Briefing By IMF Managing Director Horst Köhler and First Deputy Managing Director Stanley Fischer On Establishing An International Capital Markets Department
March 1, 2001
MR. KÖHLER: Thank you for attending this press briefing. Early today I informed the Executive Board of my decision to establish a new department in the Fund, the International Capital Markets Department. Let me give a little background to this decision and briefly outline some of the benefits that I believe will follow.
In Prague, I outlined a vision of the future role of the Fund, which was unanimously endorsed by the members of the Fund. A central element of that vision was that the Fund should become what we called a Center of Excellence for the stability of the international financial system.
In the process of making this vision operational, I had asked a panel of outside experts in October 2000 to provide an independent perspective on how the Fund should organize its financial sector and capital markets work. That group, the so-called Lipsky group, because the Chairman of this group was John Lipsky, Chief Economist of Chase, presented its report in January 2001.
Broadly, it observed that although important improvements had been made in the past few years, the Fund's work in this area needed to be considerably enhanced. It made a number of recommendations to achieve this, including the creation of a new department that would consolidate and develop further the capital markets-related functions that are now carried out in several functional departments of the Fund.
After intensive deliberations among management and senior staff over the past few weeks, I have concluded that the creation of a new department is the appropriate step to take. I see this decision as a critical element of the ongoing efforts to strengthen the international financial architecture and ensuring the necessary support to the Fund's work on crisis prevention and crisis management.
More specifically, the consolidation of the work on capital market issues in the new department is expected to deepen the Fund's understanding of financial market operations and of the factors influencing the supply of capital to member countries; to provide enhanced support to the Fund's surveillance and lending operations in member countries through strengthened links between information gathering, analysis and judgment regarding capital market developments; and to enhance the Fund's conceptual capacities in addressing systemic issues stemming from developments in international capital markets.
I am confident that the decision I am announcing today is in the interest of all members of the Fund. It will enhance the Fund's early-warning capabilities, and more fundamentally, it will strengthen the Fund's ability to help member countries in their efforts to gain access to, as well as deal with and benefit from interactions with the international capital markets and their potential for income and job creation.
To be able to make the new department operational as soon as possible, I have launched today the search for a department director with the appropriate professional background and experience to lead this important task.
That is my statement. I, as you see, pay a lot of attention to this development and decision because I do think it is needed and that it will tremendously improve the Fund's capacity to do its job.
QUESTIONER: Can you give us a more concrete explanation of what, in a crisis situation, you would expect this department to be doing.
MR. KÖHLER: First, I would like to stress that it is crisis prevention which is in the foreground. This means a variety of activities and action, particularly the dialogue with the private sector and the communication with investors. As you may know, we have already last year set up a Capital Markets Consultative Group. That was the first step in these activities. We are meeting next week in New York with this group, discussing crisis prevention, and on this basis we are establishing not only, say, good contacts, but also get a better understanding of what are the driving forces in capital markets.
I, too, see a further important task of this department, what I already mentioned in my statement--to work on early warning capacities. I don't think that it is possible to be so advanced in early warnings that a crisis will not happen again. But to strengthen our capacity to read developments in markets, to interpret and draw conclusions at an early stage is very important for crisis prevention, and it is the main purpose of this department.
QUESTIONER: If I could just follow up with that. The banks, you know, working through the IIF, have frequently asked that the IMF be a lot more forthcoming with inside information essentially and to allow them to see when things are going to be happening before everybody else sees when things are going to be happening. Do you anticipate that this will be a two-way flow of information, and to what degree do you think that this new department will be responsible for providing early warnings to investors, as well as vice versa?
MR. KÖHLER: Well, I'm sure you will understand that the Fund is not, say, a prolonged arm of the risk-management capacity of private institutions. They have to get their intelligence, their assessment, risk management themselves, but I think we are sitting in a common boat, in one boat, and this is that we need to strengthen our dialogue between the private sector and us.
We can even work further together in building up investors' relations of what we are doing already in Mexico. In other countries, helping the countries to build up investors' relations so that the participants, authorities and private sector people, know each other, know the policy of the country for investors so that there is less scope for surprise.
QUESTIONER: The Fund has been trying to strengthen its early warning capacity for some time. There was a study not long ago--obviously you are aware of it -- by Morris Goldstein and a couple of others that showed that Indonesia, for example, would not have been predicted by the indicators that they used in that particular study.
You obviously just acknowledged that no system would be perfect at anticipating everything that comes up, but how is creating a department, and since the Fund has been attempting -- I mean, the PDR has a Capital Markets Group, I think Research has a Capital Markets Group. I can't remember or keep them all straight. How will this what appears to be more of just a bureaucratic change by itself -- Are you suggesting that there is something else going on here that you -- there is something that you intend to do differently beyond just putting people in and establishing a department and so forth?
MR. KÖHLER: Well, certainly the objective is not just to reorganize. The purpose is to define a clear focus and to have the professional capacity for this clear focus, and this clear focus is indeed to respond to the changes in the global economy, and this is an economy mainly driven by capital markets. There are developments, if you want, there are turbulencies, there are disruptions, and we need to concentrate on this. And you are right; we have units in our Research Department.
Maybe, Stan, you could elaborate on that.
But the crucial issue is you need to focus on that, and that means not just collecting numbers in tables or to make a report annually, like the Capital Markets Report, but to have a working unit and a management information system where you are able to draw conclusions out of the most recent developments, like spreads, like the development of inter-bank lines and so on, in order to sort out whether there could be an early warning or not.
Stan, could you comment?
MR. FISCHER: In terms of the units which you know about, there are units dealing with capital markets in several departments in the Fund. The idea is to put them together and to rely on interactions among them, synergies among them, to increase the strength of the analysis that we provide.
But there is one really fundamental overriding aspect of why the management wants to do this, and that is the belief that the interactions between the Fund's operations and the intelligence-gathering aspects of what the Fund has done have been inadequate in many respects.
And what we want to absolutely do is to integrate that work completely into our surveillance work. I think it says at the beginning of this statement you got into our surveillance work, and into our operational work and to make sure that outfits which did good work, but were sort of not closely tied in with the Fund's operations, get very closely tied in. And we're going to emphasize what the Managing Director continues to emphasize that these guys have to be talking daily to the area departments about what is going on in their countries, as well as of course gathering the information from the markets.
MR. KÖHLER: I think that is a very important point that Stan Fischer made clear. It is important the interaction between this new functional department and the area departments because the area departments, as you know, all business is local, and to a certain degree all prices are also local. Therefore, we need to have the area departments being fully equipped and attentive to this, but in order to have specialized expertise, the functional department is needed to equip, to support the area departments better for their job.
QUESTIONER: To help bring this, to have our readers understand this a little bit better, it's helpful to go from the abstract to the concrete. If you were to look back at a case, and Turkey is an example, what do you think that the IMF has done -- I guess, in Stan's words -- inadequately in a concrete case that would happen differently with the set-up that you are now establishing?
MR. FISCHER: Well, Turkey is an unusually difficult case because the precipitating event was hardly to be expected by anybody's analysis. But what I would guess -- it's happening now, to a considerable extent. But what you would be looking for is, as you go forward, to have absolutely full knowledge of what the people in the capital markets are saying are the critical factors involved in Turkey. That we make sure that the area department dealing with this issue is aware of that and attentive to it, always taking into account that everybody talks their book. So you have got to both be aware of what is happening, and you have got to be able to have the strength of analytic insight to decide precisely what the real issues are in those cases.
I think it is happening, to a considerable extent in Turkey, because when dealing with the Fund, which has moved a long way since 1994, but I would say that in 1994, to take an extreme, we just didn't see the Mexican crisis coming in the capital markets. I don't think now we are in that position, but we could strengthen that considerably by having a dedicated group that is working on these issues every single day and reporting to us. And it is important that it comes to management, but it is more important that it is going to the area departments every day.
QUESTIONER: [Off microphone.] In '94, do you think this would have made a difference?
MR. FISCHER: I think, yes. The problem is that not every crisis is unforeseen. It is not always the case that you didn't see a crisis coming because sometimes the crises come because the people who have to take action, who are usually the governments, are not going to take action. So you can foresee, and you can warn. It doesn't mean that we, sitting here, will ultimately have the power in every case to persuade the governments to do what needs doing, but we should certainly be in the position to give them the necessary information, which in some cases in the past we were not.
QUESTIONER: New U.S. Secretary of the Treasury O'Neill mentioned crisis prevention. Did you consult with U.S. Treasury on this new reorganization? Are they satisfied with the Fund?
MR. KÖHLER: Well, we consulted, of course, with the U.S. Treasury, like we consulted also with the Japanese Finance Ministry. We informed and discussed it with the Executive Directors, and I don't need to go in details what we discussed with the U.S. Treasury, but you can be assured the U.S. Treasury is supporting this decision. It is in line with their thinking.
QUESTIONER: One of the elements of Mr. O'Neill's thinking is that perhaps there should be a list of -- an early warning list put out, who is next to go into crisis kind of thing. I am not sure we have many of the details of that. Is this an element in such a project?
MR. KÖHLER: We are working to prevent crises. And if a crisis happens, to be better able to find a resolution for a crisis. I don't think that it's appropriate now to comment on specific ideas that have been raised in the past.
QUESTIONER: I gather this announcement was not then precipitated by what has happened in Turkey. Was it hastened by it or would we be sitting here around this table if nothing had happened in Turkey?
MR. KÖHLER: No, at any rate, I mean, I launched this -- I think I said it -- this external advice in October last year after I came back from the annual meeting, where I said clearly the Fund has to be focused and particularly focused on capital markets, expertise and judgment. And then this group worked, collaborated, and gave us the report when I came back from Asia. I think that was mid-January.
And then we set up with the involved heads of departments, we made a working group chaired by Stan Fischer, and this working group worked hard. I was in Africa, and we communicated before, and after this we had the report of the group. I took a decision, after discussing with Stan Fischer and the other Deputy Managing Directors, the issue today. It is important enough that I thought that I should invite you to give you this information, but it has no direct link to Turkey.
QUESTIONER: Do you plan to station somebody in New York on Wall Street or in London?
MR. KÖHLER: As you know, we have this concept of the Capital Markets Consultative Group, and the idea of this is to reach out, indeed, to regions. New York, we are close. We have even someone there. He is mainly occupied with United Nations, but I am now in nearly permanent contact with New York.
But what we are doing is to reach out to Asia. I was, in January, I had the meeting with financial institutions in Singapore. I had invited institutions all over the Asian region -- Japan, China, Singapore, Indonesia. I am going to travel to Latin America again in June/July, and there I will invite Latin American financial institutions, and I will do this probably in Madrid also during the course of the second half this year.
This demonstrates our systematic attempt to reach out to private-sector people in order to tell them what we feel is important. For instance, we are working on this issue of standards and codes, and we want to know what they feel and think about standards and codes. And the very concrete issue, I think I can say this, we are working to make the CCL, contingent credit line, operational, and I will discuss it with private-sector people how they feel this facility should be used, and we will draw our conclusions.
MR. FISCHER: Could I just add something?
MR. KÖHLER: Uh-huh.
MR. FISCHER: We actually do have people in both Tokyo and London already attached to the Capital Markets Group in Research. We haven't made any decisions. As the MD says, we are very close to New York. There is probably no need.
MR. DAWSON: And we have a sub-regional office in Hong Kong, which handles the same function. [Thomas Dawson, the IMF's director of External Relations, who attended the briefing.]
QUESTIONER: If I could put the Turkey question in a slightly different way. Of course, Mr. Fischer is right in saying that no one could have foreseen that the Prime Minister was going to storm out of a meeting and cause the markets to go into a big swoon. But the criticism that has been raised is that the Fund should have seen in advance that this -- that the pegged currency in Turkey wasn't going to hold.
And so I wonder if there is some sense in which you feel there was a surveillance failure in Turkey or if the problem of the program having failed was of a completely different nature.
MR. KÖHLER: I think it is very important to see that what happened at the political level is not foreseeable. That is decisive. The situation in November, where we supported Turkey, after intensive discussions, it was a credible program, it had good chances to be successful.
MR. FISCHER: I think, the very hard part, I mean, it's what I said earlier. Things sort of -- the Managing Director has concerns about countries at any moment of time, and we don't go public with those, at least we haven't decided to do yet.
So I think I can say, without fear of contradiction, that we knew exactly what the markets were saying about Turkey, and we analyzed all of those issues, and we knew about those concerns. This was not a failure of knowing what the risks were. This was a series of incidents, political difficulties, at least in my mind and I think the management's mind in general, that sort of took a program that had a very good chance of succeeding and then made it less likely to succeed. And then when there was still a good chance at making it succeed, just did it in.
QUESTIONER: Will this new group have the capability to send out red flags in situations like Turkey's, where the financial markets are sending these signs, where the situation does seem precarious?
MR. KÖHLER: This new group will not have the capability and will not have the objective to replace private-sector risk assessment and management. That is clear, because we want to be clear that the private sector, private creditors, have to bear the risk of their decisions, and therefore it could not be seen as a replacement of their own judgment. But I think there is a common interest via transparency, via judgment of indicators to have early warnings, and we will, in the appropriate forum, also make these early warnings public and communicate it to the private sector.
QUESTIONER: When I asked Mr. Fischer about something along these lines a few years ago, he talked about this underlying tension between open information and possibly provoking a crisis. How do you resolve that issue? I mean, to what extent will access to any information developed by this group be made public? What kind of limits do you foresee on that information?
[Question directed to Mr. Fischer]
MR. FISCHER: Thanks for giving me that one. You know there are circumstances when you can make information public, and it is helpful to make it public, and there are circumstances where you could precipitate a crisis, and we just have to judge in each case.
We never have information that we don't transmit to governments about the dangers of what they are doing, if they are doing them, or the underlying difficulties that we see. You can be sure that there are cases, have been cases, in which the Fund staff -- we consult anyway with the capital markets, and the capital markets are concerned, and we are advising countries on how to react and what needs to be done to improve the situation.
I can still see after this group is set up, there will be circumstances in which it is not appropriate for us to send a message to the market. Let me assume, for instance, that we discovered that a major bank in the country is exceptionally weak. To publish that information, will precipitate a run on the bank. To give that information to the government is a responsible action.
And there could be other cases when we think that fiscal policy is going off track or something, when we believe that issuing a public warning is helpful to getting the problem corrected. So I don't think -- I may be wrong -- but I don't think that we would have the capacity to say whenever we find a problem, we are going to tell everybody. We will have to make a judgment as to whether going public helps or doesn't help in a particular case.
QUESTIONER: [Off microphone and inaudible.]
MR. KÖHLER: The global economy is slowing down, surely because the U.S. economy is slowing down faster than many of us expected, but still, there is no cause for panic. The medium-term prospects for the U.S. economy are positive. So, with the right policy management, I think we can weather this possible slowing down.
QUESTIONER: One more question on that point. The chief economist of the OECD...said that he was concerned that the Fed may overreach in trying to thwart the risk of a recession...
MR. KÖHLER: Overreach?
QUESTIONER: Overreach, and that it might -- I can't remember the exact quote, it was this morning -- that it risks losing some of the hard-won gains in reducing inflation over the last few years. Any comments on that?
MR. KÖHLER: I am sure this is a very sophisticated statement of this chief economist, and...
QUESTIONER: He just said that there was a risk that they'd...
MR. KÖHLER: I mean, who would exclude that there are risks in the world? We are paid to take risks because without risk you can't improve. Alan Greenspan is, of course, in a very difficult situation to take the right decision. But up to now, I think the decisions he had taken of the Fed system had been appropriate and right. I have no doubt that they will do the right things in a considered way also in the future.
QUESTIONER: Speaking of risk, we would all risk being ridiculed by our colleagues if we didn't at least ask, when the Turkish crisis first erupted a week ago, there were some rather strong statements out of this institution that there was no consideration being given to any further support.
There are reports now that the Prime Minister is talking about $25 billion. Is any consideration being given to augmenting the program?
MR. KÖHLER: The Fund's support is well known. That was the program of November last year. There is now a new situation, and it is first and foremost the Turkish government who has to demonstrate, by action, that it is aware about the situation and takes the appropriate decisions.
MR. DAWSON: Thank you.
[End of Press Briefing.]