避免崩溃

The international financial system is suffering a systemic breakdown, but we are unwilling to acknowledge it. The abandonment of fixed exchange rate regimes in south-east Asia touched off an unraveling process that has exceeded everyone’s worst fears, including my own. So far the large bail-out programmes implemented by the International Monetary Fund have not worked.

Lending by the international financial institutions can never replace lending by the private sector. The rescue packages are supposed to do their work by reestablishing private sector confidence. Unfortunately, the currencies of the debtor countries have continued to depreciate, aggravating their debt problems and further undermining confidence.

The countries concerned were over-indebted to start with. The decline in their currencies, coupled with the drastic rise in interest rates, has rendered the debt burden even more crushing.

We are dealing with a self- reinforcing process. Once it is reversed, it could become self- reinforcing in the opposite direction. The trouble is that the process is still moving away from equilibrium. It is impossible to tell how far it may go. What started out as a minor imbalance has become a much bigger one that threatens to engulf not only international credit but also international trade. We are on the verge of worldwide deflation.

The IMF has been criticized for applying the wrong remedy. The FT’s columnist Martin Wolf has pointed out that the deflationary effect of the debt burden is reinforced by the deflationary effect of the IMF programmes.

Jeffrey Sachs, director of the Harvard Institute for International Development, has carried the criticism further by blaming the IMF for insisting on punitively high interest rates. But high interest rates are essential to prevent the currency from going into a free fall. They have served to protect the exchange rate in countries as diverse as Hong Kong and Russia. It is difficult to see how high interest rates could be avoided, given the constraints under which the IMF operates.

The problems run much deeper. But we are unwilling to face them. The prevailing system of international lending is fundamentally flawed yet the IMF regards it as its mission to preserve the system. This does not imply I am not a great believer in the IMF. Without it, and without other official creditors, the system would already have collapsed in 1982 and again in 1994-95. With luck, we may pull through once again. But it is high time to recognize the defects of the system and reconsider the mission of the fund.

The private sector is ill-suited to allocate international credit. It provides either too little or too much. It does not have the information with which to form a balanced judgment. Moreover, it is not concerned with maintaining macro-economic balance in the borrowing countries. Its goals are to maximize profit and minimize risk. This makes it move in a herd-like fashion in both directions.

The excess always begins with over expansion, and the correction is always associated with pain. But with the intervention of the IMF and other official lenders, the pain is felt more by the borrowers than by the creditors. That is why overexpansion has recurred so soon after each crisis. Successive crises have, however, become more difficult to handle.

In 1982, banks lending to Latin America were involved for their own account. The crisis was contained by persuading them to act collectively and to extend fresh credit to allow the debtors to service their debt. The banks did get hurt in the process although not as much as the borrowers. Latin America lost a decade of growth. The banks learned to minimize their own exposure and to act as underwriters and wholesalers instead.

In the 1994-95 crisis, it was the holders of Mexican treasury bills that had to be bailed out, mainly by the US Treasury. By 1997 some of the banks had forgotten their painful experiences and became engaged on their own account, particularly with South Korean companies.

The Korean crisis, as distinct from that in other south-east Asian countries, bears some similarities to Brazil in 1982—with one major difference: the loans are not to Korea as a sovereign country but to individual companies. This has made it more difficult to get the banks to act collectively.

Since we are in the middle of a crisis it is impossible to predict how it will play itself out. There are other shoes that may yet drop, notably China. On the other hand, Japan, which looks so bad at present, has the wherewithal to solve its problems.

It is not too soon to start thinking how the system could be improved. Fresh ideas on the subject could even have a beneficial effect on how the current crisis is handled. But that would require questioning some of the most cherished tenets of the business community. To argue that financial markets in general, and international lending in particular, need to be regulated is likely to outrage the financial community. Yet the evidence for just that is overwhelming.

Given the uneven distribution of savings and investment opportunities, there is a crying need for international capital movements. But the private sector is notoriously inefficient in the international allocation of credit. It follows that international capital movements need to be supervised and the allocation of credit regulated by an international authority.

This goes against the grain of prevailing wisdom. How can bureaucrats know better than those who take risks for their own account? The answer is that the technocrats running the proposed international authority would be charged with maintaining macroeconomic balance, while the technocrats in charge of banks are guided by profit considerations. Banks earn fees as well as a return on capital and in the end they can count on the support of the official lenders, because IMF and central bank intervention—like that in Korea—tends to favor creditors. It would be better for the official lenders to control the risks they are taking more directly.

I propose setting up an International Credit Insurance Corporation as a sister institution to the IMF. This new authority would guarantee international loans for a modest fee. The borrowing countries would be obliged to provide data on all borrowings, public or private, insured or not.

This would enable the authority to set a ceiling on the amounts it is willing to insure. Up to those amounts the countries concerned would be able to access international capital markets at prime rates. Beyond these, the creditors would have to beware.

The authority would base its judgment not only on the amount of credit outstanding, but also on the macro-economic conditions in the countries concerned. This would render any excessive credit expansion unlikely. The capital of the proposed institution would consist of Special Drawing Rights. This would render its guarantees watertight. The SDRs would not be inflationary because they would be used only in case of default; at that time they would replace money that had been lost.

There are many issues to be resolved. The most important is the link between the borrowing countries and the borrowers within those countries. Special care must be taken not to give governments discretionary power over the allocation of credit because that could foster corrupt dictatorships. But once the need for such an institution is recognised, the details could be worked out.

The institution can be set up only at a time when international lending is in a state of collapse. We are now entering such a period. We can probably navigate through it without setting up a new international authority of the sort I am proposing. But we would be missing a great opportunity.

Moreover, the extent of the crisis could be mitigated by the prospect of an early revival of international lending on a sounder footing. If the world is indeed entering a deflationary period, an International Credit Insurance Corporation could play an important role in containing its negative effects.