; is this a way for the Fund to get more leverage over a country's policies? In the positive sense of the use of that word and phrase, I would say yes. It is a way of the international community saying to countries, Look, the IMF is willing to do business differently in the future than it has done business in the past. It does not want countries to wait until they stumble, get into difficulties and then come and seek resources from the Fund.

What we would like to see is a world in which countries, in fact, adhere to good policies on an ongoing basis, accept these standards, run their debt management policies in a way that keeps vulnerabilities low, and on and on. I could continue.

If the possibility of a member country requesting and securing a CCL encourages that country on an ongoing basis to do these kinds of things, you might call that leverage of the Fund. But not in a negative sense of the word; rather as an encouragement to countries and, as I put it in my opening remarks, as a quid pro quo for the commitment from the Fund and from the international community for this kind of support.

QUESTION: Mr. Boorman, looking at the access criteria of all the CCLs, it seems, on the face of it, to be a facility for countries that do not need the money. It also seems a facility for countries that could quite easily be able to arrange private contingency financing quite easily. Are we missing something? It would be nice if you could look back and do the hypothetical thing for Asia in response to which this facility was developed and tell us which Asian countries would have availed of this facility had it been there. On the face of it, it would seem the only countries that would be eligible would be Hong Kong and Singapore, and neither of them would be likely to draw on the Fund, correct? Could you just comment on those points please.

MR. BOORMAN: The answer to your first question--is this a facility for countries that do not need the money--the answer is yes. That is exactly what it is for. And if you look to the eligibility criteria very carefully, you will see that it says that this facility is for countries that will not otherwise be using Fund resources. So it is a facility for a country that does not need the money in the sense of not requiring at that moment support from the International Monetary Fund. It does not have a balance of payments problem at that moment.

But what does it have? And what is the use of this? As we saw in the wake of the problems in Russia last August, if you remember back to the atmosphere that prevailed during the last of these Interim Committee meetings back at the end of September/early October, it was rather a devastating sense of doom that was wandering the corridors during those meetings. The stock markets were falling not just in the United States, but in many countries and around the world. Markets were seizing up. Countries which had had access to bond markets, to equity markets began to see that their access was being reduced or in some cases cut. You had countries that nothing about them had changed. Their policies had been good. They promised to continue to be good. But simply because of the winds blowing from elsewhere in the world, the capital markets for those countries began to close down. In some cases, they closed firmly shut. In other cases, it manifested itself in a very large increase in the spreads that had to be paid by those countries.

So you could have had countries that indeed did not need the money when they requested a commitment of resources under the CCL from the Fund, but in the event that an occasion such as that occurs--hopefully, only something far less traumatic--their access to markets becomes problematic, and they do need, then, the support of the Fund.

In the best of all possible worlds, what we would hope is that the very existence of the facility, the commitment from the Fund and what it represents, would convince the private markets to continue to operate with this country, and it would not have to use these resources.

But if, in fact, there is a situation such as occurred over the last six months, and they did begin to lose their access to these markets, they would be assured, A, of support from the Fund, but, B, because of the other mechanisms that are asked for in the context of the eligibility criteria for this facility, they would also have set up perhaps contingent credit lines or other mechanisms with the private sector as well to try to maintain the exposure of the private sector or, indeed, even to increase it.

Does that go to your question?

QUESTION: Well, I wonder if you would comment on the countries that might have availed over in Asia, other than Hong Kong and Singapore.

MR. BOORMAN: When? Six months ago?

QUESTION: With the crisis.

MR. BOORMAN: I won't in detail. But look back at the situation of some of those countries, look back to the kinds of things the Fund was saying about Thailand. And, of course, in today's world, with today's transparency, with PINs and with all of the other mechanisms that we have been talking about, you will know what the Fund is saying about Country X much more clearly and transparently than you would have known then.

But what we were saying to Thailand was that Thailand did, indeed, have difficulties, difficulties in the size of its current account, possibly difficulties on its exchange rate because of the appreciation of the dollar against the yen and these other things. If you look at that, and you look at it in the context of the eligibility criteria for the CCL, I think you will see what the answer to that question is for Thailand, for example.

QUESTION: You say you have learned a lot about contagion, and that is one of the reasons where we are now, and I am wondering if you are going through a range in criteria for the standards of transparency. From the other side, you can ascertain different degrees to which a country is suffering from contagion and whether certain types of contagion make it more eligible for a CCL or otherwise. By that I mean you might have examples where a country is under a speculative attack because the market perceives its current account imbalance to be a target worth attacking. Or on the other hand, a country might be suffering from contagion because it happens to have reliance on a particular commodity that is coming under a lot of pressure as a result. In the context of that, I am wondering if there are countries you could cite that would have to be more or less likely to come into a CCL. I am wondering, in particular, whether Chile, which suffered a lot as a result of its copper exports, is a country that would be considered under this.

MR. BOORMAN: I am impressed with the innovativeness in asking the same question so many different ways.

Are there different types of contagion? I think it's important, and this goes a little bit to the question why a simple, forthright, complete commitment of resources was not available to the country. Why have you put the activation review in? And I answered in terms of protecting the Fund's resources.

To elaborate a little bit on that, in the context of your question, I think that contagion is not simply a financial phenomenon. It can be and certainly the visible aspects of contagion last October/November was the seizing up of private capital markets that I referred to. Countries simply found that nobody was at the other end of the telephone when they called to arrange the next bond issue or the next equity issue.

That is the financial side of it. But if you think about the impact on Latin America from the Asian crisis and contagion that affected Latin America, it also has a real aspect to it. Some of the countries in Latin America, for example, compete in the same markets as a number of the Asian countries. To the extent that there were real devaluations in the Thai baht, in the Indonesian rupee, and the Korean won and so forth, this had real economic implications for the countries in Latin America. They faced a different competitive environment than they did before. That's beyond just the financial impact.

Similarly, the slowdown in Asia is one of the reasons, if not the primary reason, for the decline in commodity prices in the world. A good number of the countries in Latin America, and you mentioned Chile, are commodity exporters, and they have suffered a real, in terms of trade, shock as a result of the quote/unquote "contagion."

One of the reasons that the Fund wants to have a mechanism whereby, in the first instance, there is a commitment of resources, but in the second instance the country must request actual disbursement of those resources through this activation review is so that the Board can assess, one, whether or not contagion has struck the country and, secondly, what is its nature?

Is it a pure financial phenomenon that you might expect to see turn around and hopefully go away in a very short period of time or is it something that brings with it some of these real economic effects? Because if it is the latter, then it is going to require adjustment measures and policies by the country concerned.

So the Fund wants to be in a position to have that discussion with the authorities and to see that the authorities, in fact, in light of the judgments about the nature of the contagion and so forth, are in a position to take the kind of measures that may be necessary. Maybe they will not be. Maybe nothing will be necessary if it is a purely arbitrary financial contagion, but maybe something will be required.

QUESTION: I would just like to know how you have actually involved the private sector in the whole of this new financial architecture. And, particularly as APEC is looking at a Transparency International initiative on corruption and the involvement of the private sector in that initiative, if there is any linkage between the two.

MR. BOORMAN: On the involvement of the private sector, I think there is a number of aspects of what is going on. As you know, in terms of concrete operations in countries we have, over the last 20 months, I guess it is, since the Thai crisis broke in July of 1997, we have had a number of country cases where we have had to involve the private sector quite specifically, quite concretely in assisting in financing the country in the midst of a program with the Fund.

In Korea, you know the story about insisting on rollovers by the commercial banks and then restructuring. In Ukraine, there was the deal with the bond holders. In Brazil, there was the more informal voluntary approach taken to the commercial banks to get them to maintain their exposure. And so forth.

So there has been quite a lot of experience in the context of specific country cases with bringing the private sector into these kinds of situations.

On the level of discussing issues, which is a completely different level, there are enumerable fora that have taken up all of the implications of and lessons to be learned from the crises. The IIF here in Washington, for example, over the course of the last number of weeks, have put out three or four study papers on different topics involving the private sector; risk assessment, transparency and so forth.

We have, as staff of the Fund, had discussions with the IIF and the panels that they convened on these kinds of issues. The Council of Foreign Relations in this country has been doing a study on this issue that some of us have participated in. There have been discussions in a good number of fora elsewhere in the world as well. So it is a fairly dynamic process I think that is under way in terms of interacting with the private sector.

QUESTION: I have a question with regard to the scope of the CCL and the possible interference with the private sector.

If we assume a country like Argentina has a CCL and something happens like what happened, that suddenly the spreads on bonds go way up; they are able still to get money, but for very high spreads. Now, is that a case for you to let them draw the CCL or is it not? Where is the judgment involved? Is it unreasonable or is it not, or is there no such judgment? Do you need a real possibility of balance of payment crisis, like Argentina has to give up their Currency Board, or is it enough that they just suffer a lot from the contagion? How do you anticipate making these judgments? Where do you draw the lines there?

MR. BOORMAN: The example of contagion of last September, October, November was pretty dramatic. I do not remember anything like that happening in--I do not know how far back I want to go, but my memory is not terribly long--but I do not remember anything like that happening to the extent that it did.

The intermediate cases are the more difficult ones. I mean one hopes that as that kind of contagion develops, in fact, the very existence of this kind of facility provides some comfort to the private sector, so, that they are willing to go on lending to the country as they have. Or that because of the mechanisms that were put in place ahead of time, the ex ante mechanisms that we have been talking about, peripherally here, but quite directly in the context of that paper on the private sector we put out two weeks ago, that there would be mechanisms to keep the private sector in.

The judgments will not be easy. That is quite clear. We are not trying to put in place a mechanism which means that when the spreads go over X, the Fund becomes the financier of the member countries. That is not the intention.

We are going to review this facility a year from now and, as you may have noticed, it also has a sunset clause in it after two years. And there are a number of questions of this nature where I frankly think I have to say we will be finding our way in the kind of judgments that will have to be made.

QUESTION: I have a specific question on Mexico. It is a big question. In February, last February, the Secretary of the Treasury of Mexico announced that Mexico was working on this CCL asking for $9 billion and then they changed the amount. They are talking about now $3-to-$5 billion.

Taking the part that you say that this is for countries that do not really need money, was this just to impress the private markets, or what is really the situation of the Mexican position in this CCL. When is Mexico going to be eligible?

MR. BOORMAN: I think everybody is going to have to go back in a sense to the drawing board with this document. You remember this idea was first raised last September about some kind of a contingent facility. It had no flesh. Nobody knew quite what this was going to be. It is now six months later and it has taken six months of very hard work by a lot of people, here, in capitals, in discussions and so forth, to put flesh on this thing, and to try to cast it in a way that looks like it has promise to do what it was intended to do.

But anyone who was speaking in February did not know what this was going to look like. There are a lot of people saying, yes, contingent credit line from the Fund; that sounds like a good idea. I would like to have that. But when they were saying that it was basically a very early expression of interest in something that is yet to be defined. Well, now, it's defined and I think the Mexican authorities will need to go back and say, well, now that we see what it is and we know what our needs are, what will we do? Will we try to request the Fund for use of resources under this facility or will we use some other facility?

QUESTION: Even granted what you said about wanting to protect the resources of the Fund being a factor in this, is not on the other hand the Fund in a way guilty of a certain lack of transparency, itself, in the way that the implementation procedure has been set out in that it leaves the actual criteria for implementation completely open, really, for the Board to decide.

And when private sector banks have given credit lines to countries like Argentina, they do not have this kind of open-ended conditionality attached to them. Why would the Fund be able to have an open-ended conditionality?

And does this not raise the danger that the whole process will be politicized again in exactly the way that some of the emergency arrangements of the past few years are said to have been politicized with different criteria being applied to different countries?

MR. BOORMAN: We have tried, as I said, to balance these two issues: i.e., providing resources quickly, having the markets confident that, in fact, resources will be available to the country in the event that it gets hit by a bout of contagion of the nature that we talk about in here.

We have done a couple of things to try to reach this balance. One is the initial demands on the country in terms of the quality of its policies, its adherence to standards, and so forth. What we are trying to do really is to set up a real class facility, if I can use that word, which will permit the kind of judgments that the Board will need to make if the countries who qualify for that facility find themselves in a position of need. That is one aspect of it.

The other is you will notice that there is a fairly demanding monitoring mechanism put in place; that the staff would intend to be in contact on pretty much a continuous basis with the authorities in terms of assessing the way in which policies continue to evolve. The purpose of that is so that if contagion strikes, and if it strikes reasonably quickly, the staff and ultimately the Board will be in a position to make the kind of quick decisions that would need to be made.

Thirdly, there is all the language in there, and it is to be taken seriously, on reacting speedily, expeditiously and so forth. And, fourthly, I believe there is a reference, as well, to the benefit of the doubt being given to the member in these circumstances. And benefit of the doubt is a bit of a term of art in the Fund as to the kinds of demands that are placed conditionality-wise on a member under certain circumstances.

So, all of these things are there to try to strike this balance and get over this hurdle. Again, we may not have the perfect answer. Nobody has ever tried to construct a mechanism like this before. And that is why these two other aspects are in there: A review after a year and a possible sunset clause in two years.

[Edited transcript]


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