Concern is growing that promises of more IMF dialogue with the private sector may be difficult to meet.
One of the first things that Horst Köhler did after taking up his appointment as IMF managing director in May was to hold a meeting in New York with senior executives from leading financial institutions from around the world, to initiate dialogue between the Fund and the private financial community on enhancing the stability of the international financial system.
Shortly afterwards, he launched a capital markets group and scheduled its first meeting for September 12 in London. These moves were welcome news to leading international banks, investment banks, fund managers and others.
They had long complained that, for all its gestures towards greater openness and transparency, the IMF remains aloof and secretive in deciding what information to divulge to private institutions that nowadays provide the lion’s share of capital to emerging markets.
Mr Köhler’s arrival seemed to herald a new era of co-operation between the official and private sectors.
“We are delighted with the fresh energy and vision that Mr Köhler has brought to dialogue with the private sector,” Charles Dallara, managing director of the Washington-based Institute of International Finance (IIF) told The Banker. “He has made it clear to us that he views co-operation as an essential part of his mandate. This does not mean he can solve all the problems between the IMF and the private sector but at least there is a desire for dialogue. Now we need to find practical ways of implementing this dialogue.”
This will be the hard part and, in private, some IMF officials fear their new chief may have promised more than he can deliver. One official says: “A lot of market participants reacted quite positively to the statements of the new managing director. They reflect very much where he is coming from. However, there may be expectations about what this will lead to by way of concrete changes that are somewhat overblown.”
The IIF, which speaks on behalf of a broad group of global financial institutions, has made its views clear about what it expects in the way of co-operation between the IMF and the private sector.
In April 1998, it wrote to the then chairman of the IMF interim committee suggesting: “The Fund could facilitate consultations on a range of broad issues in emerging market finance by establishing a private sector advisory council. This could be supplemented by meetings with varying groups of creditors and investors focusing on the major issues in a particular sub-region.”
This is still on the agenda. “We would like to see regular dialogues at regional level between IMF and capital market participants,” says Mr Dallara. “We have been urging better relations between emerging markets and the investor base. What we need is regular dialogue between the IMF and investors on the overall economic outlook for a particular country or region.”
The private sector needs to know, for example, the outlook on exchange rates, what is happening in capital markets, how corporate and financial sector restructuring is progressing and what fiscal, trade and investment policy developments might occur in any given country.
“The IMF’s strength is in monetary policy and central banking areas,” says Mr Dallara. “But it has not been strong in understanding the dynamics of the capital markets. It will need to work with regulators and with the World Bank on development of local capital markets. There needs to be some clear delineation of responsibility. We have constructive dialogues with the Bank and the International Finance Corporation [but not with the IMF, he implies]. The Fund should not try to over-reach itself, otherwise there is a danger that reforms will not be turned into operational reality.”
The IIF wants to see the IMF establish a formal investor relations programme, which would become part of the Fund’s so-called Article 4 consultations with member countries.
It also believes emerging market economies could be encouraged to establish an investor relations office in their central bank (as Mexico, South Korea and Ireland have done at their own initiative).
Mr Dallara says the IMF sometimes fails to understand the concerns and actions of private investors – such as when a mutual fund is forced to sell emerging market stocks in order to meet redemption demands.
“The Fund needs to go with the grain of the market and not fight it. IMF programmes should be designed to facilitate the return of private capital,” he says.
“Cultural factors inhibit the IMF’s ability to realise that it is not at the centre of the system any longer. Roles have changed and things have to be built around the IMF’s catalytic role. You cannot regain market confidence unless you talk to the markets. We are no longer in a world dominated by bank lenders but by foreign direct investment and portfolio flows investors. The IMF needs to appreciate the legal realities when it comes to crisis prevention.”
Mr Köhler has acknowledged the need for the IMF to “pay much closer attention to the financial sector in members countries to identify vulnerabilities and to provide advice on improving their soundness”.
But he does not see the IMF as being just one more player, along with the private sector and other official institutions, in this process. The IMF’s “oversight function for the international financial system should place the Fund quite naturally into the centre of the discussion on strengthening the global financial architecture,” he argues.
One IMF official says: “The managing director comes in with a very clear vision of the importance of strengthening relations with the private sector. One of the main purposes of the institution is to facilitate a world where the private sector is doing virtually all the work on financing member countries. The Fund has to work much more closely with the private sector for the establishment of stable conditions for the supply of private capital, not only to emerging markets but to work over time to give poorer countries access to capital markets in appropriate ways.”
The new Capital Markets Consultative Group is “designed to provide a regular forum where we can listen to the views of the private sector and take them into account, and enter a dialogue formally and at a higher level than we have done in the past,” says the official.
“It will provide an opportunity for us to how they [market players] see the risks and dangers ahead in the international financial system and, for them to tell us whether we have our judgements right about the issues and weaknesses ahead – based largely on what we come up with in our International Capital Markets Report and other publications. It provides, too, a forum for discussing Fund initiatives, including broader initiatives on private sector reform in crisis resolution, how these things ought to be handled.”
The new group, which is expected to be convened twice a year, is not, however, designed to be a forum for crisis resolution, he stresses. “We do not see this as the channel for us to negotiate with the private sector on a particular country basis. It is not our job to get in between a debtor and its creditors, and also we are concerned not to provide privileged channels of access for the private sector.
We have to maintain a certain distance [regarding] information that we can provide on current developments. We want it to be a body where the deliberations are useful both to us and to market participants. But precisely how it is handled will have to evolve in the light of what we find out when we have the first meeting.”
IMF officials insist they cannot divulge what they call “highly confidential information” to the private sector. They cite, for example, a situation in which a member government might be contemplating changes in bank prudential requirements that could have an impact on the banking system.
“We would not want to let the cat out of the bag on an issue of that sort,” says one official. “If we knew that tomorrow the government of a particular country was going to change its supervisory arrangements or [bank] risk weightings, some of that would be commercially and market sensitive material. It is up to governments to announce their policies.”
Mr Köhler, meanwhile, has made it clear that co-operation between the IMF and the private capital markets means the latter sharing more responsibilities as well as privileges. “Creditors and borrowers [in the case of any country] must know that the Fund’s resources are and should remain limited, so they assume responsibility for the risks they take and [know that] taxpayers’ money will not be available to protect them against the consequences of misjudgement,” he says.
IMF officials argue that progress is being made on the controversial issue of “baling in” the private sector on resolution of financial crises, and that considerable advances have been made since the Mexico crisis in 1995, when virtually all private creditors were bailed out by the use of official funds.
“The elements of the framework for handling these issues has been put out already and the private sector is becoming aware that they they will be called on to play a role in resolving crises,” says an official.
“We have seen cases where bonds have been exchanged and rescheduled whereas two years ago people said this was impossible and that litigation would be a problem hindering exchange of bonds. Part of the problem is that any crisis has elements that are different from any other.
Countries differ in terms of where they are in the policy mix, in terms of debt profiles. So it is very hard and counter-productive to lay down a set of rules. There has to be flexibility to handle a crisis as it comes along. The IIF, along with some European governments, is pressing for specific rules on how to resolve financial crises in terms of the claims of different creditor claims. But the US and Japan favour a more flexible approach, along lines suggested by the IMF.
“There are good reasons why we should not lay down specific rules for how to handle one of these crises because the market reaction will depend on the different things they see coming along. We do not want to be in a position where the market moves to forestall certain outcomes.”
