HISTORIC PRESS RELEASE : Delivering New Rules of the Game for the Global Economy [April 1999]

The press release issued by HM Treasury on 21 April 1999.

The Chancellor Gordon Brown today called for work on the international financial architecture to move into a new phase.

He set our proposals in three areas including agreement on codes of conduct as set out in the G7 timetable for reform, a new IMF surveillance unit to assess publicly how well countries are doing in implementing these new rules of the game, and a new approach to crisis prevention including enhanced rights and responsibilities for the private sector.

The Chancellor said:

“I believe we need three interlocking reforms to rediscover the public purpose and high ideals of 1945 and to help create a new stability in the international financial system for the twenty first century.

“First we need a framework of internationally agreed codes and standards accepted and implemented by countries which participate in the international financial system. It is only by taking the right actions in their own jurisdictions that the countries of the international financial community can deliver financial stability at a global level. It is only in this way that we can achieve global stability consistent with national sovereignty. These codes and standards are the foundations of the new architecture. We must ensure that these are completed and agreed according to the timetable set out by the G7 in February.”

Following the G7 Declaration last October, the International Financial Institutions have been working to develop internationally agreed codes and standards:

• the IMF has finalised the code of good practice on fiscal transparency;
• a draft of the monetary and financial code will be presented to the interim committee next week;
• the IMF’s Special Data Dissemination Standard has been enhanced to require greater disclosure on reserves;
• the OECD has published its draft code of corporate governance, which will be discussed at the OECD Ministerial in May.

The Chancellor continued:

“Second, we must have a new enhanced surveillance process. We need to refocus our existing international institutions and make them work more coherently together to provide effective, transparent surveillance of the framework of internationally agreed codes and standards.

“To coordinate this surveillance, I will propose next week the creation of a new surveillance unit based at the IMF. This will be charged with ensuring that the Article IV process provides effective surveillance of all codes and standards, as well as ensuring effective coordination between the IMF, World Bank and other institutions to achieve this aim.

“The new Financial Stability forum which met for the first time last week in Washington demonstrates the ability of the international community to respond to new challenges through enhanced cooperation. In time, the Forum can become the world’s early warning system for regional and global financial risk.”

The UK has emphasised that the new framework of codes and standards requires an enhanced mechanism for international surveillance to ensure they are implemented:

• we need an enhanced mechanism for international surveillance of codes and standards. This should be centred on the IMF Article IV process, but involve enhanced cooperation between the IMF and other standard setting bodies. The results of this surveillance should be published. The Chancellor will propose next week the creation of a new surveillance unit based at the IMF to coordinate this work;
• the publication of the IMF’s Transparency report on the UK demonstrates the UK’s commitment to putting in place a mechanism for the transparent surveillance of codes and standards; and
• the IMF should undertake further Transparency Reports and make them a central part of the surveillance process.

The Chancellor also called for a new crisis prevention mechanism based on partnership between the public and private sector. He said:

“Third, I believe we should move beyond general statements on the importance of involving the private sector in crisis resolution. We need a new framework to provide the right incentives and ensure that all parties which benefit from the international financial system play their part in maintaining stability.

“Next week I will propose that the international community should draw up explicit rules of the game for involving public and private sectors in crisis resolution, and a new timetable for taking this forward.”

This would include:

• a new approach to crisis resolution: in which explicit rules of the game are set out in advance designed to promote orderly and co-operative management of crises; which addresses the creditor moral hazard concerns associated with public sector rescue packages; and in which both public and private sectors contribute to maintaining financial stability;
• the official community should provide enhanced support in times of trouble for countries making efforts to implement the codes and standards and to establish closer relationships with the private sector. The IMF precautionary facility will provide support for countries that are the victims of contagion, and provide incentives for all countries to implement sound policies.
• countries must forge regular contacts and lasting relationships with their private investors: modern investor networks;
• similarly, the IMF and other international institutions should do more to explain their practices and procedures to the public and the private sector;
• countries should increase their efforts to put in place high frequency debt monitoring systems, to enable national authorities to improve their surveillance of short-term capital flows and obtain early warnings of developing problems;
• we should encourage more countries and their creditors to agree contingent lines of credit which can be drawn down in the event of a deterioration in market conditions;
• we should encourage greater use of collective action clauses in bond contracts to promote orderly workouts for countries unable to meet their obligations even over time; and
• countries that do not follow these procedures or act on advice cannot expect that they and their private sectors will secure the same degree and speed of crisis support – the moral hazard would be to guarantee such support independent of whether they do the right things.