INT’L FINANCIAL SYSTEM JOINT CLASS THIRTEEN WHITHER THE IFIs? Prof. David K. Linnan UI-UGM-USC-UNDIP - USU Univ. of South Carolina Joint Videoconferenced Class School of Law October 31, 2002

CHANGING BACKDROP Change From State to Market-Centered Approaches, Key Events/Concepts 1.Change 1970s from original fixed exchange rate-par value system from original Bretton Woods IMF concept 2.Financial deregulation and trade liberalization late 1970s-mid 1980s

CHANGING BACKDROP Change From State to Market-Centered Approaches, Key Events/Concepts (cont’d) 3.Concommittant “privatization” of international sovereign finance in recycling of petrodollars, up to Mexico as first big meltdown (1982) 4.Asian Miracle & idea of growth (actual genesis of conditionality in structural adjustment was to increase growth as anti-poverty measure)

CHANGING BACKDROP Change From State to Market-Centered Approaches, Key Events/Concepts (cont’d) There were already discussions about reforming Breton Woods in the mid-1990s (eg, the Commission Report we use for many materials is from 1994), however, the Asian financial crisis as true trigger for renewed naval gazing

CHANGING BACKDROP Change From State to Market-Centered Approaches, Key Events/Concepts (cont’d) The Asian financial crisis of 1997 was perceived as a currency crisis and banking crisis together, issues re fund flows as trigger, parallel issues of development model If ultimate reorientation of IMF is as a “crisis lender” in cutting back from structural adjustment lending for growth longer term, issue re what kind of “crisis” (older balance of payments over consumption views versus external debt and currency readjustment views)

CHANGING BACKDROP Financial Architecture Discussion Idea of not only revising IFI roles, but also facing issues on private side 1.Claim of moral hazard in banks lending on theory the IMF would bail them out in case of default 2.Problems of joint action and differences between bank loans (small group even with syndication, facilitating negotiated results) and international securities with paying agent structure (no agent to deal with, each bondholder with a veto, following approach of Trust Indenture Act of 1937) Now collective action clause debate

CHANGING BACKDROP Financial Architecture Discussion (cont’d) 3.Bankruptcy for sovereigns & IMF laying claim to the job (currently Paris Club & London Club, but no securities club) 4.Hidden problem different from Latin America in 1980s with heavy state indebtedness, Asia had relatively low state indebtedness except as forced on countries by lender of last resort character, but now example of Indonesia with circa 100% indebtedness/GDP backed up by 60% of GDP estimated cost for banking crisis

CHANGING BACKDROP Financial Architecture Discussion (cont’d) On the public or IFI institution side, 1.Idea of cutting back on conditionality so only macroeconomic “crisis” orientation (remember growth orientation originally, problem of austerity criticisms in Asian crisis programs)

CHANGING BACKDROP Financial Architecture Discussion (cont’d) 2.Idea of transparency as changed orientation, idea of avoiding market surprises (new views of surveillance) 3.Re-examination of open capital account and “hot money” debate as currency crisis causation element

CHANGING BACKDROP Financial Architecture Discussion (cont’d) 4.Odd debates like contingent credit facility (kind of special line of credit in case your economy is about to tank) 5.Strengthening technical capacity (financial sector reviews in countries, addition of capital markets department in IMF)

CHANGING BACKDROP Next Week Last Class-- Changing Domestic Regulation OJK BIS paper US intermediary legal structure (fractured regulators)