Examination of Witnesses (Questions 40
TUESDAY 23 JANUARY 2001
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
42. Is it eventually envisaged that compliance
with these codes and standards will be amalgamated into the Article
(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
(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.
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
50. Could you write to the Committee with details
(Mr Pickford) We will write to you setting out the
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
(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 informationI have been
out of Washington for the last few daysabout 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
Stateswhich are, I agree, absolutely enormouswent
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
marketsit 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
(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
(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 doand
our use of word "presumptions" is very important in
that paragraphis 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
1 See p 31. Back