Appearing before a group of finance ministers grappling with the global economic crisis, President Clinton on Monday pressed for support of a plan that would reform the world financial system to avoid a replay of events now threatening a global financial meltdown.
The Group of 22 nations, which is led by the U.S., have labored for six months to come up with the proposals. Clinton gave their work added urgency last month when he said the current financial crisis is the worst to hit the world economy since the end of World War II.
The G-22 proposals go to the heart of the problems that have contributed to the flight of capital from emerging markets and destabilized the world financial system: the failure to adequately supervise the hundreds of billions of dollars now sloshing around the globe at the push of a computer button.
“We must ensure that the international financial architecture is prepared for the new challenges of our times, especially the challenge of building a system that will lessen and manage the risks in the global market to allow countries to reap the benefits of free-flowing capital in a way that is safe and sustainable,” the president said in a rare appearance before the G-22 finance ministers.
“This is imperative if we are to maintain global support among ordinary citizens for free markets and ultimately for free governments,” said Clinton, whose words carry weight as leader of the world’s largest economy despite impeachment moves on Capitol Hill.
The G-22 proposals, if adopted, would transform the inept, undeveloped and sometimes corrupt bank regulatory systems in emerging markets that have proven incapable of supervising foreign capital. The group called for the International Monetary Fund to improve its operations and be more forthcoming about details, and they urged private financial institutions and corporations to exercise greater caution when investing abroad.
While those long-term strategies were being unveiled, U.S. and IMF officials worked feverishly behind the scenes with their Brazilian counterparts to arrange an emergency bailout package for Latin America’s largest economy.
The estimated $30 billion aid package, which could be announced later this week, is needed to ward off a run on Brazil’s currency, the real. Most economic policymakers meeting here this week believe the aid package is unwarranted, given Brazil’s underlying economic strengths.
Global financial markets are looking for any sign that the financial contagion that began 15 months ago in Thailand and has now spread to America’s doorstep is finally being contained. However, they apparently found little encouragement from the government-to-government activity over the weekend.
The Dow Jones industrial average spent most of Monday off nearly 200 points before staging a late rally to end the day down 58 points at 7726.24. That’s more than 1,600 points below its record set in July.
Overseas exchanges fared no better. Most stocks in Europe and Asia were off sharply. Even the re-election of Brazil’s President Fernando Henrique Cardoso provided little solace to investors there as the country’s main market index fell more than 4 percent, and is off 44 percent from its year-earlier highs.
The proposals now must be taken up by international agencies and national legislatures–with no guarantees that any of the proposals will be adopted anytime soon. One proposal, for instance, called for strengthening the cash-strapped IMF with a new infusion of capital. The U.S. contribution of $18 billion remains stymied in Congress.
The G-22’s three working groups included one devoted to the issues of transparency and accountability, which are key complaints of many congressional critics of the IMF. The group called on the IMF to release all information that its 182 member nations do not specifically request be kept secret, all internal policy papers and program reviews.
It also called on the individual nations to allow the IMF to publish its country-by-country annual analysis of economic conditions. When IMF programs are put in place, the countries involved should allow the IMF to release its reform recommendations.
The group proposed that all nations provide timely data on foreign exchange reserves, including money that is owed in the future. It also called on every emerging market to collect and report banking statistics in line with standards published for the Bank for International Settlements, based in Basel, Switzerland.
The proposals struck at the hidden books of private firms operating in many East Asian and other developing nations, a system that often allows crony capitalism between bankers, government officials and private companies to flourish. The group “recommends that private firms adhere to national accounting standards and that national authorities remedy any deficiencies in their enforcement,” the report said.
To better control financial crises in the future, both in terms of their frequency and severity, the G-22 proposals called for a limit on government guarantees for economic activity; stretching out loan payments if financial shocks occur; and the establishment of better bankruptcy laws or debtor-creditor regimes.
This latter proposal would allow some crises to be resolved by private parties working out their problems instead of public agencies such as the IMF bailing them out and thereby creating a moral hazard. The Federal Reserve Board’s recent encouragement of private bankers bailing out the hedge fund Long-Term Capital Management is an example of how it worked in the U.S.
“The same capacity for innovation that enabled the private sector to help create markets for a range of new emerging market debt instruments should be applied to modernize existing procedures and institutions or to develop new practices that will contribute to the orderly and cooperative resolution of future crises,” the report said.
While Clinton was boosting efforts to strengthen the international financial architecture, Treasury Secretary Robert Rubin was taking aim at countries like Malaysia that have taken steps to limit capital flows as their solution to the crisis.
