By Shawn McCarthy
The Globe and MailFebruary 22, 1999 Ottawa -- Finance ministers from the G7 nations have agreed to set up a new system for monitoring the world's financial trouble spots and for the need to step up debt relief for the poorest Third World countries. At the same time, the ministers from the Group of Seven leading industrialized nations warned that Russia appears to be headed for another economic shock like the one that sparked turmoil in global currencies and stock markets last fall.
While the ministers expressed concern about Russia and Brazil, they also took steps to avoid or minimize future shocks. They agreed to establish a semi-annual financial stability forum, which will act as a watchdog to warn of financial crises and provide strategies for avoiding them. "This is really major progress along the lines of what Canada has been proposing for the last year and a half," Finance Minister Paul Martin said in a telephone interview from Bonn, where the G7 ministers met over the weekend.
Mr. Martin had expressed concern going into the meeting that G7 leaders were losing momentum in the push to reform the global financial regulatory system. The financial stability forum was the principal recommendation of a report by Hans Tietmeyer, president of Germany's Bundesbank, that was submitted to the ministers at the Bonn meeting.
"In international terms, this was the speed of light -- not only was the report adopted but a chairman was named," Mr. Martin said. The chairman will be Andrew Crockett, general manager for the Bank for International Settlements.
The forum will include representatives from the G7, the International Monetary Fund, the World Bank, the Organization for Economic Co-operation and Development and international financial regulatory associations. It will be housed at the Geneva-based Bank for International Settlements, a global banking watchdog. Mr. Martin said the forum should be an important body for identifying the potential risks for investors in emerging markets and the gaps in information needed to assess risk. If it had been in place several years ago, he suggested, the Asia crisis might have been far less severe.
The ministers also said they hoped to have agreement on a number of reform issues in time for the G7 leaders' summit this summer in Germany. Mr. Martin has proposed that countries facing currency crises be able, with participation from the IMF, to impose a 90-day "standstill" arrangement that would prevent capital flight and allow a cooling-off period. That proposal -- and others aimed at strengthening the IMF and World Bank, and encouraging private sector involvement in crises resolution -- will be discussed in seminars this spring, with the aim of having some decisions ready for G7 leaders to endorse at their summer summit.
Mr. Martin said finance ministers also agreed on the need for broader debt relief for the most highly indebted, poorest countries, but only through the World Bank and IMF. He has rejected calls from church groups for broad-based, unconditional debt relief, arguing that cancelling the debts of corrupt or military governments may do nothing to help the people of those countries. Instead, he is urging the World Bank, which is owed much of the money from the least developed nations, to expand an existing program that is meant to provide debt relief to the 40 poorest countries but so far only has agreements with seven countries. "There was agreement around the table that we would come up with substantial initiatives in time for the leaders' summit," he said. "The view is that whatever is done, it should be done through the easing of the World Bank criteria."
Bank of Canada Governor Gordon Thiessen said in an interview that the G7 ministers and central bankers agreed on how to respond to wild swings in currencies. Mr Thiessen played down reports that German Finance Minister Oskar Lafontaine wanted to set trading bands for the world's three major currencies -- the U.S. dollar, the Japanese yen and the euro. "There was a good deal less difference than the reports suggest," Mr. Thiessen said. He added that the financial leaders all agreed they would work to encourage more exchange rate stability and that currencies should more closely reflect economic fundamentals, but he said no one was pushing the notion of fixed currencies or trading bands.
Russia's economic situation remains a worry, the G7 ministers said in a communiqué at the end of their meeting in Bonn. "In the absence of a concerted policy response to ongoing financial and macroeconomic instability, the country is increasingly faced with the serious risk of accelerating inflation, further exchange rate weakening, and continued economic contraction."
Meanwhile, analysts said yesterday that the meeting will help the U.S. dollar strengthen further against the yen and euro, but will otherwise have little impact on financial markets.
Finance ministers and central bankers from G7 nations went out of their way to avoid publicly commenting on exchange rates during the day-long meeting on Saturday. But in doing so, analysts said they effectively endorsed the current strengthening trend in the dollar against other major currencies. "We're going to get a continued slide of the yen. The dollar dominance doesn't seem to have been in any way stalled by these kind of comments," said Iain Lindsay, head of capital markets strategy with Bank of Montreal in London. "The fact that they didn't come out to defend the yen in any way is enough."
Little was produced on the topic of exchange rates, which was the element of the summit most closely watched by market participants. "The Bonn gathering could pretty much be wrapped up as having anticlimax and benign neglect written all over it," said David Brown, chief international economist with Bear Stearns in London.
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