By David E. Sanger
New York TimesFour blocks down Pennsylvania Avenue from the fund's headquarters, the White House Situation Room hums 24 hours a day. So do the State Department's Operations Center and the Treasury's lesser-known Watch Office. But 20 months into a worldwide financial crisis that churns round the clock, the IMF still closes down on nights and weekends. Last year, one senior official of the fund recalled, "we had a desperate-sounding finance minister call in," seeking advice on a currency devaluation that might have shaken markets around the world. He reportedly had a pleasant chat with the security guard.
The story is worth remembering amid the grand political pronouncements -- here, in Europe and in Asia -- about the need to build a "new global financial architecture." The rhetoric has its appeal: Most everyone agrees that the system for governing the world economy that emerged from a hotel ballroom in Bretton Woods, N.H., a half-century ago -- in the era of the gold standard and fixed exchange rates -- is hopelessly outdated. But there the agreement ends. Some say that what the world financial system needs is not a new design but better wiring, in the form of greater communication among investors, regulators, governments and international oversight agencies -- if not security guards with PhDs in international economics.
Over the last few months, a plethora of small-bore fixes have been proposed, everything from "exit taxes" to make investors think twice about bailing out of troubled markets to "early warning systems" to make them think twice about the stability of the countries where they invest. Then there are far grander designs -- so many, in fact, that it might be possible to build another ballroom at the old Mount Washington Hotel in Bretton Woods out of bound reports describing what a new financial system should look like.
In the last two months alone, the World Bank, the IMF and the United Nations have all published analyses of what's gone wrong in global finance, each coming to different conclusions about responsibility for the continuing crisis. The Council on Foreign Relations, the private public-policy group based New York, has put together a high-powered commission to propose an overhaul of the system. Its report will jockey for shelf space with similar proposals oozing out of a dozen other prominent research centers.
The Group of Seven industrialized nations couldn't wait for the council, so last weekend it announced the creation of a "Financial Stability Forum" to help bring order to the chaos. The idea is to begin to connect the wiring, providing a place for market regulators in many countries and the myriad international regulatory groups to talk about setting common standards for dealing with financial concerns. To keep the forum "manageable," a G-7 statement explained, dozens of officials from each of the seven nations will be joined by no more than three members each from the IMF, the IBRD, the BIS and the OECD. Then, of course, "the international regulatory groupings (BCBS, IOSCO, IAIS) would be represented by two members each, and the CGFS and CPSS by one each." (Readers interested in testing their knowledge of international organizations will find the acronyms decoded at the end of this article.) The forum's first meeting is scheduled for next month.
What will change? The betting these days is not much. While some modest changes are already under way -- mostly tougher disclosure requirements for countries and their central banks -- a broad remaking of the system seems unlikely. President Clinton, who during the market swoon in September described the "new architecture" drive as a top priority of his second term, has spoken about it publicly only intermittently since December. And while the Treasury Department says long-term solutions will be the focus of the annual summit of G-7 leaders in early summer, skeptics abound. "Crises are endemic to our system, and sometimes they are healthy," Kenneth Courtis, the chief economist for Deutsche Bank's Asian operations said recently. "But after every one, there is always talk about rebuilding the system, until the markets get better. Then people forget about it. I suspect the same will happen this time." For now, though, here are the hottest ideas under discussion -- and the problems that plague them.
Tsunami Alerts
Imagine a Weather Channel for the global economy, a proposal being pushed by many European nations. If financial quakes loomed -- a devaluation in Brazil, export declines in China, more capital flight from South Africa or Indonesia -- the IMF would broadcast the news. (It is already broadcasting summaries of its periodic reviews of member countries, with much of the information posted on its World Wide Web site, www.imf.org.) Sounds great: Tune in, then call your broker. But there's a hitch. Weather satellites can pick up an approaching storm a lot better than experts can see a financial disaster ahead. There were plenty of warnings about Thailand in 1997, for example, but almost no one predicted a calamity. "Nothing in my 26 years on Wall Street or my six years in government suggests that there is any predictive capability even remotely reliable enough for such a system," Treasury Secretary Robert E. Rubin said recently.
The IMF notes that it often detects signs that a crisis is brewing, only to discover later that the crisis never arrives. "We've successfully predicted 14 of the past 6 financial crises," joked Stanley Fischer, the fund's No. 2 official. Of course, when an alarm issued by the Weather Channel turns out to be false, everyone is relieved. But an alarm from the IMF could easily set off a stampede of investors -- creating exactly the kind of panic everyone is trying to avoid.
Tollbooths on the Highway
The experts call them "capital controls" -- limits, or taxes, on short-term investment money that flows in or out of small nations. The appeal is simple: If investors know that that their money will be tied up in Malaysia or Mozambique for some time, or that it will cost them a few percentage points to get it out early, they will think twice about rushing "hot money" into an economy that could be destabilized by a sudden, huge outflow of cash.
Not surprisingly, politicians love this idea. And everyone points to Chile, which taxed short-term capital until recently, when investment dried up for all emerging markets. And there's the rub. As Malaysia learned when it banned trading in its currency, capital controls are a great way to regain sovereignty over an economy. But after a while, investors begin thinking about putting their money elsewhere -- in countries that don't tax capital. In short, the country that sets up a tollbooth can expect to see fewer and fewer cars on the highway. And that means the country could go begging for foreign investment. Or it might use the existence of the tax as an excuse not to change its economy.
Promises, Promises
One lesson of the last two years is that bad things can happen to good economies. South Korea, for example, clearly has the talent and the means to rank among the world's best economies. But when it nearly ran out of central bank reserves in 1997, investors panicked and the currency melted down. To avert such panics, the IMF and some economists have suggested that countries could be "prequalified" for emergency aid, in the hope that the mere existence of a big credit line would reassure investors. It would be a little like getting one of those letters from a credit card company offering a $10,000 credit line -- just in case you come up short one month on the mortgage.
That was essentially the deal the IMF and the Treasury offered to Brazil last year, when it described a $41 billion bailout as "precautionary." Unfortunately, that package failed to prevent a run on the currency, the real, illustrating one of the shortcomings of such aid. Brazil received the aid in return for detailed promises to tighten its belt, and fast. But once the deal was announced, the Brazilian Congress concluded that the heat was off and there was no rush about the reforms. It took investors only two months, until January, to conclude that the reforms might be vapor, at which point they fled.
What can the IMF do if a country fails to deliver on its promises? In an extreme case, as in Russia, it can stop lending altogether. But un-qualifying a country is essentially an invitation for the world to pull its money out, creating the crisis the aid was intended to avoid.
Aim at That Target
The Germans, with some support from France and Japan, want an agreement to establish "target zones" that would reduce the volatility of the world's three major currencies: the dollar, the euro and the yen. Under this plan, the major economies would coordinate their policies to keep their currencies within a specified trading range.
Rubin thinks this is one of the worst ideas he has ever heard. Europe's enthusiasm for managing currencies is understandable. Its leaders want to make sure the United States doesn't let the value of the dollar slip in order to make American exports, which are declining sharply, more competitive against European products. Washington, of course, does not want a committee of the Group of Seven dictating American monetary policy. Suppose the United States economy began sinking, and the value of the dollar sank with it. The Group of Seven might mandate that the United States raise interest rates to stabilize the currency. That could worsen the economic downturn.
Smaller economies also have a dog in this fight. Remember, Thailand got in trouble because it tied its currency, the baht, to the dollar. As the value of the dollar rose, so did the value of the baht, until it quickly became unsustainably high. And when Thailand de-linked its currency from the dollar -- well, that was the day the Asian crisis started.
Start Bailing
When a country begins to list, investors bail out. So beginning with the effort to save South Korea, the Treasury has talked about "bailing in" investors. What American officials mean is that big banks and other lenders should be compelled to take responsibility for having provided countries with the money they used so foolishly. For example, the lenders might be obliged to roll over their loans or turn short-term lending into long-term lending, rather than head for the exits. When South Korea was teetering, Rubin strong-armed some lenders to do just that. But since then, the enthusiasm for "bailing in" has been tempered by reality. Bankers have begun to warn that if the risk of lending to emerging markets climbs too high, either they will charge the riskiest countries the highest interest rates (to compensate for the possibility that they will one day be "bailed in") or they will avoid them completely. A result is that the developing world may not develop very fast.
Swinging a Baton
Barry Eichengreen, an international economist at the University of California at Berkeley, says the IMF "will have to become less of a fireman and more of a policeman." In a new book, "Toward a New International Financial Architecture" (Institute for International Economics, 1999), he explained that rather than roaring to the rescue once disaster strikes, the fund should be constantly policing compliance with international rules and regulations -- and making sure that the markets understand who is abiding by the rules and who is not.
But that would require a change of culture at the IMF, which has often been beholden to its members, including the rule breakers. Fund officials would have to be willing to utter unpleasant news, in strong terms. And they might need to answer their phones on the weekends.
The acronyms:
IBRD - International Bank for Reconstruction and Development, better known as the
World Bank
BIS - Bank for International Settlements
OECD - Organization for Economic
Cooperation and Development
BCBS - Basle Committee on Banking Supervision
IOSCO -
International Organization of Securities Commissions
IAIS - International Association of Insurance
Supervisors
CGFS - Committee on the Global Financial System
CPSS - Committee on Payment and
Settlement Systems
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