Transcript

Transcript of a Press Conference by IMF Managing Director Michel Camdessus

April 21, 1999

MR. ANJARIA: Good morning, ladies and gentlemen. Welcome to the press conference of Mr. Michel Camdessus, the Managing Director of the International Monetary Fund, and to his right Mr. Stanley Fischer, First Deputy Managing Director. The conference proceedings will be under embargo until the end of this press conference. I would like to ask the Managing Director if he would like to make some introductory remarks.

MR. CAMDESSUS: Thank you. Briefly to tell you first something you know already pretty well, namely, what will be the key issues addressed by the Interim Committee next Tuesday. As usual, the review of the world economic outlook, on which you had yesterday the press conference of Mr. Mussa; recent developments, including a particular focus on the policy response to recent crises in Asia, in Russia, and in Latin America.

Second--not second in order of importance, but second on my list--the issue of the strengthening of the architecture of the international monetary and financial system. We have been talking about that and working a lot recently in the different fora, and now it is time, at least in my judgment, to go from the broad design to more specific action.

Then, with growing interest in this issue, the question of how to strengthen our initiative in favor of the highly-indebted poor countries, the so-called HIPC initiative, and together with it the instrument which allows us to do our job in this area, the Enhanced Structural Adjustment Facility, our facility for the poorest countries, and its financing.

We will also touch on and discuss strengthening our action for countries in a situation of post-conflict. We will also certainly devote some discussions to the issue of Kosovo and how the international community can evaluate, first, the regional impact of this crisis and coordinate best its efforts to alleviate the immense human suffering in this part of the world, the humanitarian effort; and, second, start preparing for the reconstruction time. Of course, this is a heavy agenda, with crucial questions at a very important moment of history. Possibly I should say a few words, a few personal impressions, on each of these items, before we open the floor for discussion.

On the economic outlook, you have seen or heard what Mr. Mussa told you yesterday. Certainly, we can say that we have come a long way since I last appeared here last October. Last October your questions were around, "Well, is there a risk, a major risk, of credit crunch; is there a major risk of systemic meltdown?" The answers to these questions at that time were not that straightforward, I must say. Well, now the climate is distinctly better. Of course, if you look at the numbers we have circulated yesterday, 1999 does not offer the prospect of stellar growth; as a matter of fact, a little bit below 1998, which was not bright. But we recognize the prospect of some, perhaps significant, acceleration of growth, and we see a significantly better year for 2000, not only as far as the numbers are concerned--we see 3.4 percent growth, instead of 2.3 percent--but also the prospect of sounder growth, inasmuch as the program reforms in the countries hit by the crisis, if they are steadily implemented, have all the potential to establish the growth pattern of these countries on a much better, sounderbasis. But there are still parts of the world with difficulties and problems. Latin America as a whole will be in a recession--Brazil mainly, but several other countries, even though in Brazil and in Latin America in general the situation today is much brighter than it was two months ago. We believe that growth could resume in that part of the world later this year, and we could have, as a matter of fact, a kind of V-shaped curve, with a rapid pickup and recovery at the end of the year and the beginning of next. There are also, as you know, signs that capital flows to the emerging markets are beginning to recover. Witness, indeed, the rapid rise of Asian equity markets, the renewed interest for emerging countries' debt instruments, et cetera.

So, the situation is, yes, better, but you know the motto of the IMF: there is no room for complacency at all. To confirm these better prospects, a lot will depend on the quality and the perseverance in continuing with the policies of adjustment and reform. Frequently we have had the metaphor of theater about the three current years, with 1998 being the beginning of a tragedy and 1999 continuing under the effects of the problems of 1998. Now we tend to believe that the third part of this world drama should be--could be and should be--the part of renewal.

You can imagine that the discussion of the Ministers and Governors will certainly focus on how the three major currency blocs will distribute among themselves the responsibility for maintaining world demand at a proper level. You can also imagine that discussions will also focus on the exchange rate relationship among major currency blocs and on exchange rate regimes in emerging countries. And, of course, what lessons should we draw for the future from all these difficult developments.

Architecture. Well, possibly one of the good things which has come out from these crises in Asia is the powerful impetus for proposals to strengthen the international monetary system. You know the directions of work: reforming financial systems; introducing more transparency in institutions, in countries, in markets; developing standards and codes of good conduct to make the international markets as civilized as the domestic markets in advanced economies; and involving the private sector more in this effort. On these principles, these directions of action--and in pursuing the liberalization of capital markets--there is a broad consensus.

The question now is how to go from this, I must say, uneven consensus on the big principles to specific and quick action. Of course, there are fears expressed about the fact that, now, with this improvement of general economic conditions in the world, the impetus for change, the impetus for changing the system, could be, let us say, less obvious. I do not think it is the case. Every day demonstrates to us that the interest in action is there. But a word of caution about the word "architecture." Possibly, it does not describe exactly what we are doing. We are not that much into, let us say, plumbing or decorating; we are into something which is much more important. We are into ensuring that we create a system which could really serve better the needs of the people everywhere. This implies many things, including the fact that we continue striving for integrating in this globalized world countries which so far are not there and which do not benefit from all that globalization can create for growth, and hopefully high-quality growth. We must not forget either the fact that the strengthening of socialpolicies is a vital complement to the reform of the international monetary system. So, we would like very much in the IMF to put emphasis on these dimensions, and on now taking action. I have proposed to the Executive Board, and I will certainly press Ministers to try to go to a more concrete agenda than so far.

Lastly, debt. There is--and I am delighted to tell you this--great interest now in the world, and widespread support, for more debt relief for the poorest countries. I believe there is a broad consensus that the time has come to adopt further steps to relieve debt. You see that illustrated by a proliferation of initiatives of major leaders of the world in several directions, but always with this basic objective. But there are many questions still unanswered, and of course they are hard. How much are major shareholders of our institutions and bilateral creditors ready to effectively pay toward this effort; and, assuming that there is really fresh money for that, how will we spend it? What is the best way of allocating these resources to have the strongest leverage for improving development conditions and the human orientation of development in these countries? Should we, in allocating the resources, try to have a deeper alleviation of the debt in the countries already identified in our list for debt relief--23, more or less, at this very moment? Or should we utilize the resources in broadening the list of the countries which could benefit from it? My personal inclination, I tell you very frankly, would be for broadening the list. Having in mind that debt alleviation can be a powerful incentive to economic reform and economic progress, then the more countries going for economic reform and progress and benefitting from debt alleviation, the better for the global community. I insist on that. If we have learned one thing about debt relief, it is not so much that the amount of debt reduction matters--of course, it matters a lot. But what matters even more is the quality and duration of the economic effort that must support the debt relief and create change for the better. This, of course, carries a message about the way in which money should be spent on debt relief. It must be in a way that creates incentives for countries to continue to persevere with adjustment and reform. And we must be inventive for that. Debt relief must give reform added chances, and then you will achieve more for the poorest people in the world. I could elaborate, later on, on that, but I wanted to tell you that, because this is central to our concerns in the IMF.

QUESTION: There has been talk in the past few weeks about Kosovo and the south eastern European region, that needs some kind of reconstruction plan. Yesterday we learned that the foreign ministers will address the subject. Has the IMF been involved in this effort? Have you been talking to some officials about the problem? What do you personally think should be done for the peace in Kosovo?

MR. CAMDESSUS: Our purpose is to serve peace through better economics, if I can put it that simply. And, of course, as all the countries in the region are members of this institution, we are very actively, and with a high degree of anxiety, working on these issues.

We took the initiative, already some time ago--instead of taking the problem country by country--to try to have a perspective of the regional consequences of this conflict in order, when dealing with each individual country, to help them in alleviating the consequences of thisconflict and to help them in the humanitarian or reconstruction field. We are working on that, hand in hand with our colleagues of the World Bank, it being understood that the IMF, of course, concentrates on the macroeconomic and balance of payments aspects of the problem. We are working with the World Bank. We have already prepared a joint paper, to be submitted to our Executive Boards and to the Ministers and Governors here. As you can imagine, it is still an extremely provisional first outline of the economic consequences of this catastrophe. A lot will depend, of course, on how long it will last, but we will have to address many aspects of the questions, not only the problem created by the influx of refugees, but also the consequences of a disruption of normal channels for trade in the region. You know that many of the lines of communication were through Yugoslavia and they are now disrupted. Then trade is interrupted or should take different channels. And then you need to finance the reconstruction costs.

Several meetings are taking place: in London, in the context of the EBRD Annual Meetings; in Brussels, in the context of the G24; and here Ministers will take this issue during the Interim and Development Committee meetings. And we will have more meetings, co-chaired by the Fund and the Bank, to see in a little bit more focussed way how much we should be prepared to contribute, how much should bilateral countries be prepared to contribute, and when. It is an enormous human catastrophe. Economically speaking, it is not insignificant. It is not such that it would lead us to change our forecast for 1999 and 2000. Nevertheless, governments must see very rapidly how to respond to the human situation created there.

QUESTION: I have two questions: one on Mexico and one on the debt relief.

On Mexico, you and the World Bank were talking about combating corruption in the governments. My question is about the Governor of the Bank of Mexico. He has been under fire from the Congress. They are charging him to be part of the fraud in the banking system that provoked more macroeconomic problems for my country. So, my question is: are you satisfied, as IMF Managing Director, with the work that Mr. Ortiz is doing in Mexico and his relationships with the financial sector in Mexico?

MR. CAMDESSUS: On this first question--and this is one of the strong traditions of this institution--the IMF never personalizes things. We are very satisfied, indeed, with our work with Mexico, for many years, including since the time Mr. Ortiz was Executive Director of this institution, and a very distinguished one, indeed. Then we worked with him in the 1994-95 rescue operation, for which the IMF has not been blamed, I understand, and for which Mexico has been praised. So, now we are continuing working with Mexico. We are discussing the support we could open to this country to resist contagion and to consolidate its situation during this time. This situation has developed very positively. For 1999 we see Mexico with a solid growth of around 3 percent--something which is indeed high in Latin America this year, as you know. And thanks to the efforts of the Bank of Mexico, inflation is distinctly on a downward trend. We have 13 percent for 1999 in our calculations. It is too high still and requires still a major effort and monetary discipline, but we are satisfied with the work of the Bank of Mexico in this respect.

QUESTION: Would you be in favor of the dollarization of the MERCOSUR as a bloc?

MR. CAMDESSUS: I would not like to lecture you for too long on the beauties of dollarization. Dollarization is already a fact in certain proportions, frequently high, in many countries of Latin America, and particularly MERCOSUR. If I remember well, Uruguay is a country which is not frequently mentioned about dollarization, but which is, I understand, the most advanced in a process of dollarization. So, dollarization is first a fact.

The question is what kind of a monetary future these countries should choose for themselves. Here, of course, a lot of reflections are still needed. I come from a part of the world where a common currency has been created, but after 20 years of steady efforts at economic convergence. This has allowed this creation of a common currency to be a rather successful one. I believe in Latin America the process of economic convergence has started, but is not that far advanced. So, the question is: can all the problems be made simpler by abandoning national monetary sovereignty and responsibilities. Before responding to this question, a lot of reflection would be in order.

This is what I observed after the interest raised by the first mention of this idea by the President of Argentina. You immediately had the warning that, yes, this is an idea which has its merits, but let us work quietly for several years before making a decision. They are in this process. We in the IMF are at their disposal to work with them on it, to share with them all the experiences we have. This is also an issue we will be discussing, along with many other aspects of the problem, during this summer, as I am asking from the Interim Committee the mandate to focus attention during the next few months on the lessons for emerging countries' exchange rate regimes of this crisis. Dollarization will be a subchapter in this huge reflection.

QUESTION: I have two questions. The first is to the world economic outlook. How great is the danger of protectionism. The second question is to the future of the Interim Committee, strengthening the architecture. There are two ideas, one from the French to make the Interim Committee a political council. The second is from Great Britain, to bring together the Interim Committee and the Development Committee. And now there is a third idea I heard from Italy. What is going on with this idea?

MR. CAMDESSUS: First, we see as an element of risk and instability the growing imbalances in the current accounts of the major currency blocs, if I may say so. Of course, the numbers are striking for the United States of America and, indeed, made even more striking by the trade numbers which have been published this morning. For instance, we see the current account deficit of the United States steadily going up from 1.8 percent of GDP in 1996 to 2.7 percent in 1998 and 3.5 percent, which is a big number, indeed, in 1999. Corresponding to it, you have Japan’s current account surplus going up from 1.4 percent of GDP in 1996 to 3.6 percent in 1999. We do not yet have a current balance for Europe, but you see, for example, France's current surplus going up from 1.3 percent of GDP in 1996 to 2.8 percent in 1999, and Italy staying with a current account surplus of 2 to 3 percent of GDP, depending onthe years. All of that creates tensions in the system, and the consequences can, indeed, be a sudden disruption of the exchange rate relationship and/or vigorous protectionist pressures. This calls for correction, and this is why in the IMF we believe that we should not resist a progressive soft landing of the U.S. economy. It is now, after eight years of superb growth performance, time for some cooling down in the U.S., and it is more than time for the European economies to do everything possible to stimulate sound growth, which goes certainly to a more intense effort at flexibility and structural change, particularly in the labor market. So, this is the way in which we see this problem.

Now, I take briefly your second question. The so-called French proposal on creating the Council. Let me tell you, first, that the question is not if or should we go that way; the only question is when. Because provision for the Council was created in 1976; it is there in our Articles of Agreement. The only question left to Ministers and Governors is to decide when. When we embarked on these far reaching efforts at renovating the architecture of the system and redefining the mission of the IMF, it was very natural to ask the Ministers--and I did that, and I am happy that the French, of course, insist on the idea--it was very natural to ask the Ministers: do you think that this is the moment to go ahead with the Council or should we wait for 25 years more or 50 years? This is the question: when?

Then you have a variety--and you have quoted two other suggestions. The merging of the Development Committee and the Interim Committee has not been greeted with enormous enthusiasm by the members of the two Boards, as really it would be difficult in practical terms to do that. There are very specific missions of the two committees, and we see an enormous importance in keeping the Development Committee as the world forum where development issues are discussed on their own merits, and not under the light of the financial problems or under the light of more diplomatic or geopolitical problems, as it would be in other fora. So, for the time being, I understand that the very broad majority of the members of the two committees are inclined to keep them, even if we can do a lot to make them work better together. I have been happy that the members of the Interim Committee seem to favor the proposal I made to give to the President of the World Bank a kind of privileged status among the observers of the Interim Committee; in particular, to give him the possibility of speaking more as an ordinary member of the committee, a privilege I myself have in the Development Committee, as the Development Committee is a joint committee. There are other ideas. The Italian ideas have not been discussed by the Executive Board because they were formulated more recently. I suspect that we will be invited to continue working on these institutional aspects of the international reform during the next few months.

QUESTION: On the architecture, last fall the White House came up with an idea for a new facility within the IMF designed to insulate countries with sound macroeconomic policies against financial contagion. I understand that many members are not very happy with this idea, and are skeptical. Among other things, first of all, they doubt whether there are really ,and ever will be, any countries with sound macroeconomic policies who are vulnerable to financial contagion. They also fear that providing large amounts of money for such a fund could send the wrong signal; I guess that is the issue of moral hazard. And they do not seevery convincing ideas for integrating the private sector into the burden sharing, and maybe also they generally are not happy about the IMF creating once again a major new facility which could strain the financial resources of the IMF further. Could you perhaps address some of these concerns,. and maybe summarize why the IMF staff supports, if it does support, this new fund.

MR. CAMDESSUS: Well, it is an important question, and one on which you will understand that I demonstrate a certain degree of prudence in my answers as we will today discuss it for the third or fourth time with our Executive Board. But I must tell you that the situation is not as bleak as you are possibly suggesting. The origin of the suggestion of creating contingent credit lines in the IMF is rather straightforward when we see in which kind of new world we are operating--one of large-scale capital flows, when for 40 years we have been dealing with more straightforward issues of current account deficits. We are also dealing in a universe where private loans are no longer preponderant. But private loans are indeed central. And in a universe where we have been able to see how tremendous are the costs of contagion, not only for countries which were vulnerable, but also for countries which were applying exemplary economic policies. This is a situation to which an institution like the Fund must react and we had to react.

It was for us obvious that the best way, the least costly way, of answering such a situation and such risks, was to strengthen the strong; to give countries who were doing everything necessary to avoid normally being faced with a situation of crisis the assurance that they would find the needed support if they were to be threatened by contagion, so that they could resist it without major damage. This is the purpose of this initiative, to try to pre-empt for those who are doing well . Here, by targeting them, we are avoiding the moral hazard, as a matter of fact, or limiting it to the extreme. I think in proposing that, we are doing our job.

But we recognize that you cannot do that without taking extreme care in answering the questions you have precisely raised, namely how to avoid moral hazard. This calls then for exemplary or very solid policies in the countries which would benefit from that. In this universe where capital flows are so preponderant, this facility must be there not to bail out the private sector at times of crisis but, on the contrary, to associate them to these efforts to forestall financial crises . This is why we are--and we will discuss that today--seeing how we can make a condition for eligibility to use this facility a demonstration of the efforts of the interested countries to avail themselves in advance with the contingent support of the private sector.

Then, of course, we must be very careful not to expose the IMF’s resources too much to major risks. Here, we are seeing if our liquidity situation after the quota increase, after the measures taken to strengthen and broaden the GAB, NAB, etc., allows us to do that. Our response is that yes, we can do that. As a matter of fact, one can argue that creating such a facility could protect the IMF rather than expose it, because this facility, if it works, will prevent us from having to spend huge amounts of money after the crisis. So, everything will depend on the quality of the design of the facility and on the quality of our surveillance of thecountries which could be candidates for this facility, on the quality of their efforts to associate the private sector to their defenses. If we have all of that properly defined, and we are working on that with my colleagues of the Executive Board, then we will have done, I think, an important thing to consolidate the international monetary system and to prevent the always possible crises in this world.

QUESTION: In yesterday's report you were very critical of the efforts of the Russian government after their crisis. You basically said you should do A,B,C and you actually did X, Y, and Z. What evidence do you have that Russia is now prepared in any way to actually do the things that need to be done and, if they don't, and if they default on debts as they are now doing on their MinFins and other debts, what will that do to your financial situation?

MR. CAMDESSUS: Russia is at this very moment probably the most difficult problem we must tackle. Indeed, here we are in a domain where there are not such things as evidence: nothing is evident there. Everything is difficult. Indeed, first of all, the conditions which the Russian government is dealing with are such huge problems in many domains. Nevertheless, as you know, we are negotiating actively with them a program which could help them to continue with the course of reform and avoid the major catastrophes you mentioned during 1999 and 2000, which will be years not only of economic recession, at least for 1999, but also years of elections, and years of major difficulties for them.

Why are we negotiating? Because we see them already trying to do by themselves a lot to try to avoid major negative developments. You remember that after the catastrophes of last summer, many observers were extremely pessimistic about what they would do with their creditors, what they would do about the financing of their budget. Will they print and how much? Will we go for hyperinflation? Will they close their borders, renounce Article VIII status? Of course they took at the beginning orientations which seemed to be in the wrong direction, a kind of back pedaling in the process of economic reform.

What we have seen--and of course we have been in a permanent dialogue with them during all this period--is that they have tried to try to maintain the dialogue with their creditors and, in particular, for the debt of Russia, they have made every effort to try to stay current while they were applying for rescheduling of the former Soviet Union debt. On monetary policy, as you know, they have been trying to keep a strong discipline and avoid printing money as a means of solving their problems. We are now negotiating with them a budget for 1999, which would be indeed amended to limit the effective deficit and, in reality, to create a primary surplus of 2 percent. We are also, together with the World Bank, negotiating to convince them to adopt major changes on the structural side. Mr. Wolfensohn was reporting to me a few days ago that during his stay in Moscow major advances have materialized in this domain. And I hear from our staff in Moscow that there is progress also in the discussion with us, even if we have major issues still to solve.

We want, in particular, to see more rapid progress in the banking restructuring. We want to have full clarification of the suspicions which have been raised about the use of our resourcesand the behavior of the central bank. We are looking forward for the result of the audit in this domain. But, in view of what they have been doing, in view of what they tell us of their intentions--and you know I have personally spent many, many hours discussing that with Mr. Primakov--we believe that there is still the possibility for us to agree with them soon. Of course, they will themselves recognize that we will have to demonstrate extra care in this operation and to have to maintain strong surveillance and be demanding for the implementation of their commitments, so the next few days will probably bring us good news. If they don't, be sure that we will continue working with them in order to assist them in this very difficult juncture.

QUESTION: Mr. Camdessus, if I could go to another part of the world. For the last several months, there have been many reports and even complaints that the economic reform program in India has slowed down. Now, do you think the current political instability will make that situation worse, and do you think there they can ever get back to a growth rate of 8 percent or more, and when?

MR. CAMDESSUS: Look, our views on India's strategy for reform and acceleration of development are well known. I have expressed them repeatedly at almost every press conference. Our views don't change fundamentally here. We believe--and on that I share your orientation, if I may say so--we believe that India and the world cannot be satisfied with India growing, of course, but maintaining its rate of growth steadily at around 5 percent. A country with such potential and with such huge problems of reducing poverty must grow at a more rapid pace. Of course, we in the Fund see possibly that instead of having 5, of having 7 or 8 percent as the rate of growth for this great country while maintaining stability. This calls for action in the budgetary field.

You will know that the central government and states have a global PSBR of around 10 percent, much too high indeed; and that the pace of reform is too slow, be it for the financial sector, be it for the corporate sector. Liberalization could certainly contribute to speed up the pace of growth in India. We would like very much to help the Indian government in this effort. Now, we are in a new political situation. As you suggest, political instability is not the best framework for bold reforms and stimulation of private investment and then growth. I hope that the political situation will stabilize soon, but here I am no more in my area.

QUESTION: Mr. Managing Director, I have a question about the Japanese economy and monetary policy in Tokyo. Despite the persistent deflationary pressures in Japan, the Bank of Japan officials appear to be reluctant to take further stimulative actions, including those you suggested in your World Economic Outlook, such as targeting the growth for the monetary base, and so on. They say they are concerned about fueling inflationary expectations in the future and probably triggering stagflation for now. Is their concern justified under the current circumstances, or do you believe they should concentrate on fighting inflation at least for now?

MR. CAMDESSUS: Well, to concentrate on fighting inflation at this very moment in Japan would be a kind of effort to fight a ghost. We don't see very much a risk of a pickup of inflation in the near future in your country. Now, Japan is so central to the prospects of the world economy that we are concerned here about Japan and we are among those who consider that it is extremely difficult to pass judgment on what will be the exact course of the economy in Japan in the next few months and next year. You know that we are, sadly enough, forecasting a further contraction in output in Japan in 1999. But, at the same time, we see that Japan’s difficult economic situation is beginning to take a turn for the better and, of course, there are many encouraging developments.

You have, thanks to the strong decisions taken by the government, increased public works spending, which is helping to support industrial production. You have injections of public capital into the major banks, which has helped to reduce concerns about the stability of the banking system. You had steps to ensure the availability of credit and liquidity, which has helped certainly to stem bankruptcies. You have all these recent announcements about corporate restructuring, which were, of course, overdue, but which certainly over time have contributed to this strengthening and possibly rapid recovery some time down the road of the Japanese economy. So, I recognize that the outlook remains highly uncertain, that confidence is not yet there, and that as long as confidence does not materialize more strongly you will not have the kind of pickup which is so indispensable. But, the day confidence will start to crystallize again, we will see that Japan has enormous margins for recovery. We look forward to that probably not before the year 2000. But then, when Japan starts recovering, this could be rapid, and indeed this will have a very powerful effect on the speed of recovery of all the Asian countries which are now starting their own process of recovery.

So, what kind of things can we recommend to the Bank of Japan? Well, as you know, they have taken steps for injecting liquidity and bringing monetary conditions to very exceptional levels. No country in the world is so close to zero as far as its interest rate is concerned. We believe that these injections of liquidity through open market operations were appropriate and we believe that during the next few months, and as long as deflationary pressures persist, it will be important that monetary policy remain very accommodative and, of course, it will be important to maintain the fiscal stimulus as long as necessary. I hope the government will be also very active in continuing with banking strengthening and helping corporate restructuring.

QUESTION: I want to come back a little bit to the Russian issue. As Managing Director, do you feel any kind of political pressure now in dealing with Russia on loans and credits, taking into consideration the Russian position on Yugoslavia, from all the western countries and, in particular, the United States?

MR. CAMDESSUS: No, sir, I don't feel any particular pressure. I know that a few people have said that after many years in this institution, I am like the fish living in the very deep waters of the sea that is structured to resist pressures, and possibly even doesn't perceive pressures, as you yourself don't perceive the atmospheric pressure. So, I cannot tell you ifthere are people around who would like to pressure us, but what I can tell you is that pressures don't determine at all our course of action in Russia.

QUESTION: I would like to know what type of lessons should a country like Argentina get from the Brazilian experience. Brazil lost a lot of money trying to defend the real. They finally let it float, and now there is no inflation in Brazil and Argentina has lost competitiveness vis-à-vis Brazil because it has the currency board.

MR. CAMDESSUS: Well, I must tell you that a country which has avoided a crisis--comparing its situation to the situation of a neighboring country which went through a dramatic crisis, with all the suffering it entails, and even if it has benefitted in getting out of this crisis from an exceptional international financing, in fact it remains that the country which has avoided a crisis should feel proud and happy. You tell me that Brazil has no inflation. Brazil has inflation; it is going down but, on average, this year it will be around 17, 18 percent. At the end of the year, it will be possibly below 10. But, let us say it will be, nevertheless, much higher than in Argentina.

The convertibility program and the currency board in Argentina have served your country pretty well. Of course, it has its discipline, but Brazil must also respect discipline, and it was because it had not respected disciplines, particularly in the fiscal domain, both at the state level and central government level, that this crisis emerged. So, I believe that it is proper for Argentina to go ahead with its present policies. As a matter of fact, we support them in doing that, and we will we have just completed our conversation with them in going ahead with a new arrangement.

We are a little bit concerned, I must tell you, by the size of the current account deficit, which is above 4 percent., even if it is well justified for a country whose excellent policies have attracted such a flow of foreign direct investment. Nevertheless, this tells us something about rising debt and calls for caution in the future, a message, of course, the government has perfectly taken on board. So, so far so good for Argentina. I see that even during this year, a year of elections, they are maintaining the course of their policies and so we are not particularly concerned.

Of course you know everything about Brazil. All the indications we have are in the right direction. We expect to have been wrong-- which occurs from time to time, as a matter of fact--in forecasting the magnitude of the recession in Brazil for this year. We expected it to be around 3.8-4 percent. What we see of the strength and vitality of the reaction, and the vitality of the economy of Brazil suggests that we could have been wrong and that the V curve could be even more V than U--and then allowing for less depression, as a matter of fact. And Mr. Fischer is telling me that I was even wrong possibly in telling you that inflation could be somewhere between 10 and 20 percent this year; the right number is possibly between 10 and 12. So, you see Brazil gives us good surprises. These are the mistakes we are happy to make in the IMF. They indeed have demonstrated their commitment to the fundamental logic of the real plan. The people of Brazil have demonstrated that they have understood that there isnothing to gain from high inflation, and this is certainly one of the factors which justify the renewed trust of the international markets.

QUESTION: Mr. Camdessus, I just want to come back to the financial architecture again. Our understanding is that social policy guidelines are being developed by the World Bank for presentation to the Development Committee, and this initiative came up also in the context of the architecture. So, my question is, is there any coordination between that initiative and the financial architecture that you were talking about? Is there coordination, integration, or are they two separate and parallel exercises?

MR. CAMDESSUS: Thanks for this important question. I have on several occasions expressed my concern that there was a missing block or there could be a missing block in this architecture, namely the labor and social building blocks. And we have been insisting in introducing this dimension in the architecture, as you know, with the help of the World Bank. Already for several years we have been redesigning our programs in the IMF to put the social concern at their heart and make sure that they always, depending, of course, on the available resources, have the proper schemes for protecting the must vulnerable, protecting education and social spending, and establishing the proper social safety net.

But, we must go beyond that in the framework of this new architecture, and the World Bank has been invited to work particularly in adding this social block to the architecture. We, indeed, work with them on that. It is important that the World Bank should complete rapidly its work in developing a code of good practices in social policies. We work in close cooperation with the ILO and we support strongly their efforts to promote the core labor standards for the protection of the workers, protection of children in work, facilitate and encourage collective bargaining, etc., etc. We are in close contact with them and working with them on all of that. Already, in our negotiation with countries, we bring these issues to the discussion, trying to promote the tripartite approach of economic decision making and making sure that the labor unions are properly consulted on the decisions which are taken, and you know possibly what the dimension this has taken, particularly in Korea and in Indonesia recently.

QUESTION: I have a question about the issue of involving the private sector in resolving and preventing crises. Could you clarify what your position is on the issue of countries defaulting on their bond obligations? There have been several instances recently--I don't have to mention the countries by name; obviously Russia, Pakistan, and so forth--where there has been a perception in the market, at least, that the IMF is encouraging countries in effect to default. I know the IMF is not in favor of default as a general principle; you don't have to spell that out. But could you clarify where you are coming down on this question of how tough countries should be in these sorts of situations?

MR. CAMDESSUS: Thank you very much. I think it is good that you put this question, because there are, I am afraid, many misunderstandings of what is the IMF stance in this domain. Well, if you would allow me, first a very, very basic thing. Contracts must berespected; countries should not default on bonds or whatever other instruments. Contracts are sacrosanct, and bond contracts no more than the others, but equally, certainly. There are situations of extreme illiquidity for the country, or at times insolvency, and there the international community must deal with the situations of objective risk of default of a country. Here we are not saying to the country "You must pay that or that, or pay this one, don't pay that one." This is a decision for the country to take. Our line--and, of course, this line is quite strongly correlated to our effort to involve the private sector more in forestalling and resolving financial crises--is not to allow a significant reduction in outstanding commitments of the private sector in a situation of crisis. This means that the country must play with all the instruments at hand. The banking community, in particular, must see what is the best way for them to maintain their outstanding commitments. Here, okay, if they see that as particularly important--and I see the importance of this--maintaining the flow of payments on the bond contracts, then they can react by bringing new money, financing to the country, and then allowing the country to repay the bonds. What we consider is that, at a given moment, if we on the public side, we take risk to maintain, to bring the country back to normality, the private sector should also be inventive in finding a way of helping the country, instead of reducing their exposure in an orderly or disorderly fashion. This is our line. Of course, each time the existing contract can be served through new money or otherwise, then of course we see it as preferable, particularly as it better preserves the creditworthiness of the country for the future.

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