Aspects of Improving the International Financial System

Improve Transparency
The first, and least controversial, is to improve transparency. This relates to public authorities, not least central banks—some of the unpleasant surprises in the Asian crisis were that the foreign exchange reserves that markets assumed were there were not really usable. Obviously, here there has to be full disclosure. Transparency also needs to improve for private financial transactions and asset liability positions. More has been known here, in fact, than has generally been admitted. And finally, most importantly, non-financial corporations also have to submit fuller information. All of this is not that controversial and these are national tasks, although they need the help of an international framework.

Stanley Fischer touched on the question of whether the Fund should go more public in publishing Article 4 country reports, and I understand there are now discussions on this issue. The arguments seem on balance in favor, though some confidential discussions about vulnerabilities may still have to be kept out. The public service function of an international instititution such as the Fund would be well-served by mandatory publication. If it is voluntary, those that have good reports would publish; others would be more reluctant, but there would at least be pressure on them to follow the same route.

More National Policy Norms?
A more controversial innovation is the introduction of more rules and norms for monetary, fiscal, and financial policy. Now, to a European, more rules about policy is not a strange concept. A useful checklist on the basis of norms of fiscal policy—i.e., some appropriate balance over the longer term and sustainability of debt positions—will improve transparency further. When we go into monetary and financial issues it’s no longer so clearly the turf of only one institution. There will have to be more collaboration between the IMF and particularly the Basle Committee on Banking Supervision. The Global Stability Forum recently adopted by the Group of 7, meeting for the first time in April, will no doubt help to formulate the kind of rules that will then subsequently have to be monitored by the International Monetary Fund.

International Lender-of-Last-Resort Facility?
Once these rules have been discussed, maybe the system can move on to the grander issues of architecture—for example, the ideas of a conditional credit facility and the international lender-of-last-resort facility, which Stanley Fischer has elucidated in a paper circulated to us.* The initial U.S. proposal of September last year was that countries that met norms of good policy behavior would become eligible for a credit line to protect them against the kind of contagion we have seen in Asia and Brazil. Some have seen the package for Brazil last fall as an early experiment, but the package for Brazil was basically still a traditional package, large and front-loaded and with plenty of conditions. The policy norms had certainly not been met a priori. There wasn’t yet a catalytic role mobilizing private creditors. The package was, however, catalytic in mobilizing the World Bank and the Inter-American Development Bank for some smaller amounts.

Now, a priori, the idea of having a lender-of-last-resort facility does sound appealing. If private market participants were to perceive that the IMF could mobilize very significant resources to come to the defense of currencies, or a banking system under attack, then the probability of that attack would surely be reduced.

But the resources are not there. Let us look at some European experience. In principle, there was unlimited support for currencies in the European Monetary System. The constraint was a short repayment period, around three months; countries had a short breathing space; and the adjustment burden was still largely on the debtors. If there are strong pressures on countries to behave in accordance to the norms that I referred to before on fiscal, monetary, and financial policy, then maybe such a system could work. But I remind you that even in Europe where the rules were to a large extent put into place for a number of years, at one point the creditors said “no” and the system did have a breakdown.

What about the problem of moral hazard? The problem of moral hazard really implies that both debtors and their creditors sometimes become excessively bold in continuing the build-up of loans. If clear policy norms were established, the moral hazard problem might be reduced to manageable proportions in relation to debtor countries and private creditors. But since it will take a very long time to build up the norms, there is a problem here also for the foreseeable future.

Regional Currency Arrangements, Greater Stability Between Major Currencies
The crisis in several Asian countries was particularly vicious because of the interaction of currency and banking crises. Such crises are very hard to predict, though it is not impossible to show that they become more probable in certain circumstances. An important contribution to the international financial architecture could, therefore, be that regional cooperation on currency arrangements be strengthened. There may have been insufficient attention to convertibility plans (or currency boards) where countries are ready to give up also their monetary policy and have sound financial systems. There are successful examples outside Argentina and Hong Kong in some smaller European countries. Might it not be worthwhile to build on some of these successes (and on the unusually low inflation observed), instead of throwing in the towel and saying floating is the only resort? When is the IMF going to discuss not only exit strategies from fixed exchange rates, but also entry conditions into fixed exchange rates?

And that, of course, brings us to the relationships between the major currencies: the dollar, the euro, and the yen. Yesterday we had a discussion of whether it was advisable to use trade-weighted pegs for the exchange rate strategy of a country. Even that may not be sufficient to assure confidence because in a financially unstable world with the three major currencies fluctuating, there will still be strong incentives to attack such an arrangement. So greater stability between the major currencies remains a central task for the IMF and for the international financial architecture, because it is a prerequisite for sound exchange rate policies in the rest of the world.