Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 60-80)



  60. What about the Russian crisis?
  (Mr Pickford) The Russian crisis, casting my mind back, was actually largely to do with the underlying structural problems in that economy and the overall problems on the fiscal side. In that case I think the benefits from transparency would have come from requiring changes to those policies at an earlier stage—changing the arrangements under which the industrial structure was organised and changing arrangements for the banking sector and so on. I think in that case transparency could have led to earlier changes in policy.

  61. How would you see the balance between the role in crisis prevention, which is really what we are talking about, and crisis resolution which has been the traditional role. How would you see the balance between those two roles developing?
  (Mr Scholar) What we are very keen to do, and the management of the Fund is also keen to do, is to sharpen the focus on crisis prevention. Prevention is obviously better than cure. It is very difficult to resolve these crises once they have occurred. It is much better to prevent them happening in the first place. We are pushing forward a broad agenda to strengthen crisis prevention—the codes and standards on policy frameworks, better surveillance, the contingent credit line, and so on and so forth. We are doing work on crisis resolution, which is very topical at the moment, and there is a lot of discussion about sovereign debt restructuring and so on and so forth. It is very important in its own right to get that framework in place, but I think it will also very much strengthen the crisis prevention framework as well because if it is clearer ahead of time what the roles of different players will be if there is a crisis that can very much help to incentives behaviour and help to avert it.

  62. The consequence of this new role of crisis prevention is that you have to intervene in a country's policy when things are calm as opposed to when things are in crisis. Are you likely to have more impact at that point than you might otherwise have? Is that not one of the weaknesses of the present arrangement?
  (Mr Scholar) That comes back to what I was saying earlier in response to Mr Tyrie, the importance of the persuasiveness of the Fund's advice. It is certainly true that in one sense the Fund has more levers at its disposal when it is in crisis because it is then in the business of lending it money and it is then in a position to ask for certain things in return for that. But we need to move increasingly to a position where the Fund's surveillance work is recognised as being authoritative, expert and independent and where countries recognise that increasingly the results of the work are available for all to see, and that takes us back to the transparency we were discussing earlier. It is obviously a difficult thing to pursue and it will take some time but we must keep pushing at it. If we can move forward to that position there will be much stronger frameworks in place for preventing crises.

  63. What evidence have you so far of that activity?
  (Mr Scholar) There have been a lot of improvements in recent years in the policy frameworks in a number of countries. One thing that we have seen over the last six to nine months is that the world economy has stood up much better than many people expected, first of all, to the impact of the slow down which was, of course, exacerbated by the 11 September shock and, secondly, to the events in Argentina. One of the reasons why there has been less contagion than some people were expecting is that there have been stronger policy frameworks in place in some countries, and that is partly due to the codes and standards. That shows that the system is working better, but of course there is quite a long way to go.
  (Mr Pickford) What has happened also is that over the last year or so the financial markets have been able to discriminate better between different countries and the risks associated with those countries. That is reflected in the interest rates which those countries are paying on their borrowing. One reason for that is that markets simply have more information on which to make those decisions. It is arguably a very good thing that markets are able to discriminate in that way.

  64. One of the factors in the crisis prevention is the IMF establishing the contingency credit line providing concessionary emergency financing for countries that pre-qualify. Why have no countries taken this up?
  (Mr Scholar) One thing which the Chancellor called for in the Spring meetings which will be happening later in the year is a review of the contingent credit line to look at precisely this question. When it was established in 1999 its purpose was to act as an insurance policy for countries and the hope was that, first of all, it would incentives good policy by countries because countries would have to follow good policies to be pre-approved and they would only be approved if they had strong economies and if they were not expected to need Fund resources, and only in those conditions would they qualify under the CCL. Secondly, it was hoped it would be taken as a signal of confidence that the international community had in a country and that in turn would help prevent or minimise the risk of crisis. The experience we have had is that it has not been taken up yet. We made various changes to it last year to make it more attractive as a crisis prevention tool. As you say, so far there are no countries who have applied for it. That could be for one of a number of reasons. It could be to do with the terms on which it is available or the cost of that type of borrowing as compared to the costs of other types of borrowing. It could also be that there is a collective action problem, that no particular country wants to be the first to take up what is a new tool in the system. It could even be that countries have felt sufficiently secure from the risk of contagion that they have not felt that this is something to which they need to have recourse. That would be a positive sign that the other elements of the crisis prevention strategy were working. As I say, we do not know exactly why countries that are eligible have not yet sought to take advantage of it. There is a review going on over the course of the year. One of the things that would be beneficial to do is to see what comes out of that.

  65. Could one of the reasons be that countries feel they may be showing they are anticipating a crisis and therefore stigmatising themselves in the international communities?
  (Mr Scholar) That is a possibility. This is a new facility and so I think it is understandable that countries will want to think very carefully before being the first to take advantage of it. It may be that there is a collective action problem and if we moved to a state where it was a part of the international regulatory system that countries have CCLs and that was part of the normal function, it would then achieve its desired purpose which would be very much as an insurance policy signalling confidence. We are not there yet. The question is how to get from here to there and that is what the review will be looking at.


  66. On the issue of the sovereign debt restructuring proposals Anne Krueger from the IMF has been putting her proposals and John Taylor, the Under-Secretary of the US, has been putting his proposals. Anne Krueger is saying there remains a gaping hole in the system and she would like incentives to help countries with unsustainable debts resolve them properly and in an orderly way, and what she is suggesting is almost like a domestic bankruptcy court, whereas John Taylor is saying that the most practical and broadly acceptable reform would be to have sovereign borrowers and their creditors put a package of new clauses into their debt contracts and debt contracts are defined very precisely. What is your opinion on the merits of those arguments? Where does the UK come down, on whose side?
  (Mr Pickford) There has been a fair degree of convergence in thinking over the last six months since Anne Krueger first floated the idea in November. I think that in theory the voluntary, contractual approach is capable of producing a more effective and better crisis resolution system. Indeed, collective action clauses are already part of a large number of bonds issued under English law. They have never been part of bonds issued under the New York jurisdiction and there are cases where the existence of those clauses has helped. I think there are limitations to that approach. Even if you had a 100 per cent take-up of clauses in bonds you would still have a problem of collective action in relation to bank lending and other forms of investment. Nevertheless, I think our view is that having a much more widespread introduction of collateral bonds would be distinctly advantageous. That is one of the reasons why the United Kingdom, along with Canada, has put collective action clauses in its own foreign currency bonds for the last couple of years. We have been trying to encourage other countries to do precisely that. Also, though, it is quite possible that the contractual approach will not be fully effective, in which case we very much welcome the work that is being done now, stimulated by Anna Kreuger's previous speech back in November, to try to develop a more statutory approach to this. As you say, what she envisaged initially was very much a bankruptcy court type mechanism. Her thinking has moved on somewhat to a lighter hand but still maintaining the same overall structure. She thinks now that more of the features could be developed in co-operation between the debtor and creditor. I think there has been a very significant convergence of views. As a result the G7 and IFC communiques in April both talked about moving forward on both of these strands of work seeing them as complementary and mutually reinforcing. I think that is now the priority for work both in the Fund and outside over the next few months to try to really move forward in terms of resolving the legal problems associated with clauses and the design problems associated with the statutory approach.

  67. So you are saying the difference between those two views is merging?
  (Mr Pickford) I think so, yes.

  68. And the United Kingdom is doing work on that specifically to ensure that outcome?
  (Mr Pickford) Yes, we are working actively on this whole agenda. The G7 has a working group in which we are actively participating and obviously Tom in his dealings with Fund staff is actively involved in pushing for that.

  69. How far will the concept of special drawing lines, as illustrated by George Soros, take off? Is that something that you do not accept?
  (Mr Pickford) George Soros presents that primarily as a way of increasing resource flows to developing countries. The Chancellor makes no secret that he would consider any mechanism that would increase resource transfers. Soros in particular suggests that firstly the Fourth Amendment to the Articles should be passed, of which we are very supportive, but this is an example where the United States Congress has not ratified it. That would give a much more equitable distribution of SDS. He then goes on and suggests there should be a general allocation of SDRs which rich countries should then donate to developing countries. Again, as I said, if there were more support for that view then we would consider it very carefully.

  70. To what extent do you think better sovereign debt restructuring procedures could have averted the Argentinian crisis? Also making a comment to you for your views, is it not the case that the Argentinian situation has shifted the template in the way in which the IMF does business with developing countries? We have had the shambles of the peso and the United States dollar being linked since 1990 and then different regions of that country producing their own currencies. It seemed it was a mess in which the IMF was complicit.
  (Mr Scholar) If I may take the sovereign debt restructuring first and then move on to the wider case of Argentina. In the case of Argentina the SDRM could have had two different effects. First of all, had it been in place it would certainly have helped to resolve the crisis and to provide a mechanism whereby the Argentinian Government could come together with its creditors to work out a write down of debt and work out the crisis. That is one reason why we think it is so important to press forward on this work, so that if there is a similar crisis in the future that mechanism will be available. Secondly, I think it would also have helped avert the crisis because by making it clear ahead of time who would be playing what role and what funds would be available from the Fund and what would be the responsibilities of private sector creditors, that would have helped condition behaviour in a way that would have made the crisis that much less likely. On the question what does the Argentinian crisis tell us about the approach of the Fund, the Fund supported Argentina under a programme from January 2000 right through to the end of last year. This was a programme which had very strong ownership in Argentina. It was the Argentinian authorities' own programme. It was a country which was in recession and it had already been in recession at that point for a couple of years. The programme which the authorities had put together was based on the Currency Board. That was right at the centre of it and was something that had very strong support in Argentina. The Fund supported that programme right up until the end of last year. The position we find ourselves in now is because of the crisis in confidence last year and the decisions of the Argentinian Government leading it to, first of all, abandon the Currency Board and then forcing it into defaulting on its debt. The IMF is now working with the authorities to put together a programme which will enable the resumption of growth as soon as possible. I can talk more if you like about the various things that the Fund is looking for, but the basic condition that has to be met before a programme can be put together is that there must be an environment in which it is possible for normal economic activity to resume. That means various changes to legislation and also the implementation of the fiscal agreement with the provinces. The Fund is working very closely with Argentina. They have got technical missions down in Argentina discussing at the moment how to do that and the Fund is now waiting for an invitation to go and negotiate. The last thing to say is the Argentinian Finance Minister is in Washington tomorrow or Thursday, which will be his first opportunity to meet the Fund management and managing director, and I am sure that will be a useful meeting.

  Chairman: There is a long way to go on that aspect. Kali on the issue of loans versus grants.

Kali Mountford

  71. I was very pleased with your answer to David Laws that the United States does not always necessarily have to have its own way. Given that George Bush has said that he would like to see 50 per cent of the World Bank's IDAs funds converted to grant rather than loans and John Taylor's assertion that these could easily be linked to measurable goals of their own, we might say that these measurable goals should be the Millennium Development Goals or PRGF or macro economic stability or some other desirable goals such as that, but others might say these could be politically driven agendas that tie countries into less desirable goals which the IMF itself might not share. How resistant are you to the move to grants rather than loans and what would be your assessment of other members' views on this? What impact do you think that would have on the IDA's future as a whole? Would it not drive a coach and horses through the Fund overall and fundamentally change the relationship not just of the IMF but of the World Bank to developing nations and really change our long-term relationships with developing countries and perhaps knock them off course from becoming full world players?
  (Mr Pickford) There are a number of elements to that question.

  72. Sorry about that.
  (Mr Pickford) I will try and take each of them. One point you made first was whether we should be linking IDA to measurable goals. As you said, that could be a good thing if the goals are set in an economically sensible way. As to your suggestion that they might transform into political goals, I think the risk is quite low in the sense that IDA itself, because it is a multi-lateral organisation focused on the World Bank, is much more resistant to those pressures and, indeed, the Bank's Articles prevent political issues intruding into the decision making. On the issue of grants specifically, I think it is worth pointing out that grants can play quite an important role in development as a whole and indeed most bilateral donors now give a large proportion of their aid in the form of grants. United Kingdom IDA is all in the form of grant and has been for years. Grants have an important role to play for the poorest countries. The question is really whether it is appropriate to extend that principle into IDA. IDA 12, which is the current replenishment, does have grant-making facilities for post-conflict countries, and I think the question is how much further we would want to go in terms of extending grants into IDA 13. The policy lead on IDA is in fact with DFID rather than the Treasury and the Secretary of State talked about that to some extent in the International Development Committee. The discussions are on-going. We are trying to reach a resolution whereby everybody is comfortable with the outcome. Ultimately the IDA 13 replenishment will not happen unless there is consensus on this issue and we are all hoping these intensive discussions which are under way at the moment will result in something that everybody can live with and is comfortable with, preferably before the period of IDA 12 runs out at the end of June.
  (Mr Scholar) I think it is important to distinguish between two things, the US proposals for IDA, which is a multi-lateral matter and part of the World Bank, and their proposals for how to deliver their own aid and the extra 5 billion a year which they announced on that. On the first of those, as Stephen says, since this is a multi-lateral effort we know very much the types of purposes for which the money is going to be supplied and that will all fit very squarely within the World Bank's poverty reduction mandate. As far as the way in which the US disperses its increased aid, they have announced they are going to put it into a Millennium Challenge account. The UK Government (DFID rather than the Treasury) is discussing with them various ways in which they could do that so we hope to have some influence on that.

  73. It is making grants sound like a fluffy bunny answer to everybody's problems, but that is not necessarily the case, is it? Does it not depend really on what these measurable outputs or goals are? What would be our influence on that, if any, if the United States insisted on taking that particular route?
  (Mr Scholar) It is right that grants are not always the answer. If you look at the system as a whole taking in the Fund, the Bank, the UN, the EU and bilateral donors, you have got a large number of people providing grants, you have got a large number of people providing loans on different terms, and depending on the country's state of development one or the other or a mixture might be the best way forward. To take one example, when Korea joined the World Bank in 1962 it was a very poor country and it took a lot of money from IDA in the shape of loans, as well as grants from other sources. By 1978 it had had such success in reducing poverty and raising growth it became a contributor to IDA. What we would like to see is countries moving through a process where the poorest countries start with grant and gradually move into very concessional loans and over time become able to borrow on the market more generally. You are absolutely right, there is a broad spectrum of approaches. The point in the American proposal last year which concerned us and a number of other people was that 50 per cent was such a high figure for the grants share within IDA. It would very much change the character of the Bank's relationship with countries and would lead possibly to a problem of overlap with other organisations. That is why we have been discussing with them ways in which the grant element can be properly targeted, because we think there is a case for a grant element. As Stephen says, there is an existing one already, the question is to try and find something that, first of all, will not in any way put the financial strength of IDA at risk, so that is another important consideration and, secondly, will enable IDA to go on playing the role it is currently playing within the overall system.

  74. I am happy with those answers overall. A point of caution, you implied that it was certainly impossible to have a political agenda but I have seen cases where a political agenda can be dressed up as an economic agenda or an aid agenda. I am not entirely satisfied that politics can be kept out of such grant arrangements.
  (Mr Pickford) I think that is fair. In a multi-lateral setting the safeguards are greater.

  75. I hear what you say.
  (Mr Scholar) Just to add to that, the World Bank has an independent evaluation department and one of the things it does is look at all this and reports quite independently of management and publishes its report, so that is another safeguard we have.

Mr Cousins

  76. Could I just ask you Mr Pickford does the British Government have a view on whether a currency transaction tax might increase transparency and assist in the detection of financial crime?
  (Mr Pickford) One by-product of a financial transactions tax such as a Tobin Tax, which I think you are referring to—

  77. There are all sorts of variations.
  (Mr Pickford) One by-product might be that the information you acquire is greater. I think you have to balance that off against other questions about the efficiency of a tax like that because it would require every jurisdiction to introduce the tax at the same time at the same rate otherwise you would end up risking diverting finances into unregulated or untaxed jurisdictions. But I take the point you are making entirely which is that the Government is very, very concerned to try to do whatever it can in order to fight money laundering and fight terrorist financing, which is why we have been very much in the forefront of efforts to use the multi-lateral system to strengthen it. The IMFC itself has been part of that process in terms of calling on the member countries to ratify the UN conventions. The IMF also has a work programme to extend its money laundering investigations into terrorist financing. We put an awful lot of weight on making more effective the procedures we have in place to stop financial abuse.

  78. The IMF's reviews of offshore financial centres have been going on. How has this fed through into the British Government in terms of assessing how the offshore financial centres for which Britain has a general responsibility perform? Do they meet those standards?
  (Mr Pickford) Most of them are certainly improving. I doubt if any jurisdiction, offshore or onshore, entirely meets all of the desirable attributes. The United Kingdom Government has been trying for a number of years to ensure that the offshore centres for which it is responsible directly or indirectly improve their regulatory structure and supervision structure. Back in 1997 we commissioned a report by Edwards into the Channel Islands and the Isle of Man and then in 1999 or 2000 we commissioned KPMG to look into the Crown dependencies and look at their supervisory system. So we have had this on our agenda for some time.

  79. What actions have resulted?
  (Mr Pickford) What has happened is most of the jurisdictions have taken active measures to improve their supervisory and regulatory standards.

  80. How has that been reported to Parliament, do you think?
  (Mr Scholar) We would have to come back to you on that. The IMF is involved in looking at all these things but a different bit of the Treasury takes the policy lead on this.
  (Mr Pickford) Could we give you a note on that?
  (Mr Scholar) Could we let you have a paper on that?

  Chairman: We have exhausted our questions. Can I thank you on behalf of the Committee for appearing before us this morning and being very open with us. You have been very helpful to us in our inquiry and in particular to Tom I would like to thank you for the efforts you made on our behalf in the United States in January when the Committee visited. We had some very helpful meetings with the IMF and the World Bank. Following that and with your assistance I am delighted to be able to announce this morning the welcome decision of the Managing Director of the IMF, Dr Horst Ko­hler, to accept an invitation to appear before our Committee on the morning of 4 July. We thank you for your efforts and we look forward to continuing this inquiry.

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