G-7 Spars Over Reshaping of Financial System
International Herald Tribune
September 30, 1998
Alan Friedman

With just days to go before the start of the annual meetings of the World Bank and International Monetary Fund, the world's leading industrial powers have reached conflicting conclusions over how to reshape the international financial system to cope more effectively with the strains imposed by the global economic crisis.

Against a backdrop of growing pessimism about global economic prospects, international financial officials in Washington are predicting that the wealthy Group of Seven nations will make bold statements but are unlikely to agree on any defin-itive course of action when they meet on Saturday.

The most likely outcome will be little more than a restatement of the G-7's rather generic plan to strengthen the world financial system, push for more transparency and disclosure and seek to ensure that private sector creditors share in losses resulting from the crisis.

In order to save face, the G-7 will also probably promise to further study various proposals, some of which conflict sharply with traditional G-7 free-market practices.

Among the ideas being discussed are the following:

A proposal from France to transform an advisory body of the IMF, the so-called Interim Committee, into an executive council with unprecedented political clout. The French plan also includes the suggestion that other regions of the world should imitate Europe's single currency bloc as a way of ensuring stable exchange rates worldwide. - A proposal from Gerhard Schroeder, Germany's chancellor-elect, to try to ensure stability by setting target zones for the world's main currencies. - A Japanese proposal to allow emerging market economies to impose temporary capital controls and fixed exchange rates in order to prevent capital flight in times of crisis. - A proposal from Prime Minister Tony Blair of Britain to re-examine the role of the World Bank and IMF and consider a partial merger of the two Bretton Woods organizations. - A preference by the United States for a more gradual approach to reshaping the architecture of the global financial system that avoids most of the above proposals, which the Clinton administration deems unwieldy and unworkable. The proposals for reform offered last week by Mr. Blair, including a suggestion that the IMF and World Bank might be partially merged, are being dismissed by many private sector experts and international financial officials as lacking in detail and substance. France, meanwhile, is spearheading a campaign that would reinforce the power of Michel Camdessus, the IMF's French-born managing director. Mr. Camdessus has been heavily criticized by members of the U.S. Congress, by private sector economists and bankers, and by some G-7 officials for having failed to apply flexible solutions to troubled Asian economies and for having been unable to stanch the Asian contagion as it spread from the region to Russia and Latin America. ''It is always easy to say the IMF made mistakes,'' said France's finance minister, Dominique Strauss-Kahn. ''But the problem is not really mistakes by the IMF but the fact that it is not politically authoritative enough. I think we need to implement a genuine political governance of the IMF.'' In an interview, Mr. Strauss-Kahn argued for the IMF's 24-member Interim Committee to be transformed into a formal council that would hold regular meetings of finance ministers and enable IMF decisions ''to give more importance to the political side.'' Mr. Strauss-Kahn also criticized the U.S. initiative that has brought together the G-7 plus 15 other emerging economies in an ad hoc group — dubbed the G-22 — that is working on international financial reforms. ''I can understand that our American friends want the IMF to go on as before,'' Mr. Strauss-Kahn said, ''but a lot of countries are not represented in the G-22.'' A U.S. official on Tuesday dismissed the French proposal, saying it was merely a mask for Mr. Camdessus, ''who wants everything done inside the IMF and is worried about losing control.'' When asked about the notion of transforming the Interim Committee into an executive council that holds regular minister-level meetings, the U.S. official said, ''Fat chance of that happening,'' and he noted that Washington had enough votes to veto such a proposal at the IMF. Mr. Strauss-Kahn's other key proposal, which is part of a 12-point French plan, is to improve international coordination on exchange rates by recommending that other parts of the world imitate European monetary union on a regional basis. ''The experience we have in Europe on EMU is probably an experience that can be used to help limit exchange rate fluctuation,'' he said, adding, ''There may be a role for currency blocs or monetary unions on a regional basis, modeled on EMU.'' The German proposal for targeting exchange rates, while dismissed by some international financial officials as unworkable, was also attacked on Tuesday by a Bundesbank council member, Franz-Christoph Zeitler, who told Reuters that calls for controls on foreign exchange would be seriously flawed as they would lead to the temptation to put off hard solutions that would get at the root of problems. Japan, meanwhile, is sending its delegation to Washington with a proposal to impose controls on the flow of capital in times of crisis, according to Mr. Miyazawa, the finance minister. ''Restricting the free flow of capital is not easy,'' he conceded Tuesday. One senior international financial official on Tuesday poured cold water on the idea, which is also close to anathema for the free-market oriented United States. Earlier this month, Prime Minister Mahathir bin Mohamad of Malaysia imposed sweeping capital controls, but few other countries have followed suit. Japan's other idea, to be discussed in Washington, is to consider ways of providing financial support for troubled East Asian economies. A year ago, the U.S. and the IMF shot down a Japanese proposal for a regional rescue fund, but the new proposal is intended as a way of helping crisis-stricken countries to recover. (Page 13.) Mr. Miyazawa said Tuesday he may also propose ways of regulating hedge funds during the G-7 gathering in Washington. The $3.5 billion private-sector rescue of Long Term capital Management in New York, arranged by the Federal Reserve Bank of New York, has drawn criticism internationally and is expected to be discussed by the G-7. For example, Mr. Strauss-Kahn, the French finance minister, said he could ''understand why the Fed did what it did, and the issue is not whether it was a good idea or not.'' ''But the hedge fund rescue showed we need more information from the private sector as well as the public sector,'' he said. A U.S. Treasury official, while declining to comment on specific proposals from other G-7 governments, stressed that the work of the G-22 group would be putting forward ''important ideas and approaches to improving the architecture of the international financial system in three areas.'' These, he explained, ''include how to achieve more transparency, incentives to improve the financial system and to involve the private sector to a greater extent.'' The meeting of the G-22 will be held next Monday.

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