Pakistan and new global financial architecture

Oct 02 - 08, 2000

Text of the speech delivered by William B. Milam, US Ambassador to Pakistan, at a

seminar arranged by Management Association of Pakistan

The title of my presentation is a question: How does Pakistan fit into the new global
financial architecture? This question immediately elicits two more questions: 1) what is
the new global financial architecture; and 2) in fact, what is financial architecture?

First, financial architecture is simply the framework of understanding in which the

international financial system operates—its parameters, if you will. Secondly, the new
global financial architecture arose from a retrospective undertaken by the G-7 in its June
1999 summit in Cologne on what went wrong and caused the new financial collapse in
Asia in the mid 1990's and why it wasn't seen coming earlier. The G-7 concluded that,
primarily, loose and non-transparent financial policies, out-of-date international financial
institutions, and weak regulation caused the problem. These conclusions led the G-7 to
endorse a number of reforms to the understandings that govern how the international
financial system should work. These reforms are designed to reduce the risks of future
financial crises and better manage those that occur.

This is not an abstraction; the subject is vitally important to Pakistan as it labours under a
heavy debt burden and is in the process of beginning to reform and restructure its
economic and financial system in ways that move the economy to higher sustainable
growth rates. For Pakistan, this process begins with a new agreement with the
International Monetary Fund (IMF) and follow up agreements with the World Bank and
the Asian Development Bank.

The G-7 recognized that responsibility for maintaining global stability is shared among
the industrial countries, the developing countries, especially those called emerging
markets, and the international financial institutions. The G-7 proposed reforms are broken
down into six broad categories:

• Strengthening and reforming the international financial institutions,

• Enhancing Transparency,

• Strengthening financial regulation in industrialized countries,

• Strengthening macroeconomic policies and financial systems in emerging markets,

• Improving crisis prevention/involving the private sector,

• Promoting social policies to protect the poor and most vulnerable elements of society.
Strengthening and reforming the international financial institutions: The IMF and
the World Bank have the central role in the international economic and financial system.
Rather than replace these institutions or create new ones, the G-7 decided to work toward
making both institutions more efficient.

It called for enhanced international cooperation in financial market supervision and

surveillance and created a group to work on the implications of highly leveraged
institutions, offshore centers and short-term capital flows.

It also endorsed improving IMF surveillance of exchange rate and economic policies of
member countries and improving IMF transparency. This new surveillance and scrutiny is
apparent in the IMF's recent emphasis on a free market float of the Pakistani rupee.

Enhancing transparency: The G-7 concluded that the availability of timely and accurate
information was essential for well functioning financial markets and market economies,
both to guide market participants and as an incentive for policy makers. Here too,
Pakistan has experienced a much more rigorous analysis of its financial data, reserve
position and monetary and fiscal policies.

Strengthening financial regulation in industrialized Countries: The G-7 called on

industrialized countries to improve their own financial regulations to ensure that creditors
improve their risk management and risk assessment for lending to emerging markets. It
discouraged investors from using excessive leverage. The G-7 proposed that private firms
strengthen their own risk management and looked forward to ensure that banking
institutions implement adequate risk management practices.

Strengthening macroeconomic policies and financial systems in emerging markets:

Recent financial crises demonstrated the need to strengthen economic fundamentals and
financial systems in emerging economies, to promote their own development and
international and financial stability. Emerging economies should also adhere to sound
principles of debt management and strengthen their financial sectors and supervisory
regimes.

The G-7 called for appropriate exchange rate regimes for emerging market economies:
stability depends on the exchange rate regime being backed by consistent macroeconomic
policies and supported by a robust financial system.

Improving crisis prevention/involving the private sector: One of the major lessons
from the late 1990's financial crisis was that the international community needed to
strengthen its approach to crisis prevention and resolution. The G-7 endorsed the IMF's
contingent credit line, which provides member countries with strong economic policies
— a strong precautionary defense against future balance of payments problems that might
arise from international financial contagion. The G-7 proposed a framework of principles
and tools for involving the private sector in the resolution of crises. The aim was to help
promote cooperative solutions between debtor countries and their creditors and to shape
expectations in a way which reduces the risk that investors believe they will be protected
from adverse outcomes.

Promoting social policies to protect the poor and most vulnerable elements of
society: The G-7 noted that social policies are the "cornerstone of a viable international
financial architecture. They supported the identification of principles and best practices in
social policy to protect the poor and most vulnerable. While recognizing the financial
constraints on the abilities of governments to fund social programmes, the G-7 noted that
effective social policy can ease the task of adjustment during times of crisis and help
build support for necessary reforms. The IMF was also called upon to take into
consideration the degree to which its recommended adjustment programmes provide for
adequate spending in the social sector.

What can Pakistan do to fit in?

Open markets: Keeping markets open for goods and capital will make the economy
more resilient to shocks. The benefits and economic opportunities derived from open
markets will lead to significant improvement in living standards in industrialized and
emerging markets alike. We believe the process of globalization offers great additional
potential to create wealth and employment.

Maintain sound macroeconomic policies: The challenge for Pakistan is to promote

financial stability through national action as well as through enhanced international
cooperation. All countries must assume their responsibility for pursuing sound
macroeconomic and sustainable exchange rate policies and establishing strong and
resilient financial systems. It requires the adoption and implementation of internationally
agreed standards and rules to meet the demands of today's global financial system.

Enhanced transparency: The need is for Pakistan to establish public authorities to

provide for enhanced transparency and disclosure, improved regulation and supervision
of financial institutions and markets, and policies to protect the most vulnerable. It also
requires that private creditors and investors bear responsibility for the risks that they take.

Sustainable exchange rate policy: Pakistan needs to pursue a sound and sustainable
exchange rate regime. A fixed exchange rate requires Pakistan to subordinate other policy
goals to that of fixing the exchange rate. However, it has been agreed that the
international community should not provide large-scale official financing for a country
intervening heavily to support a particular exchange rate level. Pakistan should also avoid
controls on capital flows, although they may be justified for a transitional period, because
such controls carry costs.

Debt management: Pakistan should work with the IFIs to promote best practices in debt
management. There should be a greater reliance on long-maturity, and if possible
domestic currency denominated, debt to maintain a debt profile that provides substantial
protection against temporary market disruption, avoid transforming long-term debt into
short-term debt.
We hope that Pakistan is able to build upon the standby agreement it has recently
negotiated by next year, agreeing with the IMF to a Poverty Reduction Growth Facility
(PRGF), which is a long-term concessional facility that focuses on long-term structural
reforms.

Pakistan remains dependent on foreign donors and creditors to meet its financial needs.
Even with IFI assistance, Pakistan has run a currant account deficit in recent years. Both
annual debt servicing requirements and the current account deficit have hovered around 3
per cent of GDP in recent years, while gross external public debt is over 50 per cent of
GDP. In addition, defense spending and debt repayments absorb close to 80 per cent of
current expenditures.

Promoting social policies to protect the poor: Recent events in the world economy
have underlined the important link between economic and social issues; and that good
economies depend both on stable relationships between governments and their citizens,
and strong social cohesion. An efficient social safety net, by equipping people for change,
builds trust and encourages people to take the risks, which are a necessary part of a
competitive modern market. This in turn helps to mitigate the risks and spreads the
benefits of globalization.

Openness is the overriding theme in this new global financial architecture — openness
which can't be abused because of enhanced standards of regulation, transparency,
surveillance, and policy oversight. How can Pakistan fit into the new global financial
architecture? In essence how can it fit into and prosper from an increasingly open
international financial system? Simple! By embracing openness, welcoming the
competition, maintaining policies and practices which draw in the world's capital instead
of repelling it.

Pakistan's economic performance has been harmed because barriers to the global
economy have resulted in ineffective governance and weak policy implementation.

Pakistan's clear potential for higher growth rates can only be realized by effective
measures to achieve macroeconomic stabilization and increase economic efficiency.

Can Pakistan fit into the global economy? Time will tell. Meeting IMF pre-conditions and
conditions have positioned Pakistan for renewed lending by the IMF, other IFIs and set
the stage for a possible Paris Club rescheduling. This is a start, and it could be the
beginning of a sustained effort at economic reform and restructuring that will attract both
increased domestic investment and private capital inflows/foreign investment. The
challenge at present is to begin the journey and stay on the road.

International Financial Architecture for 2002:

A New Approach to Sovereign Debt Restructuring
Address by Anne Krueger
First Deputy Managing Director, International Monetary Fund
Given at the National Economists' Club Annual Members' Dinner
American Enterprise Institute, Washington DC
November 26, 2001

I. Introduction

Mr Chairman. Ladies and Gentlemen.

It is a great pleasure to be here tonight. For more than 30 years the National Economists'
Club has provided a valuable forum, bringing together economists from the public and
private sectors, from universities and think-tanks, and from national and international
bodies. Having just made the transition from academia to a Bretton Woods institution for
the second time, I know how useful and stimulating it is to meet with — and learn from
— fellow economic practitioners working in different fields. So thank you for inviting me
to meet with you this evening.

My topic tonight has been of concern to economists and policymakers for a number of
years. As you know, much has been done to strengthen the architecture of the
international financial system in response to the recent emerging market financial crises.
But there remains a gaping hole: we lack incentives to help countries with unsustainable
debts resolve them promptly and in an orderly way. At present the only available
mechanism requires the international community to bail out the private creditors.

It is high time this hole was filled. This evening I would like to share with you an
approach that the management and staff of the IMF are discussing and which we believe
could be implemented.

Our aim would be to create a catalyst that will encourage debtors and creditors to come
together to restructure unsustainable debts in a timely and efficient manner. This catalyst
would take the form of a framework offering a debtor country legal protection from
creditors that stand in the way of a necessary restructuring, in exchange for an obligation
for the debtor to negotiate with its creditors in good faith and to put in place policies that
would prevent a similar problem from arising in the future. The mere knowledge that
such a framework was in place should encourage debtors and creditors to reach
agreement of their own accord. Our model is one of a domestic bankruptcy court, but for
a number of reasons it could not operate exactly like that. It is better to think of it as an
international workout mechanism.

A number of our members have expressed a desire to move in this direction. We look
forward to discussing our ideas with the Fund's Executive Board next month. But even
with unanimous political support this approach could not be in place for at least two or
three years. So none of what I have to say tonight has implications for our current
negotiations with member countries — Argentina and Turkey, for example.
Let me begin by putting our proposal in the context of other changes made to the
architecture of the international financial system. I will then talk about the current
obstacles to orderly sovereign debt restructuring, before turning to the principles that
underpin the possible new approach and some of the practical questions it raises.

II. Reforming the Architecture

Architecture first. The growth of private international capital flows has delivered
important benefits for borrowers and providers of capital alike. Foreign direct investment
has risen steadily in importance, but as portfolio flows have become larger and more
volatile, a price has been paid in more frequent and more severe financial crises.

One response of countries afflicted by the crisis would have been for them to retreat from
the global capital markets, but almost without exception even those suffering most in the
turmoil have chosen not to do so. Instead, they have rebuilt investor confidence and
helped restore growth by putting in place corrective policies: fiscal adjustment, financial
sector strengthening, and more flexible exchange rate regimes, to name but three.

In addition, as the smoke has cleared, the international community has made a
determined effort to promote more effective crisis prevention. This has had three main
elements:

First, we have strengthened the IMF's surveillance of national economic policies, and
international markets. Second, we are encouraging better communication between the
IMF, its members, and private investors and lenders. And third, we have created the
Contingent Credit Line facility, offering countries with sound policies a public "seal of
approval" and a way to bolster their official reserves at very low cost.

Better national policies and the reforms made to the architecture should help make crises
less frequent. But prevention will never be foolproof. So we have also taken steps to
improve the management of crises. We have been guided by the recognition that capital
account crises — in which countries face exceptional balance of payments problems
because of a sudden loss of investor confidence — require solutions different from the
current account problems that the Fund has traditionally had to deal with.

One important advance in crisis management has been a change in the content of the
adjustment and reform programs that the Fund supports in helping countries recover. In
addition to the necessary macroeconomic prescriptions, we focus much more urgently on
helping to resolve balance sheet problems in the financial and corporate sectors. In many
cases these problems were at the heart of the 1990s crises.

Another advance was the creation of the Supplemental Reserve Facility in 1997. This
moved the Fund in the direction of Walter Bagehot's classic prescription for a lender of
last resort, advancing large amounts for relatively short periods at penalty interest rates.
In lieu of collateral, Fund lending requires agreement with the borrower on economic
policy measures that will improve its balance of payments and help it repay.
But the parallel between the Fund and Bagehot's lender of last resort cannot be taken too
far. For one thing, unlike a domestic central bank, the Fund cannot print money. Its
resources are limited to part of the quotas paid in by its members and the borrowing
agreements it has in place with a number of industrial and emerging market countries. In
an informal but nonetheless important way its lending is also limited by the
understandable reluctance of Fund members to see resources used to bail out private
creditors of countries that find themselves in trouble. Moral hazard remains a concern.
Private institutions may be encouraged to lend and invest recklessly — or at least more
than they should — by the belief that the Fund will ensure that their creditors can repay
them.

III. Involving the Private Sector in Crisis Resolution

Let me now turn to the question of involving the private sector in crisis resolution, which
is certainly among the most difficult issues in reforming the architecture of the
international financial system.

Temporary assistance from the Fund and agreement on a convincing economic

adjustment package is normally sufficient to rebuild confidence among investors and
lenders — and restore a country's access to foreign private capital. But what if banks and
bondholders suddenly take fright and want to pull out of an emerging market? Or if a
country faces a short-term need for foreign currency beyond that which the official sector
is willing and able to provide, and has little prospect of securing private capital in the
near term? Then it may be necessary to encourage private creditors to roll over existing
commitments and to limit their demands for repayment. This is what is meant by
concerted involvement of the private sector in crisis resolution. When a country has a
large debt, it is not just the flows we have to worry about, but what happens to the stock.
When creditors will not roll over the stock, there is still a problem.

In the 1980s, restructuring sovereign debt was a protracted but generally orderly process.
Typically the major creditors were commercial banks, and they negotiated through a
steering committee of maybe 15 people holding perhaps 85 percent of the debt. They had
a number of incentives to cooperate. First, they wanted to maintain good relations with
the debtor to safeguard future business. Second, they were subject to the suasion of the
official sector through regulators, especially since they were banks. Third, conflicts
between creditors were limited by similar financial and institutional interests. And fourth,
there was little incentive for holdout creditors to pursue claims through litigation, because
they would have had to share any proceeds with fellow creditors.

Today we live in an entirely different world. Since 1980 emerging market bond issues
have grown four times as quickly as syndicated bank loans. With many banks and
bondholders now involved, private creditors have become increasingly numerous,
anonymous, and difficult to coordinate. The variety of debt instruments and derivatives in
use has also added to the complexity with which we must deal.
Bondholders are more diverse than banks, and so too are the goals with which they
approach a restructuring. Some are interested in a rapid and orderly restructuring that will
preserve the value of their claims. Others, which buy debt on the secondary market in
hope of profiting through litigation, prefer a disorderly process allowing them to buy
distressed debt more cheaply. Individual bondholders also have more legal leverage than
banks and are less vulnerable to arm-twisting by regulators.

No wonder countries facing severe liquidity problems often go to extraordinary lengths to

avoid restructuring their debts to foreign and domestic private creditors. Even an orderly
restructuring can impose severe economic costs and devastate the domestic financial
system; a disorderly restructuring can block a country's access to private capital for years
to come, making an already bad situation even worse.

But when a country's debt burden is truly unsustainable, the inevitable cannot be put off
forever. In Pakistan, Ukraine and Ecuador fears that litigation would disrupt the process
in fact turned out to be unduly pessimistic. But the more recent success of an aggressive
legal strategy employed against Peru by a vulture company called Elliott Associates
underlines the power that holdout creditors retain. The threat of disruption remains likely
to deter countries from seeking a necessary restructuring for longer than is desirable
either for the country itself or for the international community.

In 1997 Elliott Associates bought $20m of commercial loans guaranteed by Peru. Rather
than accepting the Brady bonds offered when Peru tried to restructure its debt, Elliott
demanded full repayment and interest. In June 2000 it obtained a judgment for $56m and
an attachment order against Peruvian assets used for commercial activity in the US.
Elliott targeted the interest payments that Peru was due to pay to its Brady bond holders
who had agreed to do the restructuring. Rather than be pushed into default on its Brady
bonds, Peru settled.

It is not clear if Elliott's strategy would survive legal challenge in future cases. But this
case — and the possibility that rogue creditors will open other legal avenues — shines a
spotlight on what is a missing element in the international community's current approach
to the roles of the public and private sectors in debt restructuring.

The current approach to private sector involvement was endorsed by our members last
year. Noting that official financing is limited and that creditors and debtors need to take
responsibility for their decisions, it favors voluntary and market-oriented solutions to debt
problems wherever possible. In most cases policy adjustment and temporary official
financing is assumed to be sufficient to restore a country's access to private capital. In
some cases, the official sector will also need to encourage creditors to reach voluntary
agreements to help overcome their coordination problems. And when there is no realistic
chance of restoring access to private capital on terms that will leave its debt burden
sustainable, a more comprehensive restructuring may be required within the context of a
Fund-supported adjustment program.
Ideally, this should be achieved in a largely voluntary and market-friendly way. But
Peru's experience suggests this may be more difficult to achieve in the future. Our
members agreed that in these circumstances the Fund should be prepared to give its
implicit support to a temporary standstill in a country's debt repayments, as long as it is
implementing a sensible economic adjustment package and is ready to negotiate with its
creditors in good faith. The Fund would signal its support by being prepared to lend to
the country even though it was in arrears to its private creditors.

But implicit support of this kind would not prevent holdout creditors from disrupting the
restructuring. As a result, the current approach does not provide an adequate incentive for
debtors and creditors to reach agreement of their own accord.

This is the missing element we must provide. Let me explain now in broad outline how
we could do it.

IV. A New Approach to Sovereign Debt Restructuring

A formal mechanism for sovereign debt restructuring would allow a country to come to
the Fund and request a temporary standstill on the repayment of its debts, during which
time it would negotiate a rescheduling or restructuring with its creditors, given the Fund's
consent to that line of attack. During this limited period, probably some months in
duration, the country would have to provide assurances to its creditors that money was
not fleeing the country, which would presumably mean the imposition of exchange
controls for a temporary period of time.

As I have emphasized already, our primary objective in creating a formal mechanism of

this type would be to create incentives for debtors and creditors to reach agreement of
their own accord, so the mechanism would rarely need to be used. There is an analogy
here with domestic insolvency regimes like the US bankruptcy court. When they are
well-developed and predictable in their operation, the bulk of domestic corporate
restructuring takes place "in the shadow of the law" rather than in court.

This approach would benefit creditors as well as debtors. The threat of disorderly
restructuring means that when countries get into trouble, the value of their debt on the
secondary market falls much more sharply than it would do in a more predictable
environment, imposing losses on investors and lenders who mark to market. By helping
resolve collective action problems among the creditors, it will help protect the value of
their claims.

It is also worth emphasizing that while this proposal would create a mandatory process
for restructuring, the outcome in any given case will remain where it should be — in the
hands of the debtor and creditors. Holdout creditors would be restrained in the event of an
agreement, but it would remain for the bulk of the creditors to negotiate and ultimately
decide whether to accept the terms on offer. The international community is not going to
impose the terms of any restructuring agreement on debtors and creditors.
The new approach would also benefit the international community more widely, by
contributing to a more stable international financial system. The presence of a formal
mechanism that would encourage them to restructure would help convince private
institutions that the official sector is not waiting on the sidelines to bail them out when
things go wrong. This could reduce the overall volume of capital flowing into the
emerging markets. But that would be no bad thing if it meant that creditors and debtors
were assessing risk more appropriately. Sound lending and borrowing decisions would in
turn make it less likely that countries would find themselves overindebted to begin with.

A formal sovereign debt restructuring mechanism would need to be built on four key
features:

· First, the mechanism would need to prevent creditors from disrupting

negotiations leading to a restructuring agreement by seeking repayment through
national courts. This would make restructuring less costly for the debtor country,
reducing the incentive for it to try to delay the inevitable unnecessarily. It would
also prevent a "grab race" getting under way among the creditors, in which each
has an incentive to enforce its claim as quickly as possible to prevent others
capturing the limited assets available.

· Second, the mechanism would have to provide creditors with some guarantee
that the debtor country would act responsibly during the course of any standstill.
In other words, that it was adopting appropriate economic policies, negotiating in
good faith with its creditors, and refraining from treating some creditors more
favorably than others.

· Third, private lenders would need encouragement to provide fresh money to help
the debtor meet its financing needs. To achieve this, providers of new money
might have some guarantee that they would be repaid before existing private
creditors i.e. possibly some kind of preferred creditor status.

· Fourth, the mechanism would have to bind minority creditors to a restructuring

agreement once it has been agreed to by a large enough majority. This would
prevent rogue creditors demanding repayment on the original terms and achieving
leverage by securing an attachment on the assets of the debtor until they were
repaid.

These four principles are much more easily stated than satisfied. They raise a number of
practical questions for the operation of such a approach, with which we have been
grappling and which are by no means settled upon. Let me discuss six of them briefly.

First, on what legal basis would such a mechanism rest? If we are to restrict the ability of
creditors to enforce their claims in national courts, then the mechanism must have the
force of law in those countries where enforcement might be sought. It would not be
enough to pass laws in a few leading countries. In practice, the mechanism must have the
force of law universally. Otherwise creditors will deliberately seek out the jurisdictions in
which they have the best chance of enforcing their claims.

Second, who should operate the mechanism? The Fund's involvement would be essential
to the success of such a system. We are the most effective channel through which the
international community can reach a judgment on the sustainability of a country's debt
and of its economic policies, and whether it is doing what is necessary to get its balance
of payments back into shape and to avoid future debt problems.

Having said this, there are other parts of the mechanism to which the Fund's existing
institutional structure would be less suited. For example, there will no doubt be a need
occasionally to adjudicate disputes among creditors and between the creditors and the
debtor. It will also be necessary to verify creditor claims and confirm the integrity of
voting on a potential restructuring. These are not things the Fund could well do.

Third, what would determine if and when the mechanism was formally set in motion?
The standstill would be activated if a request by the debtor country was endorsed by the
Fund. The Fund would agree if in light of the limitations on the official finance available,
the member's debt profile was unsustainable and it had little prospect of securing access
to private capital in the foreseeable future.

The presence of a predictable framework should encourage the debtor and creditors to get
together of their own accord, mimicking the features of the formal process as happens
frequently in domestic bankruptcy regimes. But even if there is broadly-based agreement
on a restructuring, activation of a formal standstill may still be necessary in order to bind
potential holdout creditors into the majority decision.

Fourth, how would we ensure the debtor behaved appropriately while it was enjoying
protection from its creditors? There is a clear analogy here with the way the Fund ensures
that countries get their policies back on track when it is lending to them. Like an IMF-
supported adjustment program, the standstill could be endorsed for limited periods and
renewed following reviews of the country's economic policies and its relations with its
creditors. Establishing a maximum period beyond which the stay could not be maintained
without the approval of a required majority of creditors would also encourage the debtor
to negotiate in good faith.

Fifth, what financing should the Fund provide? After the restructuring, Fund financing
should be limited to the amount necessary to help rebuild reserves and pay for essential
services and imports. There should be no extra support to help finance payments to
creditors on the restructured debt.

Sixth, what types of debt should the stay and the binding-in of minority creditors apply
to? This involves a number of complex issues. Let me mention two: the treatment of
sovereign debt owed to domestic residents and the treatment of foreign debts owed by
domestic residents other than the sovereign.
Sovereign debt owed to domestic residents may well need to be included in any
restructuring for three reasons. First, in the absence of capital controls, balance of
payments problems are as likely to arise from the flight of domestic investors and lenders
as from withdrawal of foreign ones. Second, domestic debt may impose an unsustainable
fiscal burden, especially as the crisis will already be weakening the country's budgetary
position by depressing economic activity. Third, external creditors are less likely to agree
to a reduction in the value of their own claims if they know that domestic investors are
simultaneously being repaid in full or in much greater proportion.

The stay might also need to apply to foreign debts owed by nonsovereign residents. This
is because of problems created by the use of exchange controls to protect foreign
exchange reserves. A company that is relatively unaffected by the crisis, perhaps because
most of its earnings come from exports, may suddenly find itself vulnerable to litigation
because exchange controls might prevent it paying its overseas creditors during the
period of the stay. An alternative would be to extend the legal protection offered to the
sovereign to these enterprises as long as they make the payments they would have made
to their creditors into an escrow account. These could then be paid to the overseas
creditors once the exchange controls are lifted at the point at which the stay is terminated.

V. Conclusion

Let me conclude by discussing briefly how the approach I have outlined would affect the
incentives faced by the key players in the sovereign debt market.

For debtor countries, the new approach would clearly reduce the cost of restructuring and
would encourage countries to go down that road earlier than they do now. This is no bad
thing. At the moment too many countries with insurmountable debt problems wait too
long, imposing unnecessarily heavy economic costs on themselves, and on the
international community that has to help pick up the pieces.

But it would be ridiculous to argue that our approach would make restructuring an easy
option. I would not support it if it did — countries, like anyone else, should pay their
debts as long as they are able to do so. Under the new approach, as now, even an orderly
restructuring can impose severe economic costs and threaten to devastate the debtor's
banking system if it holds a lot of sovereign debt. No country is likely to go down this
path unless it absolutely has to.

For creditors, our new approach might appear unattractive if it meant that debt problems
were more likely to be dealt with through restructuring than through large bailouts from
the official sector. But most creditors now accept that official financing is limited and that
the choice is not between workout and bailout, but between an orderly restructuring and a
disorderly one. For most creditors the guarantee of an orderly restructuring is much to be
preferred to the threat of a disorderly one. The value of their claims on the secondary
market is unlikely to fall anywhere near as much is it does now when a country starts to
get into trouble.
The approach I have outlined tonight holds out the promise of a fairer and more efficient
process of sovereign debt restructuring, one which would encourage countries to resolve
unsustainable debts promptly and in an orderly fashion. There are many technical
questions to be addressed and we look forward to discussing them with our executive
board, which is the next step. But some approach along these lines would serve the
causes of better crisis prevention and better crisis management simultaneously, to the
benefit of debtors, creditors and the international community.

The political imponderable is whether our members are prepared to constrain the ability
of their citizens to pursue foreign governments through their national courts as an
investment in a more stable — and therefore more prosperous — world economy. This,
ultimately, is a matter for them.

I for one hope that they are — and I know that in time they will have to. I hope they will
sometime soon. Thank you.

World financial architecture

By Shahid Javed Burki

For many people all over the world, the appeal of globalization lay in the belief that
mankind would better run its affairs if some national sovereignty was surrendered to
international institutions devised to advance common good. A few institutions were
created after the Second World War. The United Nations systems brought together all
nations of the world to reflect on - and sometimes also to act upon - what was good for
their citizens seen not as citizens of a particular nation but as the citizens of the world.

The United Nations Security Council was given the power to enforce some UN decisions.
At times the Security Council succeeded. In 1990, it voted to act against Iraq's invasion
of Kuwait. When Iraq failed to pull back, a UN-backed force led by the United States
pushed the Iraqis out of Kuwait. But sometimes the UN failed. It failed when its members
- in particular those that wielded the veto power - were unable or not prepared to carry
out the collective will of the international community. The Kashmir dispute has simmered
for more than half a century, bringing war to the subcontinent of South Asia on two
occasions and a series of "near-wars."

The latest of these continues to drag on. Similarly, the dispute over the control of territory
in Palestine continues to take a heavy toll of life among both the Palestinians and the
Israelis. In spite of several UN resolutions aimed at settling this dispute, there is still no
light visible at the end of what has been a long and dark tunnel.

The United Nations was not the only institution to rise from the ruins left in Europe and
East Asia by the Second World War. The countries that triumphed in that war had learnt
that economics was often at the root of conflict among nations. They wished to hand over
the management of economic crises to international institutions that would be expected to
act not out of the interest of the world's dominant powers but in the interest of the world
at large.

The Bretton Woods conference, held in 1944 at a resort of that name in New Hampshire,
United States, expected to create institutions to deal with national and international
economic crises. Those attending the conference, including Lord Maynard Keynes from
Britain, were of the view that future turbulence in international economy would be
largely the consequence of three factors - underdevelopment and economic
backwardness, financial disruptions caused by currency misalignment, and disputes about
trade.

The New Hampshire conference managed to create two institutions. The International
Bank for Reconstruction and Development (IBRD) was established to help the world's
economically backward nations to grow and become more prosperous. The International
Monetary Fund (IMF) was created to help countries manage financial crises by drawing
upon the resources contributed by all member countries into a common pool. The Bretton
Woods conference did not succeed in establishing a World Trade Organization. That
happened much later, towards the close of the 20th century.

The establishment of the WTO was not agreed at the time of the creation of the World
Bank and the IMF since the nations assembled at Bretton Woods were reluctant to
surrender their authority over trade to an international body. Control over trade among
nations affected powerful groups in all countries. These groups were reluctant to allow
their governments to acquiesce in the creation of an international organization that could
act independently, devise rules for the conduct of trade that went against the interests of
individual countries, and develop the legal capacity to enforce these rules.

On the other hand, the creation of the IBRD and IMF did not breach in any significant
way the exercise of power by the world's dominant states. They saw themselves as
contributors of resources to these institutions. They did not envisage that they would ever
be in situations when they would have to accept the diktat of international bodies run by
faceless international bureaucracies.

The closest the Bretton Woods conferees came to accepting some international oversight
over the functioning of developed economies was to include Article IV in the charter of
the IMF. According to this Article, the Fund was authorized to hold periodic discussions
with the economic managers of all member countries, developed and developing. These
"Article IV" discussions form the basis of country reports the IMF prepares for the
institution's Executive Board for discussion.

A world trade authority would by its very nature be very different from the two
international financial institutions established at Bretton Woods. Since the bulk of world
trade was among the rich nations, an international body managing trade could be
effective only if it exercised control over trade. This the rich countries were not prepared
to countenance at that time.
Both the IBRD and IMF evolved in significant ways over time. The former developed
into what is today called the World Bank Group, a cluster of institutions that includes not
only the original IBRD but also IDA, IFC and MIGA.

The International Finance Corporation (IFC) was established in 1956 to provide equity
and loans directly to the private sector without guarantees given by the government. The
International Development Association (IDA) was established in 1961 to provide interest-
free loans to developing countries who could not afford to borrow on IBRD terms. India
and Pakistan were the largest recipients of IDA assistance for the first few years.

In 1988, the World Bank, by establishing the Multilateral Investment Guarantee Agency,
or MIGA, expanded further its assistance to the private sector. Private entrepreneurs
operating in the developing world could now obtain insurance and guarantees against all
kinds of non-commercial risks, including appropriations by governments of their assets.

The IBRD experiment - having a well financed institution to tap the world's financial
markets for resources and then lend them to developing countries at rates they could not
themselves obtain - was considered so successful that it prompted replication at the
regional level. Accordingly, developed countries worked over the years with regional
governments to create a number of regional banks.

The Inter-American Development Bank, the Asian Development Bank, and the African
Development Bank were all modelled after the World Bank. Later the world's Muslim
nations founded the Islamic Development Bank to develop Islamic instruments of finance
for providing resources to the poor Muslim countries. The bulk of the Islamic Bank's
capital was provided by the rich oil producing and exporting countries (OPEC) of the
Middle East.

Still later, the collapse of the Soviet Union and the grant of independence to the countries
that were once part of the Soviet empire or were under its influence, prompted the
countries of Western Europe, North America and Japan to establish the European Bank
for Reconstruction and Development (EBRD). The element of "reconstruction" in the
original mandate of IBRD referred to the need for rebuilding Europe and Japan, two parts
of the world that had been left devastated by five years of the Second World War. The
"reconstruction" in EBRD was aimed at rebuilding the economies of Eastern Europe and
Central Asia as they began the difficult process of moving from socialism to management
by the markets.

The expansion in the developmental role of the IBRD through its own evolution as well
as the establishment of regional and sub-regional banks was not matched by the IMF.
Nonetheless, after the collapse of the Bretton Woods exchange rate system following the
decision, in the early 1970s by the US President Richard Nixon to de-link the dollar from
gold, the IMF lost its original purpose - stabilization of exchange rates around the globe
with reference to the US dollar denominated in terms of gold. This decision by
Washington occurred at a time of extreme economic uncertainty in the world, which was
exacerbated by the OPEC move in 1974, to quadruple the price of oil. That meant a
dramatic change in the terms of trade of oil-importing countries. Developing countries
importing oil were especially hard hit. With their economies seriously damaged and their
external accounts under great pressure, they turned to the IMF for assistance. The Fund
now had a new mandate to help countries deal with crises.

In the following quarter century, the Fund's programmes were to rescue a number of
countries out of deep economic problems. Most large countries of Latin America
negotiated their way out of the debt problem of the 1980s with the assistance of the Fund.
In late 1994, the Mexican peso came under great pressure when it was revealed that the
country had borrowed a larger amount of money from the international financial markets
and built up a heavy burden of short-term debt.

Tesebonos, the instrument used for purchase of foreign debts, brought the country close
to bankruptcy. When a new administration took power on December 1, 1994, it decided
to deal with the situation by readjusting the value of its currency. What followed was
extreme economic turmoil and a plunge in the value of the peso.

The Mexicans once again turned to the Fund for help which it received in January 1995
in the form of a large package of assistance to which contributions were made not only by
the IMF, but also by the World Bank, the IDB and several rich countries, including the
United States. These multibillion dollar packages were to become a popular instrument
for addressing serious country crises that had the potential of disturbing, through
contagion, other economies in the developing world. Such a contagion was the defining
characteristic of the debt crises of the 1980s.

In the late 1990s, another set of crises burst upon the global scene. Starting first in
Thailand in July 1997, the East Asian financial crisis touched most countries of the
region, some - such as Indonesia - with devastating consequences. A year later, Russia
defaulted on its foreign obligations and a few months after that, first Brazil and then
Argentina, had to face a severe loss of confidence in their economies on the part of
international financial markets.

The IMF stepped into all these crises, once again, with large, multi-billion-dollar
programmes of support and rescue. Some of these programmes involved draconian
measures required of the countries in the region which caused a great deal of pain. The
Fund's approach in East Asia drew criticism from a number of well-informed sources.

Joseph Stiglitz, Nobel laureate in Economics, was particularly sharp in his criticism of
the IMF stance. Stiglitz was of the view that the enormous amount of financial power
wielded by the Fund with reference to the countries in economic crisis was often
misapplied. He questioned the application of the same economic philosophy across the
board no matter what were the immediate causes of the crisis. He was not persuaded that
the fiscal retrenchment sought by the Fund in East Asia was needed. It only helped
worsen the pain that the citizens living in these countries were already feeling.
Why We Need--and Why There Will Not Be--a New International
Financial Architecture

J. Bradford DeLong

Professor of Economics, University of California at Berkeley

Research Associate, National Bureau of Economic Research
Co-Editor, Journal of Economic Perspectives
Visiting Scholar, Federal Reserve Bank of San Francisco

http://www.j-bradford-delong.net
delong@econ.berkeley.edu

for a World Affairs Council Program, March 16, 1999

As prepared for delivery

Far to the west of the established industrial centers of the world economy--across the broad ocean--an
industrial revolution was in progress. Mammoth infrastructure projects laid the groundwork for cities and
factories where before only rude farmers had dwelt. Natural resources are tapped, and rising exports of
resource-based products raise living standards both in the new boom economies and in the older industrial
core. Alongside the resource exports a flow of manufactured goods begins and grows, as the emerging
industries find their competitive niches. All this is funded by an enormous flood of capital out of the
established financial centers seeking higher returns, and willing to bear some extra risks as well.

But all is not well. Corrupt government officials have been siphoning off unbelievable amounts of money
from state-funded infrastructure projects. Revelations of the extent of production lead to legislative censure
of the truth-tellers. Meanwhile, the largest financial institutions have become overextended: poured their
money into enterprises doomed to failure, and then tried to conceal their unsound fundamentals.

When a sudden shock lays bare the extent of official corruption and of unsound private business practices,
investors in the industrial core realize that all is not well in the lands to the west across the ocean. Capital
stampedes out, back to the industrial core, no matter what interest rates are paid or equity terms are offered.
And with a shattering crash, the largest and most prominent financiers--those whose houses have been the
vacation retreats of national presidents, and who have been the business partners of close relatives of
national leaders--fail and go bankrupt.

East Asia in 1997-8? Yes, of course. But also the United States of America in 1873-4.

Jay Cooke, the wizard financier of the Civil War, bet double-or-nothing four times in succession in an
attempt to salvage his investments in the Northern Pacific Railroad. He wound up spectacularly bankrupt
when his tame congressment were not able to push through extra public subsidies.

Leland Stanford and his friends collected their governments subsidies for building their part of the
transcontinental railroad, channeled the wealth through sweetheart deals with their own private construction
company, and left the railroad's investors and creditors in possession of an overleveraged and near-bankrupt
enterprise. The money that British investors had committed to the New World in the hope that it would
provide for their old age wound up as the endowment of Stanford University.
Our robber barons had little if anything to learn about crony capitalism and corruption from the friends of
Suharto. And British and other European investors reacted then just as American and other investors
reacted in the past two years: pulling their capital out of the enterprises and economies that only a year
before they had seen as profitable goldmines.

British and European capital fled the United States. The amount of railroad miles built in the United States
fell by 80%, as the country entered a severe depression. Until 1933, it was the U.S. depression that
followed 1873 that had the name of "Great Depression."

Yet in retrospect we are not sorry that our predecessors borrowed on a large scale from the world
economy's core to finance the late nineteenth century industrialization of the United States. It was a roller
coaster--boom, depression, overtime, unemployment, immigration, riot, and the bloodiest labor-relations
history in the world. But by 1910, even with a very large immigrant population for which English was a
second or third language, the United States was the richest country in the world.

Now we are watching the same movie. I do not think that we want to cancel the show--to cut off the flow of
capital out from the center to the industrializing periphery of the world economy. The ability of newly
industrializing countries to borrow on a large scale from the industrial core has the potential to cut a decade
or two off of what is otherwise a half-century long or longer process of industrialization.

But in the past--both the distant past and the recent past--with growth have come fluctuations: spectacular
financial manias, panics, and crises; and deep depressions.

For the root cause of the crises is a sudden change of state in international investors' opinions. Like a herd
of not-very-smart cattle, they all were going one way in 1993 or 1996, and then they turned around and are
all going the opposite way today. Economists dispute which movement was less rational: Was the stampede
of capital into emerging markets an irrational mania disconnected from fundamentals of profit and
business? Is the stampede of captal out of emerging markets today an irrational panic? The correct answer
is probably "yes"--the market was manic, it is now panicked, and the sudden change in opinion reflects not
a cool judgment of changing fundamentals but instead a sudden psychological victory of fear over greed.

Can we give the movie not a different ending--for the ending is a happy one, successful industrialization, a
chicken in every pot, a roof over every head, a high-speed DSL internet link to every CRT screen--but a
different middle, a middle without the manias, panics, crashes, and depressions?

Perhaps.

Today we know a lot more about how to manage the financial sectors of industrial market economies than
our predecessors knew a century ago. The U.S. Treasury and a Federal Reserve understand very well the
need to safeguard the world economy as a whole. Today we remember 1873--and 1857, and 1866, and
1893, and 1907, and 1929, and 1933, and 1992, and 1994. We understand that good can be done at very
little risk if we have institutions willing to collectively act as lenders of last resort. When financiers in the
industrial core panic, it is possible to greatly shorten and lessen the subsequent depression with large loans
to provide liquidity to keep the engine of capitalist development appropriately greased.

We can advise countries that seek to take advantage of the large benefits (and they are large benefits) of
global capital flows need to make sure that they do not destroy their own ability to handle crises. In the
current international monetary system it is assumed that one reaction to a crisis will be a devaluation: since
the world economy has signalled that it is no longer willing to pay as much for a country's capital or goods
as before, a devaluation is a way of reducing the price of a whole nation's goods, the analogue to a firm
cutting its prices in response to falling demand. But devaluation does little good if the value of the debts
owed by a country in crisis rise as the currency falls in value: if the banks and firms in a country in crisis
have borrowed not in their local currency, but in dollars, pounds, yen, or marks.
Thus the first thing that a country seeking to take advantage of international capital flows must do is
establish a system to detect and penalize home-country institutions and firms that borrow in money-center
currencies, for a large amount of such borrowing is what turns a shift in animal spirits by foriegn investors
from an annoyance to a catastrophe.

We can advise the creation of a good system of domestic banking regulation: a system that will detect--and
close down--financial institutions that are insolvent or nearly-insolvent, and that thus have strong incentives
to make risky but uneconomic investments. After all, if a firm is already insolvent any further investments
it makes are "heads, we win; tails, our creditors lose" propositions. Only if the financial system can be kept
well-capitalized and solvent will the inflow of foreign capital generate productive and profitable
investments.

But most of all there needs to be sufficient international liquidity to handle the kind of large-scale financial
crisis that springs from a shift in animal spirits on the part of investors in the industrial core. There need to
be well-capitalized institutions to make large-scale loans to countries that have been hit by panics. There
needs to be a willingness on the part of creditor countries to accept flows of imports from developing
countries that are the real-side counterparts of financial flows. A rebuilt, reformed, and renewed
international financial architecture seems to be called for.

And it is from this perspective that recent political developments are troubling.

As U.S. Representative Barney Frank remarked during the debate over boosting the
IMF's resources, the end of the Cold War has robbed economic internationalists of 50
votes in the U.S. House of Representatives. As late as mid-September the then-leaders of
both houses of Congress promising his political allies that the U.S. Congress would not
approve giving the IMF more resources: "we're not turning $18 billion over to a French
socialist [Michel Camdessus] so that he can throw it away."

Economic historian Charles Kindleberger thought that, at the deepest level, the cause of the Great
Depression was that Britain could not longer and the U.S. would not take responsibility for dealing with
international financial crises. Listening to Newt Gingrich and Trent Lott, it is hard to escape the conclusion
that we are about to enter an era in which once again the U.S. will not take responsibility.

Outside the United States, the global economic news in 1998 was not good. There were
several reasons for the sudden increase in the price of risk that we saw last summer--the
increase that bankrupted the hedge fund Long-Term Capital Management, and that scared
Federal Reserve Chair Alan Greenspan enough to lead him to reduce interest rates more
than once last fall. The first was the failure of emerging markets in East Asia to resume
strong growth--a failure blamed on the stagnation of the Japanese economy. The Mexican
crisis of 1994-5 was brief in large part because rapid U.S. growth created strong demand
for the products of Mexican industry. But in East Asia in 1998 the analogue of the U.S.
was Japan, Japanese growth was not strong, and so the exports of Malaysia, Thailand,
Indonesia, and Korea did not grow.

The second was Russia's suspension of payments. There had been a belief that the G-7
regarded ex-superpowers with large arsenals of nuclear weapons as "too big to fail," and
that a way would be found to keep Russia current on its obligations. This belief proved
false, and investors worldwide took note.
The third and most important reason for the rise in liquidity, risk, and default premia last
summer was that when investors look to the future they see further failures of economic
management--continued stagnation in Japan, European central banks that wring their
hands and say they can do nothing about ten percent unemployment in Europe, and the
prospect of refusal by the U.S. Congress to recognize that a global economy requires
well-financed global institutions to regulate it.

Thus there is no world-wide political consensus, and so it is hard to see the emergence of
financial institutions that will do as much to promote growth and avoid depression in the
early twenty-first century as the Bretton Woods order did in the third quarter of the
twentieth century.

Therefore it seems to me more likely than not that dreams of a rebuilt, reformed, and
renewed international financial architecture will remain nothing but dreams.

FINANCIAL ARCHITECTURE

Overview

Throughout this year, officials of multilateral lending institutions and G7 governments have
discussed measures to increase the private sector's involvement in forestalling and resolving
international financial crises, including, in some cases, involuntary techniques to engage private
sector support for economies in distress.

However, SIA urges increased participation and involvement by the private sector creditors whose
support is being sought. Only extensive consultation by the official community with the private
sector at all phases of these discussions can reduce the potential for uncertainty in the global
capital markets. The Securities Industry Association believes that international financial crises are
resolved best through direct negotiations among issuers and their creditors, and that voluntary
market-based mechanisms exist to address such crises effectively. We urge the official sector to
engage the private sector in developing and implementing such solutions.

A summary of our preliminary views on these issues, drawn from an excerpt from the ICSA 1
(International Councils of Securities Associations) Communiqué of The 12 th Annual General
Meeting, Gleneagles, Scotland, U.K, April 24-27, 1999, is set forth below:

Rescheduling of Sovereign Debt Issues

When discussing the globalization of capital markets, and the benefits to financial services firms
and their clients, ICSA members acknowledged that emerging market turmoil, and its contagion
effect, had exposed weaknesses in the current global financial system. While ICSA both
encourages and supports private and public sector dialogue on how to build investor confidence
and strengthen the global financial system, ICSA members equally express serious concern that
certain debt relief burden sharing proposals are likely to have a severe adverse impact on the
international securities market. As a consequence, ICSA strongly recommends that the official
sector consider very carefully the appropriate nature of this "burden-sharing." In this respect,
ICSA regards the Paris Club's current attempt to force rescheduling of sovereign bond issues
on a retrospective basis as particularly troubling, because such rescheduling does not properly
recognize the distinction between bonds and other forms of credit, or the nature of contractual
rights of bondholders, and would, inter alia, raise funding costs for emerging market borrowers
and damage investor confidence and systemic liquidity. ICSA members agreed that it should be
exclusively at the discretion of sovereign issuers and bondholders to determine how best to
resolve such financial difficulties. In ICSA's opinion, no retroactive changes to the contractual
terms of outstanding bond issues should be forced upon bondholders. ICSA members agreed to
develop a response opposing this initiative, and to raise ICSA's serious concern with the
appropriate authorities at both national and supranational levels.

Proposals For Voluntary Burden-Sharing

It is critical that the private sector play a role in efforts to formulate practical approaches to ensure
the orderly resolution of crises in international financial markets. Discussions of measures to
facilitate the private sector's involvement in forestalling and resolving international financial crises
should not be limited to the authorities of national governments and supranational institutions, but
should also include representatives of the private sector.

Without such consultation and participation, we believe an orderly resolution of these important
and complex issues is unlikely to occur, and that uncertainty will continue to deter investors and
impede the capital formation process. SIA calls on both the International Monetary Fund and the
U.S. Treasury to provide an appropriate forum for these discussions at the earliest possible date.

Therefore, SIA, in consultation with and on behalf of its membership, proposes the following:

Elimination of Moral Hazard

Just as we do not believe private sector creditors should be insulated by the official sector
against their misjudgments of risk, we similarly do not believe borrowers should be
insulated from the consequences of their contractual obligations through the intervention
of the official sector.

In the interim, we call on the official sector to dispel what has become a widely held, but
hopefully mistaken view, that it is encouraging sovereign debtors to default on their bond
obligations. To fail to withdraw support for this view invites moral hazard -- encouraging
imprudent behavior on the part of debtors that can only increase the severity and duration
of future crises.

In addition, if this view persists, rightly or wrongly, it threatens to disrupt any prospects for
orderly negotiated solution of the crises. Such unilateral action would impede debtors'
access to external finance, raise the cost of financing for even "creditworthy" borrowers,
and potentially damage liquidity.

Participation by Private Sector Creditors – Before and During Crises

SIA strongly supports the involvement of the private sector at all stages of a crisis. The
recent examples of Mexico, Korea and Brazil demonstrate the value of consultations
during crises that include representatives of the private sector as well as representatives
of the official sector. Moreover, in order to avert crises or enable them to be addressed in
their earliest stages, we strongly support a regime of close and regular consultation
among debtors, their creditors, and the official sector.

We also believe that a satisfactory solution to an international financial crisis – that is, a
solution that is orderly, preserves stability and ensures the sustainability of future capital
inflows – must be based on a transparent and fair process, voluntary, and
 comprehensive. It must address the underlying causes of the debt-servicing problems
and the need to maintain investor confidence, which is a prerequisite for sustainable
capital inflows and development of local financial markets. Debt relief should be
conditional upon and coincident with adjustment measures by the debtor.

We have serious concerns, for example, about the fairness of the recent actions of the
Republic of Ecuador. The government selectively halted payments to only one type of
creditor, specifically bondholders, and appears to be proposing the restructuring of claims
of some bondholders while continuing to service the claims of others. In fact, bonds have
been among the most stable, long-term sources of external finance for developing
countries and as such are arguably deserving of extra protection against restructuring.

Private Sector Solutions

We believe a wide range of mechanisms exist to ensure voluntary participation of the

private section in the resolution of international financial crises. We do not believe
retroactive changes to the contractual terms of outstanding bond issues should be forced
upon bondholders. Rather, such changes should come only as a measure of "last
resort," and then only as part of a comprehensive negotiated restructuring of all creditor
claims. Inclusion of provisions for the modification of terms by qualified majorities and
collective representation provisions to facilitate the restructuring of bond issues should be
voluntary. Other proposals identified by the IMF in its April report on the subject should
be carefully explored. These include: voluntary restructuring; official enhancements of
new debt to catalyze private sector exposure and help restore market access; and, a
concerted rollover and restructuring of trade and interbank lines to provide a breathing
space.

To establish an orderly and predictable process for rescheduling, the use of creditor
councils should be considered as fora for discussions. Such councils should reflect the
composition of a debtor's creditors and protect the interests of minority (small) creditors.
These councils, when they deem it appropriate, may decide that official sector
representatives should be invited to monitor these discussions.

Conclusion

Contrary to voiced concerns that the private sector has been "bailed out" in recent crises, private
sector participants do not enter into transactions expecting to be protected from their mistakes by
the official sector. The facts clearly show that the private sector has suffered severe losses in
connection with these crises. For example, loses by foreign equity investors in Asia are estimated
at $166 billion. Additional losses by foreign banks in East Asia and Russia totaled $60 billion.

The SIA and its member firms have a great interest in establishing an effective framework for the
resolution of international crises that is transparent, orderly, fair, and voluntary. We would be
pleased to work with the official sector in crafting such a framework.

Footnotes

1. The members of ICSA are as follows: Association Francaise des Enterprises d'Investissement,
France; Chinese Securities Association, Taipei; International Banks and Securities Association of
Australia, Australia; International Primary Market Association, International (based in London);
International Securities Market Association, International (based in Switzerland); Investment
Dealers Association of Canada, Canada; The Korea Securities Dealers Association, Korea; Japan
Securities Dealers Association, Japan; London Investment Banking Association, England;
National Association of Securities Dealers, Inc., United States; The Bond Market Association,
United States; The Securities and Futures Authority, England; Securities Industry Association,
United States.