Note: Remarks as prepared for delivery
Questions & Answers
With programs in Indonesia, Korea, and Philippines and Thailand, the International Monetary Fund is at the center of international efforts to stem the financial crisis in Asia. IMF Managing Director Michel Camdessus discussed at a meeting at the Council on Foreign Relations on February 6, 1998, the IMF’s perspective on the region’s problems and efforts to resolve them.
Michel Camdessus assumed office as the seventh Managing Director and Chairman of the Executive Board of the IMF in 1987. He was recently unanimously selected to serve a third five-year term as the IMF’s Managing Director. Prior to joining the IMF, Mr. Camdessus served as Chairman of the Paris Club, Chairman of the Monetary Committee of the European Economic Community and as Governor of the Bank of France.
Text as Prepared for Delivery
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IMF MANAGING DIRECTOR MICHEL CAMDESSUS:
The IMF and its Programs in Asia
Ladies and gentlemen, it is a pleasure to join you here once again at the Council on Foreign Relations and to have this opportunity to talk to you about what the Fund is doing in Asia.
So much has already been said and written about the Asian crisis, that I don’t need to recount past history. Nor do I plan to describe the details of the Fund-supported programs in Thailand, Indonesia, and Korea, since anyone who is interested can check the websites of the IMF and these countries, where they can read the full text of the commitments that these countries have made to the IMF in their “letters of intent.”
Instead, I would like to explain briefly what these programs are trying to achieve. Then, since there are still quite a few misconceptions about what the Fund is doing in Asia, I would like to set the record straight on a few points. Finally, I will say a few words about the implications of the Asian crisis for the future architecture of the international financial system
A new approach
So what are these programs in Thailand, Indonesia, and Korea all about? Many people assume that they must be the same kind of belt-tightening adjustment programs that the public has long associated with the Fund. Quite the contrary. These programs represent a marked departure from the kind of programs we have traditionally supported in the past.
I say this because the centerpiece of each program is not a set of austerity measures to restore macroeconomic balance, but a set of forceful, far-reaching structural reforms to strengthen financial systems, increase transparency, open markets and, in so doing, restore market confidence. To this end, non-viable financial institutions are being closed down, and other institutions are being required to come up with restructuring plans and to complyowithin a reasonable period that varies from countries to countryowith internationally accepted best practices, including Basle capital adequacy standards and internationally accepted accounting practices and disclosure rules. Other institutional changes are under way to strengthen financial sector regulation and supervision, increase transparency in the corporate and government sectors, create a more level playing field for private sector activity, and increase competition. Taken together, these reforms will require a vast change in domestic business practices, corporate culture, and government behavior, which will take time. But the process is already in motion, and already some dramatic steps have been taken.
Will it work?
A dramatic departure, yes. But will it work? Some have argued that these programs are still too tough, either in calling for higher interest rates, tightening government budget positions, or closing down financial institutions. Let’s take the question of interest rates first. By the time these countries approached the IMF, the value of their currencies was plummeting, and in the case of Thailand and Korea, reserves were perilously low. Thus, the first order of business was, and still is, to restore confidence in the currency.
Here, I would like to dispel the notion that the deep currency depreciations seen in Asia in recent months have occurred by IMF design. On the contrary, in our view these currencies have depreciated far more than is warranted or desirable. Moreover, without IMF support as part of an international effort to stabilize these economies, it is likely that these currencies would have lost still more of their value.
To reverse this process. countries have to make it more attractive to hold domestic currency, and that means temporarily raising interest rates, even if this complicates the situation of weak banks and corporations. This is a key lesson of the “tequila crisis” in Latin America 1994-95, as well as from the more recent experience of Brazil, Hong Kong, and the Czech Republic, all of which have fended off attacks on their currencies over the past few months with a timely and forceful tightening of interest rates, along with other supporting policy measures. Once confidence is restored, interest rates can return to more normal levels.
Let me add that companies with substantial foreign currency debts are likely to suffer far more from a long, steep slide in the value of their domestic currency than from a temporary rise in domestic interest rates. Moreover, when interest rate action is delayed, confidence continues to erode. Thus, the increase in interest rates needed to stabilize the situation is likely to be far larger than if decisive action had been taken at the outset. Indeed, the reluctance to tighten interest rates in a determined way at the beginning has been one of the factors perpetuating the crisis. Higher interest rates should also encourage the corporate sector to restructure its financing away from debt and toward equity, which will be most welcome in some countries, such as Korea.
Other observers have advocated more expansionary fiscal programs to offset the inevitable slowdown in economic growth. Here, the programs must strike a delicate balance. At the outset of a crisis, countries need to firm their fiscal positions, to deal both with the future costs of financial restructuring andodepending on the balance of payments situationowith the need to reduce the current account deficit. Beyond that, if the country’s economic situation worsens, the IMF generally agrees to let automatic stabilizers work and allow the deficit to widen somewhat. However, we cannot disregard the level of the fiscal deficit, particularly since a country in crisis typically has only limited access to borrowing and the alternative of money printing would be potentially disastrous.
Likewise, we have been urged not to recommend rapid action on banks. It would be a mistake, however, to allow clearly bankrupt banks to remain open, as this would only perpetuate the region’s financial crisis, not resolve it. The best course is to recapitalize or close insolvent banks, protect small depositors, and require shareholders to take their losses. At the same time, banking regulation and supervision must be improved. Of course, we take individual country circumstances into account in deciding how quickly all of this can be accomplished.
In short, the best approach is to effect a sharp, but temporary, increase in interest rates to stem the outflow of capital, while making a decisive start on the longer-term tasks of restructuring the financial sector, bringing financial sector regulation and supervision up to international standards, and increasing domestic competition and transparency. None of this will be easy and, unfortunately, the pace of economic activity in these economies will inevitably slow. But the slowdown is mainly the result of the reversal of capital flows. Without these programs and the international support behind them, the slowdown would be much more dramatic, the costs to the general population much higher, and the risks to the international economy much greater.
Of course, not everyone agrees with this approach. Some say that it would be better simply to let the chips fall where they may, on the grounds that providing assistance to countries in crisis will only encourage more reckless behavior on the part of borrowers and lenders in the future. I do not share this view. First of all, the notion that the availability of IMF programs encourage countries to behave recklessly is not very plausible: no country would deliberately court such a crisis even if it thought international assistance would be forthcoming. The economic, financial, social, and political pain is simply too great. Nor do countries show any great desire to enter IMF programs unless they absolutely have to.
Second, despite the constant talk of bailouts, most investors are taking heavy losses in the crisis. With stock markets and exchange rates plunging, foreign equity investors have lost nearly three quarters of the value of their equity holdings in some Asian markets. Many firms and financial institutions in these countries will go bankrupt, and their foreign and domestic lenders will share in the losses. International banks are also sharing in the cost of the crisis. Moreover, the fourth quarter earnings reports now becoming available indicate that, overall, the Asian crisis has been costly for foreign commercial banks. It is true that some short-term creditors are being protected, and this is an issue that needs to be addressed. But in the case of Korea, they are being bailed in at longer maturities and below comparable market rates.
The bottom, line is that there is a trade-off in how the international community chooses to handle the Asian crisis. It could step back, allow the crisis to deepen, bring additional suffering to the people of the region and, in the process, possibly teach a handful of international lenders a better lesson. Or it can step in and try to do what it can to mitigate the effects of the crisis on the region and the world economy, albeit with some undesired side effects. In my view, the global interest lies in containing and overcoming this crisis as quickly as possible. And working through the IMF offers the most expeditious and cost-effective way of doing this.
Toward a new architecture
Let me turn now to some of the ways in which the Asian crisis may affect the international monetary system. In the initial months of Asia’s financial turmoil, much of the world’s attention was focused on how to contain the crisis. But today thoughts are turning to how best to strengthen the international financial system so that such crises will be less likely to occur in the future and those that do occur can be handled more effectively. Although seven is a pleasing number, I see six pillars supporting this new architecture. Why only six? Well, perhaps because this new edifice is still on the drawing board. Briefly, these pillars are:
- one, more effective surveillance over countries’ economic policies, facilitated by fuller disclosure of all relevant economic and financial data. As you may know, the IMF has established data standards to guide members in releasing reliable data to the public. It is also promoting fuller disclosure through its programs and policy advice.
- two, regional surveillance, because experience shows that there is considerable scope for improving economic performance on a regional basis when neighboring countries get together to encourage one anotheroor put pressure on one anotheroto pursue sound policies. The Fund is assisting with such initiatives in Asia, just as it already does in the G-7 and other fora.
- three, financial sector reform, including better prudential regulation and supervision. Working with the World Bank and others, the Fund has helped develop and disseminate a set of “best practices” in the banking area, so that standards and practices that have worked well in some countries can be adopted and applied in others.
- four, more effective structures for orderly debt workouts, including better bankruptcy laws at the national level and, as recommended by last year’s study by the G-10, better ways at the international level of associating the private sector with official efforts to help resolve sovereign debt problems.
- five, orderly capital account liberalization: this means neither a return to antiquated capital controls nor a mad rush to full immediate liberalization, regardless of the risks, but properly sequenced and cautious liberalization, so that a larger number of countries can benefit from access to the international capital markets; and
- six, a strengthening of the international financial institutions, including their financial resources. At the IMF, we are deeply aware that support for the institution ultimately derives from members’ legislatures, which vote on their countries’ quotas, or subscriptions in the Fund. We know that we must work hard to merit their support. At the same time, however, we trust that the wisdom of legislators everywhere will lead them to see how much the IMF does to support economic well-being in their countries and around the world.
Suffice it to say, when all these elements are in place, the architecture of the international financial system will indeed be more modern and more substantial, and more equal to the challenges in the global economy today.
Ladies and gentlemen, there are many more issues that 1 would like to discuss with you, but I do want to save some time for your comments and questions. So let me stop here and turn the floor over to you.
Council on Foreign Relations Luncheon Address with Michel Camdessus
February 6, 1998
Questions & Answers
Paul A. Volcker: Thank you for those comprehensive and, I think on balance, optimistic views about the role of the Fund and future outlook in the wake of this crisis. I have no doubt that you have aroused many questions and I would like them to be put as succinctly, as directly, and as provocatively as possible. We’ll start going counter clock-wise for some reason.
Question: Thank you very much and thanks for a terrific speech. I would suggest to make your perfect seven that you single out the corruption issue as your seventh. It’s implicit in your first but I think it’s so important. My question is this, Michel, you went to Jakarta and you gave them a package and they signed a set of reform and austerity measures in return. I would submit to you that the chances of them actually carrying out their part of the bargain are tiny. They’ll do a few cosmetic things. They’ll cancel the car project because it was a disaster anyway. But they are not going to do what you have in mind. What are you going to do after they get the money but don’t do their part of the bargain?
Michel Camdessus: Well, it’s very simple. I will not give them the money before they do. You know, we have embarked on a three-year program with Indonesia and with the others. These programs have first prior actions before every disbursement. And then you have criteria and things to do at the end of every quarter. And each time there is failure, we stop our disbursement. And you will tell me, “Why, you will not have the guts to do that.” Yes, we have. And if you have doubts, ask Mr. Yeltsin.
Paul A. Volcker: If you are successful in Indonesia perhaps you can work on campaign reform in the United States.
Question: Given the current situation in Southeast Asia and the last dip we had, how do you expect the currencies to behave going forward, say for the next couple months, the next year? Do you expect a lot of ups and downs or some stabilization?
Paul A. Volcker: What’s your position?
Question: I think it’s going to be a mess but I’ll defer to Mr. Camdessus.
Michel Camdessus: You have two central bankers here, the kind of people who never answer these things, who will never tell you where currencies are going. But I will tell you what is on my mind. These programs are designed to restore confidence and with the caveat you have just heard, they are structured for doing that. And restoring confidence will have an immediate impact, and it has already, to bring the currencies to a more acceptable level. They continue to be over-depreciated. If governments implement strongly these programs without hesitation, without apologizing for doing that, then you will see these currencies recovering their normal level.
Let me add a word because I didn’t answer the point on corruption. I am, indeed, 100 percent in agreement with that. Full stop.
Paul A. Volcker: I wonder if there are any other questions on exchange rate implications of this crisis? Is that where you are, Mr. Hormats? O.K., whether or not you were before, you are now.
Question: I had three options. I would like you to comment, if you will, not so much on where exchange rates are going to be but on the general question of exchange rate regimes for countries. Many of these countries got into trouble because of their relatively fixed rates compared to the U.S. dollar. Some were locked in, others floated in narrow bands around the dollar.
What do you see going forward as an optimum set of principles for exchange rate policy? In the United States there are those who advocate currency boards, a relatively rigid system. There are those who want complete floating rates without any government intervention. What lessons have we learned and where do you see the system going, at least the thought process going, for these countries?
Paul A. Volcker: That’s a very general question and useful. Is there anyone else who would like to supplement that question? Exchange rates only.
Question: My question really is looking back on exchange rates. You said, Mr. Camdessus, that the exchange-rate falls that took place were dramatic-you didn’t use the word dramatic-but were excessive essentially because they were not justified by fundamentals. When you were here at the Council last with Mr. Volcker it was October 16 and after October 19, 1987, we got circuit breakers. What do you think is the potential for circuit breakers in exchange markets?
Paul A. Volcker: O.K., let’s deal with exchange rates and then move on to something else. Do you have very short on exchange rates? Very short?
Question: Just one more on the exchange-rate situation. Looking a little bit backwards and forwards. If we had put the pieces of the puzzle together and seen the extreme volatility of the yen, for example, against the dollar as it rose to below 90 to the dollar in 1995 and then swung to past 130 might we not have seen this coming? Did the IMF see this coming that those currencies were suffering greatly at the hands of a very depreciated yen. And we look at it after that we see that now those currencies really on a trade weighted basis really only stand about 25 percent devalued against the yen . . . [off mike]...looking close at the lessons here as we move toward a European Union in 1999.
Paul A. Volcker: I planted that question.
Michel Camdessus: Did you? Well, I must tell you that coming here and after a few months in the IMF I became much less dogmatic on these issues [exchange-rates] than I was as a central banker in Europe. Not because I was taken by the fashion of floating rate but because I have been around such a variety of experiences, good ones and bad ones, that a high degree of pragmatism guides us now and will guide us in the future dealings of this issue.
It’s true that inappropriate pegs or pegs inappropriate such as inappropriate terms have been part of the origin of the crisis in Asia. And I must tell you, it’s no more a secret, that during the year preceding July 1997, the beginning of the serious deterioration of the situation in Thailand, I have traveled four times to Bangkok, two or three times secretly, to tell them to get rid of your peg with the dollar. The dollar now will go up because it was at a dramatically depreciated level. The yen was at a dramatically level with the dollar. We the seven are engineering a rebalancing of things but you, the Thais, you cannot continue being wedded to the dollar in view of your present loss of competitiveness. So please move.
Well, they didn’t do that because they had many reasons, political in particular, the weakness of the government and so on. They took measures too small and too late. They decided to float with no accompanying measures and you had the catastrophe. And this was, indeed, also but partly only the case in Indonesia. Not that much in Korea. As a matter of fact, the Koreans had the system of crawling peg or something like that which protected them on that part of their economy.
Now, what for the future? Well, we have a variety of successful experiences. Of course, we have the currency board. And we never rule out anything. But we have less rigid systems which have also demonstrated their efficiency. And we discuss with each of them which kind of system should be established once their currency will enter again into a normal zone of floatation in view of what will be their fundamentals. Here we are ready to work with whatever system, provided it is in harmony with the macroeconomic situation of the country, with the strength of the central bank, the will, and the understanding of the government to act with a kind of a regime or another. You cannot have a single recipe but this is the spirit in which we are moving.
Now, this harmful relativity and the problems of crisis, violent speculation at some moment. The reflection on circuit breakers has not advanced in these domain. I don’t know exactly the reason but the fact is that all efforts are geared at avoiding the emergence of this kind of situation. And avoiding this kind of situation leads you to deal first and fundamentally with the basic underlying elements of the economy, the macroeconomic balance, the interest rate policy, and so on.
Of course, then you have all the reflections more fundamental about how the three big currencies of tomorrow will behave and this is indeed a secular matter for discussion among central bankers and others. Should sometime down the road, should the world have a kind of-I don’t dare to say-a target range or target zone system among these currencies? Possibly, if the zones are very broad this could be conceivable. But what is more important is the quality and intensity and trust prevailing in the relations between those responsible for these key currencies in order to keep that decently stable. A purpose all of them share as a matter of fact.
Question: [off mike]
Paul A. Volcker: Is there anyone else who would like to add a question about implications for Japan and China or vice versa? It was a pretty general question. So go ahead.
Michel Camdessus: Let’s take them separately. And I will start. You are absolutely right to raise that because we cannot have any vision of the future of the three countries and the program with us if we don’t have a clear perception of where China and Japan are going.
The first immediate thing to worry about is how China will react to the loss of competitiveness to which China is exposed now due to the depreciation of the currencies of these three significant partners. There are many worries about that. And it’s true that if China were to devalue in the proportion of the depreciation of the others this would be a catastrophe not only for the region but possibly for the world in view of the circular effect that this could have. This is why I have been myself discussing with the Chinese. I visited Beijing to this effect, to try and see where they were and how they were seeing the situation. I was happy to see that they were seeing the situation as we see it, namely that all scenarios being considered to move the exchange rate in the present circumstances would be a mistake. One, because they don’t need it. You know that they devalued before the others by a significant amount in 1994 and 1995 and they have kept significant margin of extra competitiveness if I may say so. Now they have lost that but they are not suffering that much in their exports. And they know pretty well that if they were to move then they would create a turmoil they couldn’t control and you know certainly that China is a country obsessed with stability. They need stability because they have an internal agenda-I don’t talk about the political agenda-but they have an agenda of strengthening their banking sector, reforming their state owned enterprises and for that-and they want to do that quickly-they need stability. So, they promised me that they wouldn’t touch, raise this issue in the near future.
Well, Japan is central indeed. And one of the best things these countries need is recovery in Japan and a strengthening of the financial structures of Japan. Japan, of course, is contributing its fair share to the international efforts, $19 billion which is not a small amount to the restoration of the economies of these countries. But much more important for these countries is what they intend to do to strengthen their financial sector, to liquidate banks which are insolvent and to restructure the others, and to get rid of nonperforming loans, to establish a solid system of guarantee of deposit, and so on. They have now an important program to this effort. If it were adopted soon and accompanied by some measures of temporary tax cuts or others in order to give a little bit more impetus to their activity, this would be a distinct contribution to the overall recovery.
Paul A. Volcker: I think this end of the room needs a question, succinctly.
Question: Fire fighting and worrying about the rescue of course is a very important function but we’ve heard very little about your views of what caused this in the first place? Everything was going wonderfully, seven percent growth rates, capital was flowing in, some short term, some long term, maybe too much short term in some of the worst affected countries. And this morning the blame was put on the same two countries we just talked about: Japan not having enough demand and the devaluation in China. The question I wanted to ask is have you noticed, for example, Taiwan and Singapore facing the same external shocks have not had the same consequences? And what is your conclusion based on that in terms of the causes in the most affected three countries?
Michel Camdessus: The causes are multiple and different according to the places but you had in some way in all of them one degree of overheating, particularly in Thailand and Korea, the abstention de facto of monetary policy, very weak and weakening financial structures, and too high short-term foreign exposure. These are key elements which were there together with economic structures, government structures which were rigidified, which had not allowed enough openness, which had facilitated all forms of monopolies, cartelization, inhibiting foreign direct investment, facilitating banking indebtedness. All those elements are there in the beginning of the crisis in the three countries. All of that is clear and analytically can be well established.
The difficulty for us at this stage at our work of our analysis is not so much in the analysis of the causes of the crisis in each country but the contagion phenomenon, its speed, and the aggravating factor it had on the crisis of each. And the kind of interconnection between this particular crisis. Here we are not sure that we still understand everything but what we know is that in the future we will have to be much more attentive to this interrelations between the countries.
Paul A. Volcker: According to the clock we have a 15-second question and a 30-second answer.
Question: Do you favor public disclosure of the details of Article 4 consultations with countries and of the development of programs for individual countries by the IMF?
Michel Camdessus: I favor that but I am dealing with 182 sovereign countries which put at our disposal information that they consider as confidential. The quality of our dialogue, the quality of our analysis, the quality of our judgment on their situation depends for us on the availability of this confidential data. If we betray that trust and without their consent we publish that it is nice in the instant but it’s the end of the job for the IMF.
So we are in a different track and this track is to progressively convince each country that for them it’s a winning game for disclosure and to utilize us in this business of disclosure. You have not perceived that possibly because the good things are not publicized but in the last two years we have convinced half of our membership to accept the conclusions of our executive board on the Article 4 discussions and there we are very blunt, we say what goes well and what is left to be desired. Of course, the underlying analysis is not provided but at least the views of the IMF are laid down without any censorship. We do not allow the executive director of the country to change a single word to my summing up of the debate. And we do that. We will go ahead pushing in this direction and we will give any extra push also to what we call the special dissemination standard because we believe that giving information to the IMF is a nice thing but it is much better to give the information to the markets.
Paul A. Volcker: I don’t know if we’re applauding for your information or for Michel Camdessus. I think we are applauding for both. We greatly appreciate your presence here, the frankness with which you have spoken can reinforce our confidence in you and the institution you are leading. Thank you so much.