*EPF216 04/01/2003
Text: Financial Group Urges Cohesion of G-7 Economic Policies
(Geopolitical uncertainty underlies need for overcoming differences, it says) (2530)

A group representing the world's largest banks has called for increased macroeconomic coordination among the most advanced economies and actions to restore confidence, bolster growth and contain financial market volatility in coming months.

The group, the Washington-based Institute of International Finance, sent its suggestions in a April 1 policy letter to the policy-setting body of the International Monetary Fund (IMF).

The letter to the IMF's International Monetary and Finance Committee (IMFC) emphasized the need for a renewed commitment to international economic coordination and cooperation at the time when heightened concern about the health of the global economy is magnified by the war in Iraq.

"In the current environment it is more important than ever to demonstrate that they can take a cohesive approach," Charles Dallara, IIF managing director, said at an April 1 press briefing.

Notwithstanding uncertainties over the war in Iraq and its impact on the global economy, he said, serious economic problems overshadow the world economic outlook.

"When the dust settles, literally and figuratively, the reality is that the European economy, U.S. economy and Japanese economy are beset with some serious underlying challenges," Dallara said.

He warned the IMFC, which meets in Washington in mid-April, not to assume that a successful and relatively early conclusion of the war in Iraq will eliminate or moderate the necessity of urgent action.

Assuming a "quick and contained war in Iraq without sustained disruptions to global oil supplies," IIF forecasts no substantial improvement in 2003 over the meager growth rates of 2002. It expects the economies of the G-7 -- the Group of Seven most industrialized countries comprising Canada, France, Germany, Italy, Japan, the United Kingdom and the United States -- to grow at a 1.9 percent annual rate, only 0.1 percentage point faster than in 2002.

"That is a sobering reality," Dallara said.

The letter urged policy coordination by G-7 authorities on three broad fronts: monetary policies biased toward further easing, management of fiscal policies characterized by a flexible approach and renewed efforts to invigorate World Trade Organization (WTO) trade negotiations.

Dallara said that the G-7 countries must be "extraordinarily" careful so that the diplomatic and political tensions that characterized the period preceding the war do not spill over into the economic and financial domain.

The letter recommended "compelling" structural reforms in labor markets, product markets, and pension and tax systems in Europe; bank and corporate restructuring in Japan; and corporate governance in the United States.

IIF expressed hope that multilateral institutions will encourage the G-7 and other member countries to stand ready to respond flexibly to changes in global conditions, and, particularly, to provide additional support to emerging market economies in financial distress.

But the letter said that the vigilance of multilateral institutions and the readiness of developed countries to back emerging economies would not suffice to secure a sustained rebound in capital flows to those markets and prevent or resolve financial crises. In regard to the financial crises, the letter recommended pursuing the approach developed by IIF to facilitate more orderly restructuring of sovereign debt. This approach would incorporate comprehensive restructuring clauses, so-called "collective action clauses," in debt instruments. These clauses, found in sovereign bond contracts, limit the ability of dissident creditors to block a widely-supported restructuring on an individual bond issue. The letter also proposed the establishment of a voluntary code of conduct to guide the behavior of creditors, debtors and international institutions and of a group, which would monitor adherence to the code and provide a forum for early consultations.

Dallara said the IMFC should support these proposals, which, he said, have both public and private sector backing, rather than a competitive approach advanced by IMF Deputy Managing Director Anne Krueger.

"This is time for the IMFC to move on this decisively," Dallara said.

Krueger proposed to create a legal framework that would allow a qualified majority of a country's creditors to approve a restructuring agreement binding on all.

(Note: In the text "billion" equals 1,000 million.)

Following is the text of the IIF letter:

(begin text)

Institute of International Finance, Inc.

Charles H. Dallara
Managing Director

April 1, 2003

The Honorable Gordon Brown Chairman of the International Monetary and Financial Committee

Dear Chancellor:

Your Committee is meeting at a time of heightened concern about the health of the global economy, a concern magnified by the conflict in Iraq and the associated geopolitical tensions. Intensified macroeconomic policy coordination among the G-7 is essential, as is action by individual country authorities to restore confidence, reinvigorate growth, and dampen financial market volatility. This situation calls for a renewed commitment to international cohesion by the WTO, the IMF, and the Multilateral Development Banks (MDBs).

As measures are put in place to strengthen the economic outlook, it is also necessary that actions be taken to improve the framework for emerging markets finance. Against the background of anemic levels of private capital flows to emerging market economies, we have no doubt that your Committee will recognize and reinforce the importance of market-based approaches to crisis prevention and crisis management. A number of workable proposals have gathered support from both the private and public sectors, and the time has now come to move collectively toward their implementation.


Concerns about the economic outlook reflect not only the Iraq situation, but also the underlying fragility that is a consequence of the lingering imbalances and excesses accumulated during the bubble years. These problems should not be underestimated as you gauge the need for clear measures. Industrialized countries should act individually and collectively to build confidence between consumers and investors alike and to create a platform for sustained global economic recovery. Convincing steps are all the more pressing in light of the increased downside risks to growth prospects reflected in recent data. Priorities should include the following:

-- A bias of monetary policies toward further easing, underpinned by a joint commitment to act decisively if warranted by circumstance.

-- Flexible management of fiscal policy in the short term without compromising longer-term stability.

-- Compelling structural reforms, with a focus on labor and product markets, pensions, and tax systems in Europe; bank and corporate restructuring in Japan; and corporate governance in the United States.

-- Determined progress on trade liberalization. The Doha round now appears to be facing severe difficulties, in part because of the issue of agricultural subsidies. It is imperative that the political will be mobilized to place the Doha round back on track.

In addition, the IMF and the MDBs should stand ready to provide additional support to performing emerging market economies in case of a further deterioration in the outlook. A flexible response is especially warranted for countries under an existing Fund program in which policies are strong and authorities are prepared to take additional measures.


These efforts by themselves will not be sufficient to secure a sustained rebound in capital flows. They must be accompanied by measures that strengthen the fabric of the system itself. Strong collaboration is essential to put in place an international framework that focuses on overcoming the malaise in capital flows, avoiding crises where possible, and managing them more predictably when they arise.

Reviving Private Capital Flows: A Key Goal

Healthy private capital flows to emerging markets are a necessary ingredient of successful globalization and a well-functioning international financial system. Early-year active issuance and a recent narrowing of spreads point to private flows of approximately $135 billion in 2003.

-- At this level, flows are only slightly above the 2002 volume of $128 billion (the lowest total in a decade) and substantially below the annual average of $185 billion for the past 10 years.

The weakness in capital flows reflects concerns beyond the softness in the global economy. The severity and frequency of financial crises and the resulting losses have eroded investor confidence. This has contributed to a pullback in all forms of investment, including direct equity, which had been the bedrock of emerging markets funding for the past decade.

The governments of the emerging market economies will play a crucial role in reviving investor confidence. A number of them have persevered with good policies in a difficult environment. All should pursue consistent implementation of sound macroeconomic policies as well as structural reforms and institution building. In addition, authorities should strengthen their financial markets while building respect for the rule of law and its enforcement by an independent judiciary. Proactive dialogue with market participants is also essential.

Shifting from Debate to Action

Support has been growing in recent months for an approach that is centered on collective action clauses (CACs) for sovereign bonds and a code of conduct to guide the behavior of creditors, debtors, and international institutions in crisis prevention and resolution.

Instead of giving further consideration to the Sovereign Debt Restructuring Mechanism (SDRM), we look forward to the Committee lending its critical support to the consensus that is forming around this approach as the best way forward. Together we can strive toward its successful implementation.

New Bond Clauses

Over the past 27 months, the IIF Special Committee on Crisis Prevention and Resolution in Emerging Markets has pursued extensive consultations and developed a series of key principles to strengthen the international financial system. Within this context, the Special Committee outlined a three-pronged approach to restructuring sovereign debt last
April, which includes broad-based use of CACs.

Since last summer, the Institute and six other leading industry groups have developed marketable clauses to help facilitate the prompt and equitable resolution of payment difficulties. CACs represent a proportional response to problems in the restructuring process while limiting the risks to future private capital flows. Their implementation will lead to a more flexible and supple system. Work by the official sector, including the G-10, has also contributed importantly to advancing this approach.

The clauses put forth by the private sector enhance collective action while reinforcing creditor rights. They specifically provide for:

-- Amending payment terms through supermajority action to address potential free rider problems.

-- Instituting procedures for the formal establishment of creditor groups within and across debt instruments to facilitate negotiations on restructuring terms.

-- Limiting precipitous legal action by requiring larger majorities than currently in practice in order for an event of default to trigger a broader default.

-- Implementing new transparency provisions both for the reporting of data and for the proposed treatment of other creditor groups.

Mexico's successful issuance of a $1 billion bond under New York law with CACs in February was a critical first step to give operational meaning to the growing interest in such clauses. The 12-year bond was launched in line with the issuer's yield curve, indicating market acceptance of this action by Mexico.

Encouraged by this initiative, debtors, investors, and underwriters should move ahead to spread implementation of marketable CACs, leading to a new best practice standard among all issuers. The IMF should support these clauses through Article IV consultations and its Debt Management Guidelines.

A New Framework for Cooperation

The proposed new bond clauses will promote more effective resolution of debt problems, but the key players in emerging markets finance should act within a broader framework of cooperation to promote a revival of private flows. Last September, Bank of France Governor Jean-Claude Trichet sparked interest in the concept of a code of conduct, and since then various discussions have led to some common themes. An informal group of private and public sector leaders from industrial and emerging market economies should now be formed to agree on a code and endorse its rapid implementation.

An important predicate of the code, stressed by the IIF Board of Directors, is that market participants accept full responsibility for their investment and lending decisions in emerging markets and do not expect "bailouts" from the official sector. Given this principle, the code of conduct should:

-- Provide a comprehensive set of standards of behavior and responsibilities for the main parties in crisis prevention and resolution, including in cases in which debt restructuring is needed.

-- Offer clear guidance for actions, while being sufficiently flexible to enable its application on a case-by-case basis.

-- Recognize the role of the IMF and endorse firm access limits with provisions for exceptional circumstances.

-- Affirm a commitment by all parties to actions that guard against crises, including adherence to standards and codes and application of sound risk management. In this context, recent ideas about strengthening IMF surveillance and possibly providing for greater independence deserve serious consideration.

The code's central features should include a process for debtor-- creditor consultations before problems become unmanageable and the promotion of early restoration of creditworthiness and market access, as well as the incorporation of marketable CACs and other arrangements for orderly restructurings.

Experience shows that early consultations and actions can enable countries that face financial difficulties to avoid full-blown crises. We suggest the formation of an emerging markets monitoring group, which could consist of a small number of representatives from the private and public sectors in industrial and emerging markets. This group could monitor adherence to the code -- essential to its credibility -- and also provide a forum for early consultations.

-- To avoid restructuring in a specific case, early consultation could lead to a convincing policy framework anchored by an IMF program and bolstered by renewed market confidence.

-- In the context of strong performance and continued debt service, banks and investment houses could consider participation in a voluntary, temporary maintenance of trade and interbank advances.

In cases in which restructuring becomes unavoidable:

-- Sovereign debtors should negotiate promptly and directly with a broadly representative group of creditors the terms of any proposed restructuring.

-- The IMF should disburse financing to the debtor during an event of default only if, following consultations with creditors, it is determined that the country is negotiating in good faith.

-- Creditors should endeavor not to take enforcement action against the debtor or its assets (such as declaring cross-defaults and bringing lawsuits) unless it is deemed necessary to preserve and protect asset values and contract rights.


Meeting the challenges facing the global economy today will require strong cooperation and mutually reinforcing, decisive action. In many cases, it will take political courage to overcome entrenched domestic opposition. At the upcoming meetings, your Committee can set forth a blueprint for policies to avoid the specter of prolonged economic weakness and help lay the basis for a new phase of growth and stability.

Restoration of global growth alone will not suffice. The world of emerging markets finance has been disrupted time and again by a string of crises and volatile market conditions over the past eight years. Public and private sectors have been searching for common ground as to how best to strengthen the process of crisis management. We are now seeing for the first time the emergence of a public-private consensus. It is crucial to seize the opportunity to move forward together on a path to strengthen private capital flows and foster growth and development in emerging markets.


Charles H. Dallara
Managing Director

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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