Taylor’s plan involved no centralized official action to override creditors’ rights. Instead, international lenders and the countries they financed would voluntarily agree to insert provisions called “collective action clauses” (CACs) into the contracts of bonds issued by national governments. The CACs would specify procedures for what would happen in the event of a crisis, allowing a supermajority of bondholders, rather than 100 percent, to approve a standstill or debt restructuring if such actions proved necessary. This “decentralized approach,” Taylor contended, “makes much more sense and is much more workable” than Krueger’s plan.
CACs seemed such an excellent idea in principle that the finance ministers of wealthy countries first urged the governments of developing nations in 1996 to incorporate them into their bond contracts. But nobody followed up, because in practice CACs have some drawbacks. First, emerging-market officials have shied from issuing bonds with CACs, fearing that Wall Street would demand higher interest rates to compensate for the reduction in individual bondholder rights. Second, and more important, the clauses wouldn’t provide much immediate benefit because of what might be called the “overhang” issue: Many old-style bonds—that is, those with clauses requiring unanimous approval for changes in payment terms—remain outstanding and won’t mature for a number of years. Thus, even if all newly issued bonds contained CACs, using them to provide the option of orderly debt restructuring for countries would still be a distant dream.
In sum, words like “thorny” and “contentious” (which were used previously to describe the issue of how to corral an Electronic Herd that includes bondholders) may understate the difficulties involved. Clearly, agreeing on the principle that the private sector ought to be bailed in when crises occur, and that an alternative to big bailouts and default is needed, is much easier than devising a method for accomplishing those goals.
In fact, another huge drawback afflicts both the SDRM and CAC proposals. Since they apply only to debt issued by national governments, they don’t address the sorts of crises that struck Thailand, Indonesia, and Korea, where the problematic debt was issued by private companies and banks.
Tempting as it may be for policymakers to throw up their hands in the face of these complexities, such a response would be shameful. Too many years have already passed with no major alteration in the international financial architecture. If the international community is serious about limiting the damage from the sorts of crises that so cruelly reverse the progress of countries striving to reach advanced stages of development, and if the U.S. government in particular is serious about repudiating the endless cycle of IMF bailouts, then an international bankruptcy regime is essential, however imperfect it may be. Implementing both the SDRM and CAC proposals, or something very much like them, would represent a major step in that direction. But both plans need strengthening and broader scope.
Professor Peter Kenen of Princeton University has proposed an ingenious variant of CACs, which he calls “a comprehensive contractual approach.” All new standardized debt contracts—privatesector as well as those of sovereign governments—would have to include CACs. Furthermore, in the event of a crisis, the clauses would automatically provide for three-month standstills if the government of the country in question declared a financial emergency and the IMF certified that Judgment. Nations of the world would obviously have to enact laws requiring such clauses, and to spur them to do so, Kenen proposed in an article published in 2002 that countries failing to adopt the necessary legislation “after, say, a five-year period” would be penalized by suffering a cut in their access to IMF loans.
Kenen’s plan represents solid architecture, not interior decoration. But given the urgency of the problem, as demonstrated by Latin America’s travails, why give countries five years to change their laws? Why not require a time frame of one or two years? And why not deal with the overhang problem of CACs by mandating new laws that would declare null and void the existing bond provisions requiring unanimous approval for changes in payment terms?
The Herd, and many emerging-market governments as well, can be expected to fight such measures tooth and nail. The finance ministers of emerging markets want to borrow plenty of money cheaply to fund their governments’ current activities; the Herd wants to supply that money; and they won’t look kindly on legal changes that might spoil their game. Only vigorous and determined U.S. leadership could possibly overcome the opposition. So far, the Bush administration has shown scant signs of being inclined to take up the cudgels.
In other words, far-reaching change in the international financial architecture is a long shot. By the time this book is published, the SDRM may be dead politically; the IMF’s policy-setting committee is scheduled to consider a formal proposal at the spring 2003 IMF-World Bank meetings, and earlier in the year bankers were voicing confidence that support for the SDRM was fading fast. But perhaps the powers in Washington will yet come around, for the radical options must be evaluated on a “compared-with-what” basis, against the alternatives of more large bailouts or unilateral defaults—neither of which should appeal to policymakers concerned about both shunning moral hazard and sustaining economic growth.
There can be no excuse for ignoring the implications of what happened during the late 1990s. The current institutions and mechanisms safeguarding the global system are dangerously weak, and boldness is warranted in shoring up the system’s defenses before catastrophe strikes anew. Deservedly chastened by those events, the High Command must now choose the lessons it will draw. The health of the world economy depends, in substantial measure, on how that chastening is translated into action.
NOTES
Except where noted here, the information in this book was derived from interviews. Some of the people interviewed were willing to be quoted by name, whereas others felt comfortable speaking candidly only if assured a cloak of anonymity—indeed, many were promised, in accord with “deep background” rules, that they would not be quoted even anonymously unless they granted me permission to do so.
A list of interviewees follows. People interviewed on deep background were asked permission to be included on the list. The list does not include a number of people who wished to remain entirely anonymous. Titles are those held during the crisis of the 1990s or during the period covered by the interview.
INTERNATIONAL MONETARY FUND
Stanley Fischer, First Deputy Managing Director
Executive Board
Karin Lissakers, United States
Yukio Yoshimura, Japan
Bernd Esdar, Germany
Gus O’Donnell, United Kingdom
Onno Wijnholds, Netherlands (and 11 other countries)
Aleksei Mozhin, Russia
Greg Taylor, Australia (and 13 other countries)
Policy Development and Review Department
Jack Boorman, Director
Matthew Fisher, Division Chief, Capital Account Issues Division
David Burton, Senior Adviser
Robert Kahn, Senior Economist
Research Department
Michael Mussa, Director (and Economic Counsellor)
IMF Institute
Mohsin Khan, Director
Asia and Pacific Department
Hubert Neiss, Director
Bijan Aghevli, Deputy Director
Anoop Singh, Deputy Director
Wanda Tseng, Deputy Director
Charles Adams, Assistant Director
David Robinson, Division Chief for Thailand
John Dodsworth, Senior Resident Representative for India
Kadhim Al-Eyd, Senior Resident Representative for Indonesia
Sharmini Coorey, Assistant to the Director
Mahmood Pradhan, Senior Desk Economist, Indonesia
European II Department
John Odling-Smee, Director
Yusuke Horiguchi, Deputy Director
Daniel Citrin, Division Chief for Russia
Martin Gilman, Senior Resident Representative for Russia<
br />
Thomas Richardson, Resident Representative for Russia
Western Hemisphere Department
Claudio Loser, Director
Teresa Ter-Minassian, Deputy Director
Monetary and Exchange Affairs Department
Peter Hayward, Financial Sector Adviser
Peter Dattels, Deputy Division Chief, Financial Institutions and Markets Division
External Relations Department
Thomas Dawson, Director
Roberto Brauning
Vasuki Shastry
UNITED STATES GOVERNMENT
Treasury Department
Robert Rubin, Secretary
Lawrence Summers, Deputy Secretary (G-7 Deputy)
David Lipton, Undersecretary for International Affairs
Timothy Geithner, Assistant Secretary/Undersecretary for International Affairs
Daniel Zelikow, Deputy Assistant Secretary for Asia, the Americas and Africa
Caroline Atkinson, Senior Deputy Assistant Secretary for International Monetary and Financial Policy
Gary Gensler, Assistant Secretary for Financial Markets
Michael Froman, Chief of Staff
Robert Boorstin, Senior Adviser to the Secretary
Howard Schloss, Assistant Secretary for Public Affairs
Federal Reserve Board
Alice Rivlin, Vice Chairman
Laurence Meyer, Governor
Edwin Truman, Director, Division of International Finance (also Assistant Secretary of the Treasury for International Affairs)
Charles Siegman, Senior Associate Director, Division of International Finance
Larry Promisel, Senior Adviser, Division of International Finance
Federal Reserve Bank of New York
William McDonough, President
Peter Fisher, Executive Vice President
Terrence Checki, Executive Vice President
White House
James Steinberg, Deputy National Security Adviser
Sandra Kristoff, Senior Director for Asian Affairs, National Security Council
Gene Sperling, Director, National Economic Council
Daniel Tarullo, Assistant to the President for International Economic Policy
Lael Brainard, Deputy Assistant to the President for International Economics
W. Bowman Cutter, Deputy Assistant to the President for Economic Policy
Alan Blinder, Member, Council of Economic Advisers (also Vice Chairman, Federal Reserve Board)
State Department
Stuart Eizenstat, Undersecretary for Economic, Business and Agricultural Affairs
Stapleton Roy, Ambassador to Indonesia
Michael Owens, Minister-Counselor, U.S. Embassy, Jakarta
Walter Mondale, special presidential envoy to Indonesia
Thomas Graham, Chief Political Analyst, U.S. Embassy, Moscow
Commerce Department
David Rothkopf, Deputy Undersecretary for International Trade
Export-Import Bank
James Harmon, President
WORLD BANK
Mark Malloch Brown, Vice President, External Affairs
Joseph Stiglitz, Vice President and Chief Economist
Dennis de Tray, Resident Representative for Indonesia
James Hanson, Lead Economist, East Asia Dept. IV, based in Indonesia
Stijn Claessens, Lead Economist, Financial Strategy and Policy Group
Brian Pinto, Lead Economist, Poverty Reduction and Economic Management Department, Europe and Central Asia Region
Lloyd Kenward, Senior Economist, Indonesian Resident Mission
John Nellis, Private Sector Specialist
David Ellerman, Economic Adviser to the Chief Economist
GROUP OF SEVEN GOVERNMENTS
Great Britain
Mervyn King, Deputy Governor, Bank of England
David Peretz, G7 Financial Sous-Sherpa
Ed Balls, Economic Adviser to the Chancellor of the Exchequer
France
Jean-Claude Trichet, Governor, Bank of France
Dominique Strauss-Kahn, Minister of Economy, Finance and Industry
Jean Lemierre, Director of the Treasury (G-7 Deputy)
Germany
Jürgen Stark, State Secretary, Finance Ministry (G-7 Deputy)
Klaus Regling, State Secretary, Finance Ministry (G-7 Deputy)
Heiner Flassbeck, State Secretary, Finance Ministry (G-7 Deputy)
Japan
Eisuke Sakakibara, Vice Minister of Finance for International Affairs (G-7 Deputy)
Haruhiko Kuroda, Director-General, International Finance Bureau, Ministry of Finance
Canada
Paul Martin, Minister of Finance
Ian Bennett, Associate Deputy Minister (G-7 Deputy)
CRISIS COUNTRY GOVERNMENTS
Thailand
Kleo-Thong Hetrakul, Director, Economic Research Department, Bank of Thailand
Indonesia
Sudradjad Djiwandono, Governor, Bank Indonesia
Saleh Afiff, Coordinating Minister for Economic Affairs
South Korea
Kang Kyung Shik, Minister of Finance and Economy
Byeon Yang Ho, Director for Policy Coordination, Ministry of Finance and Economy
Oh Jong Nam, Director, International Economic Policy Division, Ministry of Finance and Economy
Lee Kyung Shik, Governor, Bank of Korea
Cho Sung Jong, Deputy Director, International Department, Bank of Korea
Shin Hyun Chul, Director, International Relations Office, Bank of Korea
Kim Ki Hwan, Ambassador at Large for Economic Affairs
Russia
Mikhail Zadornov, Minister of Finance
Oleg Vyugin, Deputy Minister of Finance
Sergei Vasiliev, Chief of Staff
Sergei Dubinin, Chairman, Central Bank of Russia
Sergei Alexashenko, Deputy Chairman, Central Bank of Russia
Brazil
Fernando Henrique Cardoso, President
Pedro Malan, Minister of Finance
Arminio Fraga, President, Central Bank of Brazil
Amaury Bier, Secretary for Economic Policy, Ministry of Finance
PRIVATE SECTOR
Charles Blitzer, Donaldson, Lufkin, & Jenrette
Peter Boone, Brunswick Warburg (Moscow)
Al Breach, Goldman Sachs (Moscow)
David Folkerts-Landau, Deutsche Bank
Quentin Marshall, UBS Warburg
Roland Nash, MFK Renaissance (Moscow)
Heather Neale, Salomon Smith Barney
John Purcell, Salomon Smith Barney
William Rhodes, Citicorp
Jeffrey Shafer, Salomon Smith Barney
George Soros, Soros Fund Management
Ernest Stern, J.P. Morgan
David Tepper, Appaloosa Management
ACADEMICS, OTHER EXPERTS
Anders Aslund, Carnegie Endowment for International Peace
Choi Inbom, Institute for International Economics
Michael Dooley, University of California-Santa Cruz
Barry Eichengreen, University of California-Berkeley
Greg Fager, Institute of International Finance
Clifford Gaddy, Brookings Institution
Morris Goldstein, Institute for International Economics
Steve Hanke, The Johns Hopkins University (adviser to Indonesian government)
Gary Hufbauer, Institute for International Economics
Peter Kenen, Princeton University
Catherine Mann, Institute for International Economics
Pendarell (“Pen”) Kent, former Executive Director, Bank of England (adviser to Indonesian government)
Steven Radelet, Harvard University
Carmen Reinhart, University of Maryland
Jeffrey Sachs, Harvard University
Makoto Utsumi, Keio University
Paul Volcker, former Federal Reserve Board chairman (adviser to Indonesian government)
John W
illiamson, Institute for International Economics
CHAPTER ONE: THE COMMITTEE TO SAVE THE WORLD
Many of the facts and conclusions in this chapter are drawn from material cited in
later chapters, particularly Chapters 5 and 7 where I explore the Korean crisis in
greater detail.
Page 1: Details concerning Hubert Neiss’s career and education come from IMF news release, “IMF Sets Organization and Senior Staff Changes,” December 6, 1996, published on the IMF website, www.imf.org.
Page 7: Details on Korea’s program come from documents published on the IMF website, including “IMF Approves SDR 15.5 Billion Stand-by Credit for Korea,” news release, December 4, 1997.
The $55 billion “headline” figure of the program rose in the days immediately following the announcement to as much as $60 billion as additional wealthy countries pledged contributions.
Camdessus’s quotes are contained in IMF news brief, “Camdessus Welcomes Conclusion of Talks with Korea on IMF Program,” December 3, 1997, available on the IMF website; and in David Holley, “South Korea, IMF Finalize $55-billion Bailout Plan,” Los Angeles Times, December 4, 1997.
Page 10: I thank David Rothkopf for the analogy between the IMF’s rescues and well-trained orthopedic surgeons trying to cure a ward of patients suffering emotional breakdowns.
The Chastening Page 43