Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. You say that the motivation is that they are good for them. Do they accept that or do they accept it is only good for them to the extent the IMF will then be their friend? What I am asking is whether some of these run at all contrary to the indigenous policies for economic and social development in the country?
  (Mr Pickford) I think it is mixed still. Some countries feel that these are standards being imposed on them from outside and in a form that is not tailored enough to their own circumstances. But I think that is changing over time because, for example, on banking supervision regulations these are increasingly seen as appropriate for countries to aspire to. They are best practice, if you like, and if they want to develop their financial sector these are sensible, practical mechanisms for them to take on board.

  41. But you are saying that as an IMF man. Do other people generally agree with that?
  (Mr Pickford) We perceive that as more countries go through the process and they find that some of the worries and concerns that they might have had in the first instance are not realised and they can see the practical benefits in terms of, for example, identifying areas where the Fund and the Bank can come in with technical assistance to help them build up their capacity, they are realising that the pluses are tending to outweigh the minuses.

  42. Is it eventually envisaged that compliance with these codes and standards will be amalgamated into the Article IV process?
  (Mr Pickford) I think they increasingly are being. For example, on the financial sector, where we have got a specific programme to try to assess countries' compliance against the standards, the results of those reports will actually be summarised in the Article IV report, and that is another example where the Fund will not necessarily be doing all the work in terms of analysing and assessing but it will be brought within the umbrella of the Article IV process. I think it is an important point you make because disseminating the information in a way that does not breach confidentiality, does not raise confidentiality issues, and does not put market sensitive information into the public domain, but nevertheless gets over the broad conclusions of the assessment, is all to the good.

  43. Are these codes and standards being applied with the same rigour to financial institutions as they are to developing countries, like hedge funds, for instance?
  (Mr Pickford) They tend to focus on the financial system as a whole and the issue then is whether you have got the right supervisory and regulatory processes in place to manage effectively your financial system. It would be interesting to see how the Fund approached this in terms of the United Kingdom because the United Kingdom is going to have a financial sector assessment either at the end of this year or early next, and of course, the United Kingdom has a very highly developed financial system. We have recently overhauled the financial supervisory regime here and the institutions so we will see how it copes with a system like that.

  44. Would a summary answer be no, they are not being applied as rigorously to financial institutions as they are to developing countries?
  (Mr O'Donnell) When you do an assessment of a sophisticated financial centre it would obviously be much more complex than one that is rather more basic. When it comes to doing one like the UK then they will have to face some of these issues. I am not sure they have done that yet.

  45. I was not really thinking of the United Kingdom. Can we say that with the existence of codes and standards we will not again have a crisis with the hedge funds that occurred previously?
  (Mr O'Donnell) The codes and standards are appraising the financial systems of countries. They are not looking at specific institutions. They do not do a ROSC of a hedge fund, for example.

  Chairman: On this point?

Sir Teddy Taylor

  46. Very briefly on this point, you are making it all sound very nice and kind and understanding and everything is working out perfectly and are we not so happy to have all these lovely people. Is it not the case that after the introduction of the Heavily Indebted Poor Countries initiative, a poor country called Zambia found it was having to pay more? Is that not true?
  (Mr Pickford) We discussed Zambia towards the end of last year and reached decision point. We ended up amending our rules because of the situation Zambia was in. What happened was that Zambia a few years ago had to have its debt restructured to the IMF in particular and the way it was restructured meant that there was a grace period of five years and then it started having to pay to the IMF. That resulted in a big jump in its debt service payments in 2001-02. Even with HIPC debt relief under the old rules it would have seen its debt service payment rise. That is absolutely right. As a result of that, and under United Kingdom pressure, the Board amended the Fund's rules so that we ended up being able to increase the amount of interim relief we could give to Zambia and to other cases like this so that the limit of the total debt relief was raised in any one year from 20 to 25 per cent and as a result of that Zambia's debt service payments will go down after HIPC relief.

  47. You are definite?
  (Mr Pickford) Yes.
  (Mr O'Donnell) You are right, if we had done nothing payments would have gone up and hence the United Kingdom took the initiative and lobbied around countries to get this amendment in the rules so this would not happen.

  48. The United Kingdom took the initiative?
  (Mr O'Donnell) Yes.

Mr Davey

  49. Can I just press you on that. The information I have is that average debt payments in the years 2001-05 will be $174 million for Zambia whereas in the two years prior to HIPC they were less, an average of $142 million. Are those figures prior to the special new agreement which you have reached?
  (Mr Pickford) I am not sure I do have it year by year unfortunately. We will let you have the figures. Let me read out from the conclusion from the Fund discussion. This is the summing up from the Chairman who said: "As a result of the IMF's Board decision today coupled with decisions with other creditors under the HIPC agreement, it is clear that Zambia's debt service payments in each of the next three years will be lower than this year."

  50. Could you write to the Committee with details of that?
  (Mr Pickford) We will write to you setting out the year-by-year figures.[1]

Mr Cousins

  51. There are a lot of very impressive and rather grand words and phrases and noises on this front of codes and standards and IMF practices, but if we take an example that is very much if the news at the moment, Ecuador, we have the news media full of the appalling situation in the Galapagos Islands, which Ecuador as a country is totally unable to deal with because it is a country that is absolutely smashed by its private sector debt which the IMF has taken an unconscionable time to unwind and assist with. Does that not point up some of the real contrasts?
  (Mr O'Donnell) Can I just say on Ecuador that Ecuador is one of those cases which created a challenge for private sector involvement because there was a lot of private sector debt there that needed to be restructured, where there needed to be an important application of the principles that we have been developing in G7 for PSI and it was done. Restructuring country sovereign bonds, private sector exchange, 6.6 billion in brady and euro bonds for 3.9 million in new bonds and cash payments of about one billion. So there was quite a significant private sector restructuring that took place there.

  52. That took a long time to bring about.
  (Mr O'Donnell) It was a complicated case.

  53. And in that time the Ecuadorian public sector was smashed.
  (Mr Pickford) Ecuador faced enormous problems and one of the difficult problems was trying to work out how to restructure the private debt. In the end, as Gus said, there was a restructuring put in place which substantially reduced the debt service burden for Ecuador. Just in terms of where you started off, the Fund and the Bank, perhaps more so the Bank, do have provisions to provide emergency assistance when there are natural disasters such as this. I do not have any information—I have been out of Washington for the last few days—about plans to invoke these in this case, but there are specific avenues by which the two institutions can help in terms of disasters like this.

  54. Clearly some of the crucial areas, as the example of Ecuador highlights, is private sector debt and in your annual report you present some information about your hopes and expectations for that which are that the private sector is going to increase its contribution to the external financing of emerging market countries by something like one-third in the two-year period in which we are now in the middle, and of that the bulk will come not from portfolio investment or private direct investment but this thing called "other private flows". Bearing in mind the remarks you made at the very start of the Committee session on this, the worries about the change in mood in the world economy, how much is all of that put at risk?
  (Mr O'Donnell) There are risks. It would be foolish to write them off with the world growth rate likely to slow down as there will be pressure on emerging market flows. I think that will take two forms. One will be the recent crisis countries where there have been big increases in spreads. If you look at the ones I am thinking of particularly, Argentina and Turkey, where spreads have gone up a lot, what will happen there is that Argentina, in particular, will be reluctant to go back into the market and to borrow more from the private sector while the price it will have to pay is so high. We are talking about spreads at the moment of 700 basis points. The Argentineans would probably like that spread to come down to 500 or below before they return to the market. So it is operating in two ways. One is if spreads move that far, what you will find is that countries simply are not willing to borrow at those rates, so private flows will slow down for a while. As the Fund programme has been put in place those spreads have come down. In Argentina we are talking about spreads hitting 1,000 at the peak of the crisis, and they have come down now to 700 but they have got 100 further to go before Argentina will go back to the market probably at some point in the first half of this year. The Fund programme allows them time and allows them financing to smooth over that. In general terms the net capital flows in emerging markets continued recovering throughout the year 2000 because they had gone down very low during the crisis. They are around, we estimate, 225 billion for the year 2000 as a whole, which is not a bad figure but it is well below the peak. The peak was reached in 1996, and that was about 360 billion, so we are still some way down. Part of restoring the confidence is all this hard work on codes and standards and all the rest of it, and improving the regulatory systems and the confidence of private sector investors so they will go back in, and trying to manage crisis resolution in a way that gives the private sector confidence in terms of their investments.

  55. Clearly from the information you have just given the Committee, the recovery to the position before the debt crises of the late 1990s is still far from complete. If there were to be a renewed onset of debt crisis and financing crisis do you have the structures, the regulations, the organisations in place to protect economies such as Ecuador, which was the example I used, from all the harm that would be done to them? I am here talking about the private sector.
  (Mr Pickford) It is worth remembering that private flows completely dwarf official flows and so any solution to these countries' financing problems has to involve the private sector to a large extent. As Gus was saying, whether the volumes of lending recover would depend partly on the confidence that the private investors have in those markets, partly on the demand from the developed countries. With the US running a huge current account deficit a large proportion of the private capital flows have ended up going into the US. If that turns round that takes away some of the demand pressure on finance. It may end up making it easier for emerging markets to borrow in the capital markets but also they have to be able to borrow on terms that are not too onerous. The spreads that—

  56. Forgive me for interrupting you but you are not surely suggesting that if capital flows into the United States—which are, I agree, absolutely enormous—went negative in a short period of time people would say, "I am off to Ecuador"?
  (Mr Pickford) They may not go to Ecuador but they may go to Brazil or Argentina and those investing in Brazil and Argentina may go to Ecuador. I said earlier that Argentina has seen its spreads falling as a result of the Fed cutting interest rates. If you look at the way spreads move, they are highly cyclical. Brazil in the mid-90s was able to borrow at about 50 basis points above US Treasuries, if I recall, and in the crisis it went up to 1,000 points above the US Treasuries. Those spreads are very volatile and, in part, they would be affected by demands from the US capital account.

  57. This is what you say on this point about the organisation of the private sector's role in support for emerging markets—it is on page 12 paragraph 3.5.8: "But in order to guide expectations more effectively, the UK believes that the international community must continue to work to establish clearer presumptions concerning private sector involvement in the full range of potential crises." My point to you is what does that mean? Does it mean that you are taking the United States' view that essentially that is for the private sector to organise itself but there is some kind of holding role for the IMF here, or are you taking the view that there must be some active management mechanism which the IMF has at its disposal to organise orderly wind downs in the event of debt crises. Which of those two things?
  (Mr Pickford) I think it is saying a combination of those.

  58. Yes.
  (Mr Pickford) We are talking here about when crises hit and how the private sector is involved in trying to work out of those crises, and there is a whole range of options from at one extreme the private sector, through a voluntary restructuring or a voluntary maintenance of its exposure (as in the case of Turkey for instance where the Fund programme has provided sufficient breathing space so that the private sector is going to have sufficient confidence to keep its investments in there), to the other extreme, where you may well end up having to have concerted interventions which would involve restructurings or reschedulings. How that is organised and how you move up the scale from purely voluntary towards concerted is where we are saying we would like to have some clearer presumptions, as to what triggers particular actions on that scale.

  59. Let us be clear about this. You have talked about individual countries and of course the Committee can see that if you are dealing with crises individual country by individual country in a reasonably ordered way, you will be able to come up with situational mechanisms to deal with each country separately. But, in fact, the debt crises of the 1990s were not like that. They occurred in waves across a whole area of the world affecting a whole range of countries. As a matter of practical fact at the moment do we have in place clear rules which the IMF has available to it for dealing with that kind of situation and organising an orderly private sector wind down of whatever the consequences might be?
  (Mr O'Donnell) This is something we have been discussing at some length and will come up, I am sure, at the spring meetings. There is a G7 framework which was suggested which has generally been adopted by the Fund, but if you are looking for a complete rules-based system, it is not that. And there is not agreement on a rules-based system for fear of the implications of that for the private sector. If you were to say at this point we will trigger PSI and restructuring, then there is a fear that that will mean that people go for the exit as soon as there is any worry at all. There is an issue here about the appropriate degree of transparency and how clear rules are in advance. What we are trying to do—and our use of word "presumptions" is very important in that paragraph—is to try and establish presumptions. Some of the presumptions are very important. For example, it is a presumption for the country in crisis itself to sort out the private sector involvement. The Fund keeps an eye on it and is happy to get involved to provide technical advice. For example, in the Turkish case, Turkey calls the debtors in, has open meetings, establishes what the country is going to do, in conjunction with the IMF (and generally there is an IMF presence at those meetings) and then private sector gets involved in that way. The private sector has to make decisions about whether it is going to continue to roll over funds in a country or bail out. If it bails out there are all sorts of implications for other investments it has got there. You are trying to encourage a process where there is a positive response to the combination of an IMF programme and a sensible approach to private sector involvement because if we do not have the private sector getting involved in these situations we run into all the moral hazard problems of the private sector getting away scot free and a complete moral hazard.

1   See p 31. Back

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