AWSJ: G-7 Urges Banks, Investors To Help With Intl Bailout
Dow Jones Newswires
By staff reporters Michael M. Phillips and Bob Davis in Washington and Pamela
Druckerman in New York
The world's seven major economic powers are ratcheting up pressure on
private banks and investors to chip in for international financial bailouts,
including the rescue now being assembled for Brazil.
In statements Friday, the Group of Seven industrialized nations endorsed
creation of a preapproved credit line for nations in danger of being hit by
investor panic and called for a series of steps - from global accounting
standards to perhaps forcing hedge funds to disclose more information - to
help stem the current financial crisis and prevent future ones.
G-7 leaders, finance ministers and central bankers stressed that the private
sector must join the International Monetary Fund, World Bank and wealthy
nations in funding the plan, a tricky issue during times of market turmoil. Critics
have complained that international rescues simply allow investors to walk away
scot-free from high-risk investments.
"The private sector . . . needs to be appropriately involved in crisis
management and resolution," the G-7 finance ministers and central bankers
said.
"The IMF and the U.S. government have been exerting subtle pressure, telling
(the banks) that if you want us to sacrifice public money, you're going to have
to roll over your loans and in some cases, like Brazil, to provide new credits,"
said Larry Chimerine, managing director of the private Economic Strategy
Institute here. Friday's statements represent a less subtle approach.
Big international banks, which were strong-armed into helping rescue South
Korea last December, are reluctant to formally join the financial first-aid squad.
But one person close to the negotiations suggested banks may informally help
Brazil.
As it now stands, "banks are not participating in the IMF program in a formal
way," the person said, but may maintain or expand existing lines of credit to
Brazil. Bankers have discussed buying new Brazilian bonds backed by specific
assets. The G-7 urged the World Bank to guarantee new bonds to encourage
private investors to return to emerging markets.
Brazil wants "to be different from, say, a country like Korea, where you have a
formal restructuring; they want this to be voluntary," the person said. "They
might say, 'We would like you to maintain or even increase your lines, but
we're not asking you to formally sign a document.' " He said Brazil plans to
meet with banks soon after an IMF agreement is clinched and hasn't yet settled
on what it will ask of them. The more money the private banks lend Brazil, of
course, the less it will need to borrow from the IMF or other countries.
The IMF, World Bank, Inter-American Development Bank and G-7 countries
are expected to announce shortly a multibillion-dollar package of loans for
Brazil. For weeks, markets have been expecting a $30 billion rescue, but the
person close to the talks said the plan may total $40 billion or more.
The tussle over private funding has been one of the factors delaying a deal, but
more important has been political wrangling among Brazil, the IMF and the
U.S.
The IMF wanted to make sure that Brazil was committed to a series of
austerity measures, but the Brazilian government didn't want those measures to
wreck its chances of winning recent presidential and state elections. As a
result, the Brazilian government announced tough measures last week after it
won the elections, but hasn't yet implemented them. Now, the IMF wants
some assurance that the government will follow through on its pledges.
Before approving any loan, the IMF wants Brazil's congress to approve
pending social-security reforms and to make progress on passage of other
elements of the government's budget.
Separately, the U.S. and IMF have been jousting over how big a contribution
each should make to a rescue plan. A month ago, the IMF said it was ready to
contribute $15 billion in loans. But since then, the IMF has received an
injection of at least $65 billion in usable funds, and the U.S. wants the IMF to
increase the amount it lends. The U.S. has been talking about making its own
loans of at least $3 billion to Brazil, but hasn't yet made a firm commitment to
the IMF about the size of its participation. Other G-7 nations are also weighing
loans to Brazil.
Friday's G-7 statements capped a week of activities intended to stanch the
financial crisis that first engulfed East Asia and Russia, and is now washing up
in South America. The announcements reflect efforts by U.S. President Bill
Clinton and British Prime Minister Tony Blair to lead the world out of its
financial straits. The statement was unusual in that it came apart from any
formal meeting of national leaders or finance ministers and reflects repeated
discussions between Mr. Clinton and Mr. Blair. In recent weeks Mr. Clinton
spoke with many of his G-7 colleagues and had two conversations on
Thursday with new German Chancellor Gerhard Schroeder before the G-7
reached agreement on Friday morning.
The G-7 endorsement of the new IMF credit line will speed its adoption by the
IMF and make it possible that it will be used in Brazil in the days or weeks
ahead. The funds would be approved before a country got into serious
financial difficulties, conditional upon the government's following
IMF-approved economic policies.
The loans would be provided at higher-than-normal interest rates and
shorter-than-normal maturities to encourage borrowing countries to return
quickly to private capital markets. This approach, modeled on U.S. loans to
Mexico in 1995, was mandated by the U.S. Congress last month when it
approved $17.9 billion in U.S. contributions to the IMF.
When the U.S. proposed the contingency fund early last month, G-7
governments initially agreed to "explore" the idea; now their leaders have given
it their seal of approval. In addition, the G-7 backed a new World Bank
emergency-lending program to help the poor survive the harsh side effects of
austerity programs, and praised recent interest-rate cuts in the U.S., Japan and
several European countries.
"The world's leading economies have linked arms to contain the financial
turmoil that threatens growth, not only in emerging markets, but in all markets
of the world," Mr. Clinton said on the White House lawn Friday.
Treasury officials stopped short of declaring victory in the fight against financial
volatility. But they consider the G-7 endorsement a critical step toward turning
what had been strong words into action. Brazil's Bovespa stock index surged
7.8% Friday, as the G-7 statement boosted investors' confidence.
In its declarations, timed in part so Mr. Clinton has some results to show his
Asian counterparts when he meets them later this month, the G-7 also urged
governments and private investors to alter the terms of new bond issues,
making it easier to restructure deals and giving borrowers more leverage over
private bondholders. It also told the IMF to move ahead with its newly
expanded policy of lending to governments that are in default on private debts
- another way of giving governments more leverage over private creditors.
The G-7 also urged private lenders to establish their own commercial
contingency credit lines for emerging-market nations, a move that would tie
together the interests of private creditors and government debtors. Argentina
has been working to set up such a credit line.
The nine-page "declaration" by the G-7 finance ministers and central bankers
lays out their agenda for avoiding future financial crises, including steps to
improve disclosure by central banks and businesses. Multilateral organizations
were asked, by next spring, to come up with codes of conduct for monetary
policy, principles of sound corporate governance and international accounting
standards. The IMF is to publicly evaluate whether countries are complying
with the disclosure codes.
The G-7 is made up of the U.S., the U.K., Germany, France, Canada, Italy
and Japan.
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