Terms of Reference 3


The relevance to these issues of recent developments in the international frameworks for financial regulation.

  1. The crisis in East Asia has focused attention on the need to deal with the serious challenges being posed by globalisation and other changes in financial markets. There is a broad consensus that addressing these challenges requires:

  • promoting soundly based liberalisation and more stable capital flows;

  • strengthening domestic financial systems, macroeconomic and regulatory policies; and

  • strengthening the international financial system to better prevent crises and to manage them if they do occur.

  1. The following discusses recent developments and draws on the Australian experience in dealing with the issues raised.

  2. Soundly based liberalisation and more stable capital flows

  3. Open and integrated financial systems pose challenges for policy makers and others. However, the potential benefits to be derived from liberalisation and globalisation are large. The challenge is to seek to improve the stability of capital flows and the international monetary system more broadly, and in so doing, maximise the potential benefits of greater openness.

  4. More open capital markets can bring, and have brought, substantial benefits. However, volatile capital flows can also punish economies. This is particularly the case for those countries not pursuing sound macroeconomic policies, appropriate debt management and do not have in place financial institutions supported by strong supervisory and regulatory frameworks. Ongoing financial innovation and technological change underscore the potential risks of premature liberalisation, which have served to increase the volume and complexity of capital flows.

  5. The crisis has shown that the pace of liberalisation of capital accounts should be undertaken in a manner consistent with a countrys financial infrastructure. Equally important, the sequence of liberalisation should be appropriately balanced. One of the factors contributing to the evolution of the recent crisis was that countries pursued early and unbalanced liberalisation, in that they opened themselves up to short-term capital flows but not longer-term flows, and liberalisation took place without having sufficiently strong financial institutions to cope with those flows.

  6. There now appears to be a consensus that liberalisation should not be pursued without due regard to the strength of domestic financial institutions. The Interim Committee (IC) of the Board of Governors of the IMF has tasked the IMF with undertaking further work on the appropriate pace and sequencing of capital account opening.

  7. Language such as appropriate pace and sequencing of liberalisation is often taken to be a euphemism for resisting greater openness or going slow. This is not the case being put here. The purpose of liberalisation is to improve economic prospects and standards of living. To achieve this, important pre-requisites need to be put in place - notably sound financial supervision. Sound corporate governance arrangements are also important. Liberalisation should be undertaken in a manner that allows for these pre-requisites to be put in place. Premature or ill-considered liberalisation is likely to bring with it substantive costs.

  8. Recognition of the importance of pursuing orderly liberalisation has raised questions about a possible role for capital controls in enabling countries to better manage short-term flows. Some suggest that controls on inflows (especially market-based controls) can provide a useful means of reducing vulnerabilities. Australia had previously adopted such an approach and Chile currently has controls on capital inflows. An alternative is to place controls on outflows. Such an approach has been adopted by Malaysia, which implemented controls on outflows in an effort to avoid a crisis triggered by a sudden reversal of short-term flows.

  9. In 1972, Australia introduced the variable deposit requirement (VDR), which acted as a market-based restriction on capital inflows. Under the VDR scheme, a proportion of overseas-borrowed funds had to be placed in Australian dollars with the RBA in an interest-free non-assignable deposit until loan repayments were made. By raising the cost of overseas borrowings, the VDR in effect acted as a tax on funds borrowed from abroad. The VDR was suspended in July 1977.

  10. The VDR was introduced in Australia under a pegged exchange rate regime at a time when capital inflow, and in particular portfolio investment and increased borrowing abroad, was considered to be high. This capital inflow was causing a sharp accumulation of reserves, leading to disequilibrium in the balance of payments, and putting upward pressure on the exchange rate. The introduction of the VDR was accompanied by a revaluation of the Australian dollar and also an embargo on short-term borrowing abroad. These three policies were implemented with the objective that in combination they would reduce domestic liquidity, which had been at exceptionally high levels, and improve Australias external balance by inhibiting inflows of capital which were destabilising with respect to the spot exchange rate, the balance of payments and domestic monetary conditions. Each of these measures was considered a temporary instrument to address temporary capital account pressures.

  11. While the empirical evidence on the effects of the VDR is inconclusive, it does appear that the implementation of this instrument, together with the short-term borrowing embargo and exchange rate revaluation, had some temporary effect in reducing the volume of inflows to Australia. To this extent the VDR appears to have met the desired objectives of the time. This control on capital inflow did impose costs, to borrowers and to total economic activity through the likely distortions in resource allocation. However, at the time it is likely that these costs were considered more manageable than the inflationary consequences of high domestic liquidity or a larger appreciation of the pegged currency. In the period since the suspension of the VDR, Australia has adopted a freely floating, market-determined exchange rate. Although this means we no longer have control over the level of the exchange rate, Australia has gained control over domestic liquidity levels, and received the benefits of a more competitive and efficient capital market.

  12. A present-day example of an attempt to control the composition of foreign borrowing to an economy is provided by the capital controls currently in place in Chile. In the early 1990s, Chiles monetary policy objectives came under increasing pressure from a growing surge in capital inflows. In response, authorities introduced a one-year unremunerated reserve requirement (URR) on all non-direct foreign investment entering the country. This URR is currently set at 10 per cent. Designed to discourage short-term borrowing without affecting long-term foreign investments, this system is equivalent to the imposition of a tax on capital inflows inversely proportional to the length of the stay of the inflow.

  13. The Chilean experience has been viewed by many as a means of controlling the composition of foreign borrowing to an economy. Increasingly popular is the view that short-term capital flows may incr
    ease the vulnerability of emerging countries to financial crises, and the Chilean controls have been increasingly identified as an example of an effective method of insulation against rapid capital outflow. Certainly the composition of capital inflows does appear to have been altered in favour of long-term flows and Chile has been relatively unaffected by recent financial crises. Nevertheless, without the counterfactual, it is difficult to directly attribute this recent stability to the effectiveness of the Chilean controls. In particular, Chiles financial sector may also be protected from severe capital flow swings by its relatively strong and well-designed prudential regulations which, together with the capital account restrictions, act to limit the foreign exchange exposure of both bank and nonbank entities. Further, by increasing the cost of capital inflows, the URR may act as a constraint on the volume of capital inflows to the Chilean economy.

  14. Another economy that has recent experience of capital controls is Malaysia. In late 1998, the Malaysian Government fixed the exchange rate (the ringgit) and implemented controls to limit the convertibility of the ringgit for capital account transactions. Under these controls, approval was required for the transfer of funds between External Accounts and foreign investors were barred from repatriating the principal of their investments for at least a year. Introduced during a period of relative capital market instability, the objective of these controls was to contain speculation on the ringgit and de-link domestic interest rates from the exchange rate to allow a loosening of monetary policy. In early 1999 the condition barring repatriation of profits was replaced by a graduated exit tax, which ranges from 30 per cent for funds repatriated less than seven months from the date of investment through to zero for funds repatriated after one year.

  15. In contrast to the controls in place in Chile, the Malaysian system is directed at outflows, rather than inflows of capital. As a policy instrument, controls on outflows have attracted considerable criticism. To be effective in reducing capital outflows, these controls generally have to be wide-ranging and as such do still impose costs on long-term as well as short-term investment. By creating a more uncertain investment environment and increasing investors perceived risk, these controls may also have damaging effects by discouraging rollovers and new capital inflows. Nevertheless, these controls may be effective in the short-run if they are designed to provide temporary breathing space while necessary financial sector reforms are introduced and capital account liberalisation is pursued. Since the implementation of capital controls, Malaysia has shown commitment to financial restructuring, working to clean up bad loans and recapitalise the banking system. This appears to have reduced the uncertainties that clouded the investment environment when these controls were introduced. The controls have since been progressively eased and net capital inflow has continued to grow.

  16. The imposition of controls on capital outflows can be justified only in exceptional circumstances. They should operate only as a temporary safeguard until such time as the financial system has been restructured and strengthened. The Executive Board of the IMF has had discussions on the effectiveness of short-term capital controls and the IC has tasked the IMF with refining its work on this topic.

  17. Improved monitoring of short-term flows also offers scope to reduce the vulnerabilities associated with excessive reliance on short-term capital flows. As mentioned in paragraph 108, the IMF has strengthened its Special Data Dissemination Standard (SDDS) to improve data on short-term liabilities of the official sector and arrangements are in place to facilitate access to creditor side external debt data.

  18. The risks and vulnerabilities associated with excessive short-term borrowing strongly suggest that sovereign debt management strategies may need to be improved. As a typical yield curve is upward sloping, there may be a tendency for sovereign debt managers to rely excessively on cheaper shorter-term sources of financing. However, such a strategy ignores the risks associated with the need to re-finance on a regular basis. US Federal Reserve Chairman, Alan Greenspan, has noted that for too long, too many emerging market economies have managed their external liabilities so as to minimise their current borrowing cost. This short-sighted approach ignores the insurance imbedded in long-term debt, insurance that is almost always well worth the price.

  19. Sound principles for sovereign debt management suggest borrowers should be mindful of both the costs and risks associated with debt instruments. While foreign short-term or floating rate debt instruments tend to be less costly than domestic long-term or fixed rate instruments, in the short-term at least, they also present greater risks with respect to the volatility of future debt service costs. In particular, short-term debt instruments increase countries exposure to refinancing or funding risk (the risk that they will be unable to obtain new financing as debt matures or only be able to refinance at a high cost).

  20. Australia has progressively adopted a risk management approach to debt management over recent years. With respect to the management of funding risk, Australias broad objective is to maintain on-going market access on favourable terms. Debt issuance is concentrated into a relatively small number of liquid benchmark lines along a yield curve extending out 12-13 years. High priority is given to maintaining the length of the yield curve to ensure, in the longer term, a smooth progression of stocks available to move into the ten year bond futures contract.

  21. Australias approach to managing market risk (the risk to the future value of the debt portfolio from changes in financial prices) has focussed for a number of years on the establishment of a carefully defined benchmark to serve as a target for currency and duration objectives. The benchmark reflects a hypothetical portfolio structure that can be expected to minimise the expected cost of debt over the longer term, subject to an acceptable expected degree of volatility in annual debt service costs (that is, risk). Cross currency and domestic interest rate swaps are utilised to maintain the debt portfolio in line with the benchmark target.

Strengthening domestic financial systems, macroeconomic and regulatory policies

  1. A number of core conditions need to be in place to support financial stability. These include sound and sustainable macroeconomic policies, sound prudential arrangements, strong and independent supervisory agencies, procedures to deal with insolvency and effective market discipline.

  2. The East Asian crisis economies were perceived as leading the developing world in responsible macroeconomic management. However, the recent crisis exposed weaknesses in their financial systems and approach to public and corporate sector governance, which made them vulnerable to financial instability. The crisis economies have since made significant progress in advancing appropriate reforms, with the support of the IMF, to address these problems. In particular, reform programs have focused on:

  • implementing high standards of governance and transparency. Promoting arms length relationships among governments, corporations and banks.

  • implementing sound regul
    atory and supervisory structures. Improving prudential regulation and establishing supervisory agencies that have a high degree of independence from banks, the private sector, and other official agencies. The precise institutional arrangements will vary from one country to another.

  • promoting independent and competitive financial and corporate sectors. Restructuring and/or recapitalising troubled banks and pressing ahead with corporate debt workouts to establish viable corporations on a sound financial footing.

  1. Although significant progress has been achieved, a number of challenges remain. In particular, with the crisis now abated there is a sense that some of the momentum for reform has waned. Australia has consistently highlighted in regional fora that reform must continue if the crisis economies are to return to sustainable growth.

  2. In this respect, Australia successfully pressed for a Ministerial-level commitment to maintaining the momentum for reform at the Sixth APEC Finance Ministers Meeting in Langkawi, Malaysia in May 1999. APEC, and in particular APEC meetings of Finance Ministers, has provided a useful forum for dealing with the causes and effects of the East Asian crisis. Australia has attached particular importance in APEC to promoting good governance as a means of addressing financial and corporate sector vulnerability. Treasury was one of the authors of the report Strengthening Corporate Governance in the APEC region endorsed by Ministers at the Langkawi meeting. The report, inter alia, recommended that governments give priority to legal reforms such as in contract and insolvency law; strengthen education and training for the judiciary and professionals such as accountants and auditors; and work cooperatively and flexibly with the private sector to improve corporate governance practices.

  3. To maintain the momentum in the corporate governance area, Australia offered access, at the Langkawi meeting, to various corporate governance training facilities and proposed a joint APEC-OECD workshop on insolvency law. The proposal was accepted and the workshop will be held later this year.

Implementing a sound prudential and regulatory financial framework  the Australian experience

  1. Australia first embarked on reform of the financial sector in the early 1980s when the Campbell Committee recommended promoting efficiency in the financial system by deregulation of the banking sector, floating the Australian dollar and allowing the entry of foreign banks. The underlying philosophy of the approach was one of liberalising markets.

  2. In 1996, Australia recognised the need to update the financial sector regulatory framework to keep up with the rapid pace of change in financial markets. In particular, developments in technology and innovation in products and delivery of financial services. The aim was to ensure a regulatory system that was flexible and responsive enough to accommodate further rapid change in the financial sector. This led to the report of the Wallis Inquiry in March 1997 which found that regulatory arrangements did not treat all new market structures and activities equally, giving rise to biases in the system. This had the effect of limiting competition and increasing costs in the financial sector.

  3. In response to the Inquiry, the Government undertook a substantial refocusing of regulatory agencies with the aim of ensuring that Australias national system of financial regulation is world class for the benefit of consumers and business. In particular:

  • a new organisational framework for the regulation of the financial system; and

  • a variety of measures to improve efficiency and contestability in financial markets and the payments system.

  1. The new organisational framework consists of three single, separate regulators each responsible for clear regulatory objectives. First, the role of the RBA is focussed on the objectives of monetary policy, overall financial system stability, and the regulation of the payments system. The new Payments System Board within the Bank has been established with greater powers to ensure safety, greater competition and ease of entry into the payments system. Second, the Australian Prudential Regulation Authority (APRA), a statutory body responsible for financial safety across all sectors requiring prudential regulation - deposit-taking, life and general insurance, and superannuation. And third, the Australian Securities and Investments Commission (ASIC), with a focus on market integrity, disclosure and other consumer protection issues.

  2. Each regulatory agency has substantial autonomy and a clear charter of objectives. They have boards of directors or commissioners responsible for operational and administrative policies, and are accountable through the Treasurer to the Parliament of Australia.

  3. Underlying Australias approach to financial sector regulation is the recognition that it is not the role of regulators to eliminate risk. Rather, their role is to allow financial markets to manage, allocate and price risk within a framework of disclosure and transparency so that consumers of financial services can assess the level of risk they are willing to manage.

Strengthening the international financial system

  1. There have been a number of dimensions to the financial instability that has gripped parts of the world since mid-1997. Much of this has been the result of weaknesses in domestic policies. However, it has become clear that weaknesses in the international financial system also played a part. Recognition of the complexity of the crisis and the weaknesses revealed by it, underpins efforts in many international fora to reform and strengthen the international financial system.

  2. In October 1998, the G-7 Finance Ministers identified the need for reform in six priority areas to strengthen the international financial system. These were:

  • strengthening and reforming the international financial institutions and arrangements;

  • enhancing transparency and promoting best practices;

  • strengthening financial regulation in industrialised countries;

  • strengthening macroeconomic policies and financial systems in emerging markets;

  • improving crisis prevention and management, and involving the private sector; and

  • promoting social policies to protect the poor and most vulnerable.

  1. Many of the above issues have been addressed in earlier sections of the submission. However, it would be useful to outline Australias approach to international financial reform and review developments in international cooperation and involving the private sector.

  2. Australias role in international financial reform

  3. There are limits to what Australia, or any other individual country, can achieve on its own to strengthen the international financial system. To be successful, reform needs to be progressed in economies at all stages of development, across different regions, and in
    both the public and private sectors. This requires a global response. It is for this reason that Australia has been an active participant in advancing reforms through international groupings and fora with wide representation and involvement.

  4. To enable Australia to play an active role to the best extent possible, the Prime Minister commissioned a taskforce (referred to earlier), which included prominent public and private sector representatives, to advise on how Australia can contribute to international financial reform. The report of the Taskforce, was released in December of last year, and identifies a number of key findings, which have provided the foundation for Australias efforts in promoting international financial reform. The key findings were that:

  • reform will require a global response;

  • Australia should support the continuation of the movement towards open international capital markets and soundly based and more stable capital flows;

  • reform should be progressed through an international grouping with wide representation;

  • improved transparency by corporations, governments and international financial institutions is needed;

  • countries should improve, extend and implement internationally accepted standards and codes of conduct with respect to transparency;

  • the IMF should prepare transparency reports for each member country. Australia should take the lead in the preparation of a self-assessment transparency report;

  • all countries should be encouraged to meet the Basle Committee on Banking Supervision (BCBS) standards for banking supervision, particularly in the area of capital adequacy, loan valuation and provisions;

  • encourage external surveillance of a countrys supervisory arrangements as part of the IMFs Article IV consultations;

  • consider increasing the level of cooperation between the Government, Australian financial institutions and private sector organisations in the provision of technical assistance to enhance financial supervision in regional economies;

  • take steps to ensure adequate disclosure by hedge funds and other Highly Leveraged Institutions (HLIs) and to ensure appropriate risk management on the part of creditors and counter-parties in their dealings with such investors;

  • facilitate private sector involvement in improved crisis management;

  • maintain trade finance;

  • strengthen national insolvency regimes;

  • improve the composition of capital flows, in particular, to encourage long-term capital inflow rather than short-term flows;

  • enhance international cooperation on financial sector policy issues; and

  • advance regional cooperation on financial issues. Through organisations such as APEC, the Executive Meeting of East Asia-Pacific Central Banks and the Manila Framework Group.

  1. Considerable progress has been achieved in addressing many of these issues.

  2. Developments in international cooperation

  3. The recent financial crises have proved a major challenge for the IMF and the international community more generally. This has highlighted the need for the international community to improve its approach to crisis prevention and management. In addition to crisis preventative measures, discussed earlier, there has been considerable discussion on: new facilities to strengthen the ability of the IMF to provide financial assistance; and new arrangements to enhance cooperation within the international community on financial matters, including more effective means of involving the private sector.

  4. New financing facilities

  5. To strengthen its capacity to respond to financial instability, the IMF has developed two new facilities the Supplemental Reserve Facility (SRF) and more recently the Contingent Credit Line (CCL). These facilities were developed with the full support of the IMFs membership and are tailored to respond to the types of financial crises that we have witnessed over the past two years. Both facilities provide large-scale and quick disbursing financial assistance. The facilities also carry higher rates of charge and countries are expected to repay the IMF in a much shorter time period than is normally the case.

  6. The CCL makes available assistance for members with strong economic policies, as a precautionary line of defence against the risk of financial contagion. The CCL is intended to provide further incentive for countries to adopt the sound policies and institutional arrangements important for crisis prevention, and should also help reduce the spread of contagion.

  7. The IMF has also taken steps to ensure that is has sufficient resources to meet the potential needs of members. It has done this through an increase in quotas and in adopting the New Arrangements to Borrow (NAB) of which Australia is a participant. Under the NAB, potentially 25 participant countries and institutions stand ready to lend the IMF up to SDR34 billion to supplement its regular quota resources when needed to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that threatens the stability of the system. Australia played a key role in the development of the NAB and is the current chair.

  8. New facilities to enable more rapid provision of assistance in crisis situations have also been put into place by the World Bank and the Asian Development Bank. Bilateral creditors, including Australia, have also played an important role in offering financial assistance in the context of IMF-supported programs.

Enhancing international cooperation

  1. As recognised in the Report of the Prime Ministers Taskforce, if financial instability is to be addressed, a global response is required - a global response in the sense that all governments are encouraged to improve their national policy frameworks where needed and that steps to improve the operation of the international financial system itself are undertaken. Australia has been very active in this debate and believes that there needs to be ownership by a wide group of countries if reform proposals are to be implemented.

  2. Australia was a strong supporter of the G-22. The report of the Prime Ministers Task Force recommended that reform be progressed through an international grouping with wider representation, such as the G-22. In Australias view, the G-22 played a vital role in responding quickly to the crisis. However, it became clear that the G-22 did not have the broad support necessary for it to continue in its existing format, and the group has not met since October of last year.

  3. Notwithstanding the demise of the G-22, the need for a broad representative forum remains. As such, Australia welcomed the call at the recent APEC Finance Ministers meeting at Langkawi for the establishment of an ongoing mechanism for inclusive dialogue between industrial, developing and
    emerging market economies to build consensus on major economic and financial policies in the future.

  4. The 18 June 1999 report of the G-7 Finance Ministers on Strengthening the International Financial Architecture also recognised the importance of widening the on-going dialogue on the international financial system to a broader range of countries. To this end, the G-7 Finance Ministers agreed that, by the time of the next Forum meeting in September 1999, the Forum be broadened to include significant financial centres, in a format that provides for effective dialogue. On 21 June 1999, the Chairman of the Forum invited Australia along with Hong Kong SAR, Singapore and the Netherlands to participate.

  5. There have also been calls for institutional reform of the IMF. At its meeting in October 1998, the IC requested a review of the institutional components of the international financial system, including the possibility of strengthening and/or transforming the Committee itself. There are a number of proposals on the table aimed at strengthening the IC and IMF, but little agreement has been reached. The 18 June 1999 report of the G-7 Finance Ministers recommended that the IC be given permanent standing as the International Financial and Monetary Committee. It is unclear at this point whether this will lead to any change in the Committees functions and operations.

  6. In terms of other developments to enhance international cooperation, the Financial Stability Forum (FSF), as discussed earlier, has been established to improve cooperation between international organisations, regulators and experts with responsibilities in the area of financial regulation. In addition to this ongoing role, the Forum has established three ad hoc working groups to tackle a number of issues identified as needing further consideration, including:

  • actions that may be needed to reduce the destabilising potential of HLIs in financial markets;

  • evaluation of measures that could reduce the volatility of capital flows and the risks posed by excessive short-term external indebtedness; and

  • the role of offshore financial centres and progress towards enforcing prudential standards and information sharing agreements in relation to these centres.

  1. These groups will report on their work at the next meeting of the Forum, scheduled for September.

  2. Involving the private sector

  3. As noted earlier, improved official financial rescue packages are an important element in restoring financial stability. However, official financial assistance carries with it the risk of moral hazard - where creditors fail to undertake adequate risk assessment and management as there is an expectation that the official sector will step in and bail out economies in times of trouble. This might not pose such a problem if this implicit insurance meant that creditors maintained capital flows. But, this is not the case. Events have shown that creditors rush for the exits in an effort to be out before a crisis hits. These very actions can precipitate crisis.

  4. It has also become clear that the official sector can no longer provide the volume of financial assistance needed to address crises in a world of integrated capital markets. By formally involving creditors in forestalling and resolving financial crises, the international community aims to:

  • limit moral hazard; and

  • equitably share the burden of crisis resolution with the official sector.

  1. Reflecting this, the private sector was asked, through debt roll-over and restructuring, to play its part in the rescue packages put together for Korea, Indonesia and Thailand. This, however, took place in an ad hoc way and governments were cautious about being involved in negotiations between private parties.

  2. Since then, proposals for strengthening the international financial architecture to better involve the private sector have been discussed in a number of fora - including the IMF Executive Board, G-22, G-7 and APEC. Much of this discussion has focused on either developing general guidelines for crisis situations or the use of specific market-based measures to cope with the risk of changes in investor sentiment leading to financial crisis.

  3. A general framework to guide private sector involvement in crisis resolution will need to be flexible to take account of differing crisis situations but will also need to spell out the basic ground rules that will apply in crisis situations. In particular, any framework will need to provide creditors and debtors with clear expectations about the processes that will apply should a crisis develop. The 18 June G-7 Finance Ministers report set out a broad framework of principles, including:

  • crisis resolution must not undermine the obligation of countries to meet their debts in full and on time;

  • market discipline will only work if creditors bear the consequences of the risks they take;

  • in a crisis, reducing net debt payments to the private sector can potentially contribute to meeting a countrys immediate financing needs and reducing the amount of finance to be provided by the official sector;

  • no one category of private creditors should be regarded as inherently privileged relative to others in a similar position; and

  • the aim of crisis management wherever possible should be to achieve co-operative solutions negotiated between the debtor country and its creditors, building on effective dialogues established in advance.

  1. Measures to involve the private sector will play a key role in crisis prevention. In particular, ex ante measures can reduce vulnerabilities, reduce moral hazard and help avoid a crisis when pressures begin to emerge. Attention has focused on two particular market-based measures: private contingent credit lines and collective action clauses.

  2. A number of countries have established contingent lines of credit with private creditors. These credit lines can be activated on the basis of predetermined conditions to provide financing in the event of adverse market developments. By providing additional financing in a time of difficulty, these market-based arrangements can help cushion the initial impact of payment problems and reduce the need to resort to more disruptive measures.

  3. Collective action clauses in bond contracts is one approach aimed at fostering resolution of payments difficulties. These clauses provide for the modification of the terms of a bond contract, including those dealing with repayment schedules, by agreement between the borrower and a majority (usually a qualified majority) of bondholders. Such clauses can provide greater clarity about the circumstances in which contracts may need to be altered. They can also facilitate the process of restructuring and refinancing by not allowing individual bondholders to seek to gain advantage by obstructing agreements on restructuring. At the meeting of the IC in Washington on 27 April 1999, participants invited the IMF Executive Board and other relevant fora to explore appropriate ways
    to introduce collective action clauses in sovereign bond issues.

  4. These and other ex ante measures can play an important circuit breaking role in the event of payments problems. It is possible that these measures will increase the cost of borrowing, but this is not necessarily a bad thing, if the higher cost leads to more prudent borrowing and better reflects the risks involved.

  5. Further work is needed to address the technical and legal implications of involving the private sector. In this respect, both the IC and G-7 Finance Ministers have asked the IMF to push ahead with its work on this topic and report by the time of the IMF/World Bank Annual meetings in late September.

73 APEC Leaders' Declaration of 18 November 1998 also underscores the importance of domestic financial systems being able to withstand the pressures of short-term flows.

74 See the Communiqué of the IC meeting, 27 April 1999.

75 A short summary of the Executive Board discussions on the effectiveness of short-term controls on capital is contained in 'The Report of the Managing Director to the Interim Committee on Progress in Strengthening the Architecture of the International Financial System', IMF, 26 April, 1999. A copy of this paper is available on the IMF's web site at http://www.imf.org.

76 Testimony of Chairman Alan Greenspan 'Efforts to improve the 'architecture' of the international financial system', before the Committee on Banking and Financial Services, US House of Representatives, May 20, 1999. Greenspan also makes the point that excessive reliance on short-term debt means that the entire burden of a crisis falls on the emerging market economy in the form of a run on reserves. In contrast, if longer-term maturities are relied on, creditors share some of the burden in the form of a fall in the value of their assets.

77 The East Asian Miracle: Economic Growth and Public Policy, published for the World Bank by Oxford University Press, 1993.

78 A detailed account of APEC's response to the financial crisis can be found at http://www.apecsec.org.

79 Background on the RBA is available at http://www.rba.gov.au/.

80 Background on the APRA is available at http://www.apra.gov.au/.

81 Background on the ASIC is available at http://www.asic.gov.au/.

82 The Report of the Prime Minister's Taskforce on International Financial Reform, 21 December 1998, available on-line at http://www.treasury.gov.au. Treasury provided a briefing to the Committee on the Task Force Report on 11 March 1999.

83 The G-22 established three working groups to address: transparency and accountability; strengthening financial systems; and international financial crises. The reports of the working groups are available from the BIS web site at http://www.bis.org.

84 Australia to join Financial Stability Forum, Press release of the Treasurer, the Hon Peter Costello MP, 22 June 1999.

85 Australia and the IMF 1997-98, Annual Report to Parliament 1999, p. 8-9, available on the Commonwealth Department of the Treasury web site at http://www.treasury.gov.au.

86 For further detail on various proposals under consideration see 'Involving the Private Sector in Forestalling and Resolving Financial Crises', IMF, April 1999. Available at the IMF web site at http://www.imf.org.

87 Report of the G-7 Finance Ministers on Strengthening the International Financial Architecture, 18 June 1999, paragraph 45.

88 See the Communiqué of the IC meeting, 27 April 1999.

89 See the Communiqué of the IC meeting, 27 April 1999, and the report of the G-7 Finance Ministers on Strengthening the International Financial Architecture, 18 June 1999, paragraph 51.