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September 20, 1999 — The international community will not make real headway in crisis prevention if private creditors—and particularly large commercial banks—can escape from bad loans to emerging economies at relatively low cost, according to an independent blue-ribbon task force sponsored by the Council on Foreign Relations, chaired by Peter G. Peterson and Carla A. Hills and directed by Morris Goldstein. The IMF should therefore return to smaller rescue packages for country crises that do not threaten the performance of the global financial system. In extreme cases, the IMF should also require as a condition for its own emergency assistance that debtors be engaged in serious and fair discussions on debt rescheduling with their private creditors.
The task force believes that the primary responsibility for crisis prevention and management in emerging economies should be placed on emerging economies themselves and on the private lenders and investors that dominate today’s international capital markets.
Strengthening the international financial architecture in this and complementary ways would advance U.S. national interest, since the economy is now connected much more closely to the rest of the world than it was 20 or 30 years ago. The U.S. economy performed impressively throughout the Asian crisis because our domestic spending was strong and inflation was low. Next time the United States may not be so well positioned to weather the storm.
The task force recommends the following to strengthen the international financial architecture:
- Greater rewards for good housekeeping. The IMF should lend on more favorable terms to countries that take effective steps to reduce their crisis vulnerability and should publish assessments of these steps so the market can take note.
- Capital flows—avoiding too much of a good thing. Emerging economies with fragile financial systems should take tax measures to discourage short-term capital inflows and encourage less crisis-prone longer-term ones, such as foreign direct investment.
- The private sector: promoting fair burden-sharing and market discipline. All countries should include "collective action" clauses in sovereign bond contracts so as to restrain rogue creditors and make it easier to reschedule debt in appropriate circumstances. If debt rescheduling is necessary, the IMF should require that debtors be engaged in "good faith" negotiations with their private creditors as a condition for its own lending, and it should be prepared to support a temporary half in debt repayments.
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The IMF should also encourage emerging economies to implement a deposit insurance system for their banks that places the primary cost of bank failures on bank shareholders and large, uninsured private creditors of banks—and not on small depositors and taxpayers.
- Just say no to pegged exchange rates. The IMF and Group of Seven should advise emerging economies against adopting pegged exchange rates and should not provide funds to support unsustainable currency pegs.
- IMF crisis lending: less will do more. The IMF should abandon huge rescue packages for country crises and should return to normal lending limits. For crises that threaten the global financial system, the IMF should turn to existing credit lines when problems are largely of the country’s making and to a special systemic contagion facility when the country is an innocent victim of contagion.
- Refocus the IMF and the World Bank: back to basics. The IMF should focus on monetary, fiscal, exchange rate, and financial-sector policies, not longer-term structural reforms. The World Bank should focus on longer-term structural and social aspects of development, not on crisis management or macroeconomic advice.
- Generating political support for and ownership of financial reforms. A global conference of finance ministers should be convened to reach a consensus on priorities and timetables for actions that countries will take to strengthen national financial systems.
While not every task force member agrees with every one of these recommendations, all 29 members of the task force (see attached list) support the basic thrust of this approach to crisis prevention and crisis management.
The task force differs from the official sector in that the task force:
- Advocates a more ambitious approach than that being pursued by policymakers at present.
- Takes a tougher line on getting private lenders to accept their fair share of the crisis resolution burden and on getting the IMF to adhere consistently to normal lending limits.
- Takes a firmer position on limiting IMF support for adjustable peg exchange rate regimes.
- Attaches a higher priority to refocusing the mandates of the IMF and the World Bank on leaner agendas.
- Urges the IMF to be more explicit in identifying publicly which countries are and are not implementing a set of international financial standards.
- Takes a more activist position on the need for transparent and non-discriminatory tax measures to shift the composition of capital inflows toward longer-term flows.
- Takes a stronger view on the G-7 countries leading the way on institutional reforms in capital markets.
- Proposes a different design and funding for a systemic contagion facility.
- Offers a platform (a global conference of finance ministers) for garnering political support and promoting ownership of architectural reform in emerging economies.
The Council on Foreign Relations, founded in 1921 and based in New York, is a national nonpartisan membership organization and think tank dedicated to fostering America’s understanding of other nations through study and debate.
Commission on the Future International Financial Architecture
Paul A. Allaire is Chairman and Chief Executive Officer of Xerox Corporation. Mr. Allaire joined Xerox in 1966, serving in a variety of senior posts, and was elected President and a member of the Board in 1986.
C. Fred Bergsten has been Director of the Institute for International Economics since its creation in 1981. Dr. Bergsten served at the Treasury Department as Assistant Secretary for International Affairs from 1977-81.
Kenneth W. Dam is Max Pam Professor of American and Foreign Law at the University of Chicago. Mr. Dam was Deputy Secretary of State from 1982-85.
George David is Chairman and Chief Executive Officer of United Technologies Corporation. Mr. David joined Otis Elevator Company in 1975, just prior to the merger of Otis into United Technologies.
Jorge I. Domínguez is Director of the Weatherhead Center for International Affairs and Clarence Dillon Professor of International Affairs at Harvard University. Dr. Domínguez is a former President of the Latin American Studies Association.
Kenneth M. Duberstein is Chairman and Chief Executive Officer of The Duberstein Group, an independent strategic planning and consulting company. Mr. Duberstein served as Chief of Staff to President Reagan from 1988-89.
Barry Eichengreen is John L. Simpson Professor of Economics and Political Science at the University of California, Berkeley, where he has taught since 1987. Dr. Eichengreen was Senior Policy Advisor at the International Monetary Fund from 1997-98.
Martin Feldstein is George F. Baker Professor of Economics at Harvard University and President of the National Bureau of Economic Research. Dr. Feldstein was Chairman of the Council of Economic Advisers and President Reagan’s chief economic adviser from 1982-84.
Morris Goldstein is Dennis Weatherstone Senior Fellow in International Finance at the Institute for International Economics. Dr. Goldstein served as a staff member of the International Monetary Fund for twenty-five years, the last eight as Deputy Director of the Fund’s Research Department.
Maurice R. Greenberg is Chairman and Chief Executive Officer of American International Group, Inc. and Vice Chairman of the Council on Foreign Relations. Mr. Greenberg is a past Chairman, Deputy Chairman and Director of the Federal Reserve Bank of New York.
Lee H. Hamilton is Director of the Woodrow Wilson International Center for Scholars. Mr. Hamilton served as a member of Congress from the ninth district of Indiana from 1965-99 and chaired the House Foreign Affairs Committee.
John G. Heimann is Chairman of the Financial Stability Institute, a subsidiary of the Bank of International Settlements. Mr. Heimann was Chairman of Global Financial Institutions at Merrill Lynch & Co., Inc.
Carla A. Hills is Chairman and Chief Executive Officer of Hills & Company, an international consulting firm. Mrs. Hills was United States Trade Representative from 1989-93.
Peter B. Kenen is Walker Professor of Economics and International Finance at Princeton University. He taught at Columbia University from 1957-71, where he was Chairman of the Department of Economics, and Provost of the University from 1969-70.
Paul R. Krugman is Ford International Professor of Economics at Massachusetts Institute of Technology. Dr. Krugman was International Policy Economist for the Council of Economic Advisers from 1982-83.
Nicholas R. Lardy is Senior Fellow in Foreign Policy Studies at the Brookings Institution and Frederick Frank Adjunct Professor of International Trade and Finance at Yale University School of Management. Dr. Lardy was Director of the Henry M. Jackson School of International Studies at the University of Washington from 1991-95.
David A. Lipton is Senior Associate at the Carnegie Endowment for International Peace’s Global Policy Program. Mr. Lipton served in several senior positions at the Treasury Department from 1993-98, most recently as Under Secretary for International Affairs.
Ray Marshall is Audre and Bernard Rapoport Centennial Chair in Economics and Public Affairs at the University of Texas at Austin. Dr. Marshall was Secretary of Labor from 1977-81.
Norman J. Ornstein is Resident Scholar at the American Enterprise Institute for Public Policy Research and election analyst for CBS News. In addition, Dr. Ornstein writes regularly for USA Today as a member of its Board of Contributors and writes a column called “Congress Inside Out” for Roll Call.
Peter G. Peterson is Chairman of the Blackstone Group and Chairman of the Council on Foreign Relations. A former Secretary of Commerce, Mr. Peterson is Vice Chairman of the Federal Reserve Bank of New York, founding Chairman of the Institute for International Economics, and founding President of The Concord Coalition.
William R. Rhodes is Vice Chairman of Citigroup and a Vice Chairman of Citicorp and Citibank.
Stephen S. Roach is Managing Director of Morgan Stanley Dean Witter & Co. and Chief Economist and Director of Global Economic Analysis. Prior to joining Morgan Stanley in 1982, he was Vice President for the Morgan Guaranty Trust Company.
Henry B. Schacht is Director and Senior Advisor of Lucent Technologies. Mr. Schacht served as the company’s first Chairman and Chief Executive Officer from 1995-97. Mr. Schacht was Chairman and Chief Executive Officer of Cummins Engine Company from 1977-95.
James R. Schlesinger is Senior Advisor at Lehman Brothers and Counselor to the Center for Strategic and International Studies. Mr. Schlesinger was Director of Central Intelligence in 1973, Secretary of Defense from 1973-75, and the first U.S. Secretary of Energy from 1977-79.
George Soros is Chairman of Soros Fund Management LCC. Mr. Soros funds a network of foundations dedicated to building and maintaining the infrastructure and institutions of an open society.
Laura D’Andrea Tyson is BankAmerica Dean, Walter A. Haas School of Business, University of California, Berkeley. Dr. Tyson was Chair of the Council of Economic Advisers and National Economic Adviser to President Clinton. She served on the President’s National Security and Domestic Policy Councils.
Ezra F. Vogel is Henry Ford II Professor of the Social Sciences at Harvard, Director of the Fairbank Center for East Asian Research at Harvard, and Director of the Harvard University Asia Center.
Paul A. Volcker is Henry Kaufman Visiting Professor at New York University’s Stern School of Business. He retired as Chairman and Chief Executive Officer of James D. Wolfensohn & Co., Inc. upon the merger of that firm in 1996 with the Bankers Trust company, of which Mr. Volcker became a director. Mr. Volcker was Chairman of the Board of Governors of the Federal Reserve System from 1979-87.
Vin Weber is a partner at Clark & Weinstock. Mr. Weber was a Co-Founder and Co-Director of Empower America, a non-profit organization which deals with economic, social welfare, and educational problems. He represented Minnesota in the United States House of Representatives from 1980-92.
Co-chairs: Peter Peterson and Carla Hills
Project Director: Morris Goldstein