*EPF208 04/17/01
"Early Warning System" Urged to Reduce Risks of Financial Crises
(Big banks group forecasts falling private capital flows) (500)
By Bruce Odessey
Washington File Staff Writer

Washington -- The head of a group representing some of the biggest banks around the world has urged development of an "early warning system" to handle national financial problems before they explode into crises.

Charles Dallara, managing director of the Institute of International Finance (IIF), made the statement as he described what he considers the most potentially risky global finance situation since the 1970s.

Dallara held an April 17 press conference ahead of the April 27-29 spring meetings of the International Monetary Fund (IMF) and World Bank to describe a letter he was sending to the ministers and central bankers expected to attend the meetings.

"We see clouds in many directions on the horizon for global finance, especially for emerging markets," Dallara said.

He expected net private capital flows to leading emerging market economies to drop in 2001 to $150,000 million from the 1996-2000 average of $210,000 million.

He forecast sharp deceleration in the increase in exports from Latin American economies dependent on the U.S. market and from Asian economies dependent on Japan. Latin American exports, up 22 percent in 2000, should increase only 7 percent in 2001; Asian exports, up 23 percent in 2000, should increase only 5 percent in 2001, he said.

Dallara said that IIF members seek an early warning system as one element of more robust cooperation between the big private banks and the IMF designed to prevent crises from happening.

An early warning system would require major borrowing countries to keep their top investors and policy makers well informed about earnings prospects to help bring about appropriate response as problems emerge, he said.

It would require many more emerging market economies to subscribe to IMF data standards on reporting economic and financial performance, he said.

And it would require adherence by those economies to higher standards of corporate governance, including more respect for contractual obligations and better safeguards for minority investors, he said.

Dallara said the IMF, World Bank and private banks have to get better at handling wider aspects of financial difficulties, not just debt flows.

The financial problems in Turkey and Argentina demonstrate that a flexible case-by-case approach including early private-sector involvement can succeed, he said.

Emerging markets face their toughest challenges in decades, he said, because of the slowdown in the U.S. and European economies plus a situation of "grave concern" in Japan -- a mountain of bad bank loans caught up in a long stagnating economy.

Dallara said that cooperation by leaders in both the public political and private financial sectors of developed and developing countries can act to reduce the risks.

"The margin of error is thin, the risks of inaction high, and the case for cooperative action compelling," his letter concluded.

(The Washington File is a product of the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
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