1. We, the Finance Ministers and Central Bank Governors of the G-7 countries and Wim Duisenberg, President of the European Central Bank met today with Michel Camdessus, Managing Director of the International Monetary Fund, to review recent developments in the world economy. Ministers and Governors also discussed international financial architecture issues.
Developments in the World Economy
2. We discussed developments in our own economies and in the rest of the world. Since our last statement of October 30 there have been some encouraging developments such as the economic and financial stabilization in Asia, calmer financial markets in industrialized countries, interest rate cuts in the U.S. and Europe and most recently in Japan, progress made to implement policies to strengthen the financial system and stimulate the economy in Japan, and the successful introduction of the euro. But financial market conditions have worsened in some regions and the outlook for global economic growth is somewhat less favorable. The impact of financial crises is now felt beyond the regions where the crises occurred. Against this background, it is of the utmost importance to strengthen in all countries the foundations for sustainable growth of output and employment, social stability and the macroeconomic conditions for financial market stability.
3. We remain committed to a domestically based growth strategy that would contribute to achieving more balanced growth among our countries, reducing external imbalances and supporting recovery in emerging market economies. The outlook for price stability in our countries as a whole remains favorable.
4. In view of the challenges facing each of our economies we reaffirm the importance of intensified cooperation among us: .
In Japan short-term prospects remain uncertain. The Japanese authorities have adopted important steps to strengthen the financial system and macropolicies to reinforce growth led by domestic demand and need to push ahead with the implementation of their policies directed to those ends.
We welcome the successful introduction of the euro in eleven member states of the European Union. The euro has been well received in the international financial and foreign exchange markets. The introduction of the euro helped avoid spill overs of turbulences to financial markets in Europe. Economic and monetary policies of the euro area will have significant implications for the stability of the global financial and monetary system.
The international monetary system and exchange rates
5. In view of the increasing integration of the world economy and financial system we have a special responsibility with regard to improving the conditions for a proper functioning of the international financial and monetary system and, in particular, enhancing sound fundamentals necessary for exchange rate stability. To this end, we will maintain strong cooperation to promote stability of the international monetary system and to promote exchange rates among major currencies that are in line with fundamentals.
6. We discussed developments in our exchange and financial markets since our last meeting. We reaffirmed our view on the importance of pursuing policies to help avoid excess volatility and significant misalignments of exchange rates of major currencies. We will continue to monitor developments in exchange markets and cooperate as appropriate.
7. We confirm our strong commitment to open, fair, competitive and dynamic international trade. The rules-based international trading system has shown its potential to create the necessary demand and underpin sustainable growth and stability in the global economy. We look forward to the launch of a new round of trade negotiations in the US in November with a balanced agenda of interest to all WTO member countries. We support a World Trade Organization, and trade agreements, which are responsive to the challenges of global markets and the concerns of citizens throughout the world.
Emerging Market Countries
8. We discussed financial and economic developments in emerging markets. We welcome the progress in restoring financial stability and strengthening the foundations for economic growth in many Asian countries. In other regions, notably Latin America, outlook for growth has deteriorated since last year while the external financing environment has become more difficult. It is crucial for the countries in the region to pursue appropriate policies, including institutional, structural, macroeconomic and exchange rate policies, and, where necessary, to reinforce existing economic programs, as the best way to respond to financial markets pressure.
9. We met with representatives of the Russian Federation to discuss recent developments in Russia. The economic situation in Russia continues to give cause to concern. In the absence of a concerted policy response to ongoing financial and macroeconomic instability, the country is increasingly faced with the serious risk of accelerating inflation, further exchange rate weakening, and continued economic contraction. A viable budget for 1999, significant improvement in government revenues and sufficient progress in institutional and structural reforms are necessary for an agreement with the IMF and for economic recovery. We expressed once again our concern regarding the accumulation of arrears on debts due by Russia. Russia's debt would only be considered by Paris Club creditors in the context of an agreement on an economic program supported by the IMF. Ministers and Governors of the G7 also stressed the importance they attach to Russia's treating its obligations to all creditors comparably.
10. Concerns about the implementation of the Brazilian reform program led to renewed pressures on the exchange rate of the Real and eventually to an abandonment of the exchange rate peg. We welcomed the commitment of the Brazilian authorities to a strengthened economic program designed to prevent an initial rise in prices associated with the sharp depreciation of the Real from leading to a general inflationary spiral and to pursue a strong program of fiscal adjustment. Under present circumstances it is of utmost importance to restore confidence. Thus, we urge the Brazilian authorities to continue with their reform efforts while paying due attention to social needs. We reaffirm our commitment to support a strong IMF program and recall the importance of a strong involvement of the private sector creditors in restoring financial stability in Brazil.
Köln Debt Initiative
11. We had an exchange of views about the situation of the poorest highly indebted countries and reiterated our continuing view that maximum progress should be made in the next year. We agree that the fundamental review and the development of the HIPC Debt Initiative provide the appropriate framework to address the debt problems of these countries. We stressed the importance of improving the HIPC Debt Initiative and discussed proposals from a number of G 7 partners for achieving this, for example, by reviewing the duration and the criteria for debt reduction. We will discuss these issues with a view to reaching agreement by the time of the Köln summit. We stressed the importance of fair burden sharing among creditors and of ensuring that sufficient resources are available to finance the share of the multilateral creditors, using existing resources insofar as possible and agreed to work to this end.
Strengthening the international financial and monetary system
12. We reviewed progress of the ongoing work on strengthening and increasing the transparency of the international financial architecture. Since our statement of October 30 there has been important progress in the following areas: .
13. We discussed the effects of economic adjustment on the most vulnerable groups in society, and reaffirmed the importance we attach to the work on general principles of good practice in social policy being taken forward in consultation with other organizations. We will work together to ensure that these principles can brought into operational use as quickly as possible, to be used in the design of adjustment programs by the World Bank, the IMF and their member countries.
14. We discussed and endorsed the recommendations by the Basle Committee on Banking Supervision on how to mitigate risks involved in dealing with Highly-Leveraged Institutions (HLIs) including hedge funds. We also noted that IOSCO and other relevant bodies were also working on HLI issues and looked forward to receiving their reports shortly. We agreed with the Basle Committee that adequate risk management by financial institutions is particularly important when they deal with HLIs. We are committed to continuing to consider, in a broad context, implications arising from the operations of HLIs and of offshore centers on the framework of financial supervision, including whether additional reporting and disclosure by HLIs themselves is warranted or feasible.
Financial Stability Forum
15. We are grateful to Hans Tietmeyer for his report on international cooperation and coordination in the area of financial market supervision and surveillance. We welcome his proposal that the G-7 should take the initiative in convening a Financial Stability Forum to ensure that national and international authorities and relevant international supervisory bodies and expert groupings can more effectively foster and coordinate their respective responsibilities to promote international financial stability, improve the functioning of the markets and reduce systemic risk.
While the Forum will initially be the initiative of the G 7 countries, we envisage that over time additional national authorities would be included in the process. The issues to be addressed affect all countries, including both industrial and emerging market economies, and the G 7 regards this initiative as a step toward broader participation. .
16. We will continue to work to ensure implementation of all the reforms which we agreed in our Declaration of October 30 1998. A plan for implementation presented to the G 7 Heads in December 1998 is attached as an annex. Our work between now and the Köln summit will focus on the scope for strengthened prudential regulation and supervision in industrial countries and further strengthening financial systems in emerging market economies; exchange rate regimes in emerging market economies, crises response and greater participation by the private sector in crisis containment and resolution; proposals for strengthening the IMF and the Interim and Development Committees; and minimizing the human cost of financial crisis.
We will intensify the discussion of these issues among ourselves but also with other industrialized and emerging market economies. A first seminar involving a representative group of industrialized and emerging countries will take place on March 11 in Germany. This seminar will be devoted to exchange rate regimes, private sector involvement in crisis resolution and to proposals for strengthening the IMF and the World Bank. A second seminar will take place in the United States in April to discuss issues of prudential oversight in industrial countries, strengthening financial systems in emerging market countries, and minimizing the human cost of crisis and encouraging the adoption of policies that better protect the most vulnerable in society.
We welcome the initiative of Carlo Ciampi to hold a special preparatory meeting at the deputies level for the next Interim Committee of April to help advance reforms of the international monetary system.
G 7 COMMITMENTS
1. We have agreed to take a number of actions to enhance transparency in our own economies and to strengthen the global financial system. We will implement these according to the following timetable:
I. Implementation of the IMF Quota increase by January 1999;
II. Further consideration, in the context of the proposed enhanced IMF facility, of the appropriateness of bilateral contingent financing which might be provided on a case-by-case basis;
III. Compliance with the IMF code of good practices on fiscal transparency, with the objective of completing this by the 1999 Spring Meetings;
IV. Compliance with an internationally-agreed code of best practices for monetary and financial policy transparency, according to a timetable we will agree once the code has been agreed;
V. Dissemination of regular and timely information on the aggregate foreign exchange liquidity position of our central governments and central banks by end-June 1999, and of the whole of the public sectors in our own economies according to a timetable we will agree;
VI. Compliance with the existing IMF SDDS by the February 1999 G 7 meeting, and with the strengthened SDDS by January 1999;
VII. Report to G 7 Heads on compliance of our private sectors with standards of transparency, including on sound corporate governance and accounting, by end-1999;
VIII. Bringing together the key international institutions and national authorities involved in financial sector stability we look forward to Hans Tietmeyer's recommendations by the February 1999 G 7 meeting, and will strive for a consensus and to begin implementation of any agreed actions by the Köln Summit;
IX. Consideration of ways to strengthen regulation of financial sector institutions in our own countries; in particular examining the implications arising from the operation of leveraged international financial organizations, including hedge funds and offshore centers report by the 1999 Spring Meetings, consensus on how to proceed by the Köln Summit;
X. Consideration of ways to promote greater use of collective action clauses in bond issues report by the February 1999 G 7 meeting, consensus on how to proceed by the Köln Summit.
XI. Report on progress in development of mechanisms for involving the private sector, including market-based contingency financing mechanisms, by the 1999 Spring meetings.
TASKING THE INTERNATIONAL INSTITUTIONS
2. We have tasked the various international institutions to carry out a number of tasks, and have now written to the Heads of those institutions asking them to take forward this work according to the following timetable:
XII. IMF to report proposals for the establishment of an enhanced IMF facility which would provide a contingent short-term line of credit for countries pursuing strong IMF-approved policies, by the end of 1998;
XIII. IMF to complete a manual on implementation of the Code of Good Practices on Fiscal Transparency by the 1999 Spring meetings, and to begin surveillance of implementation of the Code thereafter;
XIV. IMF to work with the BIS, supported by a diverse group of central banks, and with other relevant organizations, on a code of best practices for monetary and financial policy transparency, with the objective of completing this by the 1999 Spring meetings;
XV. IMF to reach decisions on steps to strengthen the SDDS by the 1999 Spring meeting;
XVI. OECD, taking into account the views of the World Bank and other international regulatory organizations, to complete its code of principles of sound corporate governance by the May 1999 OECD Ministerial;
XVII. IASC to finalize by early 1999 a proposal for a full range of internationally agreed accounting standards. IOSCO, IAIS and Basle Committee to complete a timely review of these standards;
XVIII. Appropriate committees headquartered in the BIS, consulting with IOSCO, the OECD and other relevant bodies, to examine transparency and disclosure standards for private sector financial institutions involved in international capital flows, including hedge funds preliminary findings by the 1999 Spring meetings, formal report by the Köln Summit;
XIX. IMF, and standard-setting bodies, to prepare strategy for implementation and surveillance of all the above codes and standards by the 1999 Annual Meetings;
XX. IMF to publish transparency reports, beginning 'pilot' assessments immediately and finalizing a structure for transparency reports by the 1999 Annual Meetings;
XXI. IMF, World Bank, OECD and international regulatory and supervisory organizations to provide technical assistance to help countries comply with the codes and standards. IMF and World Bank to prepare a joint paper on this strategy by the 1999 Annual Meetings;
XXII. World Bank, together with the IMF and other multilateral development banks, to prepare an interim report on progress in establishing insolvency and debtor-creditor regimes, by the 1999 Spring Meetings;
XXIII. IMF to move ahead with its recently reaffirmed policy of lending into arrears and to consider extending this policy, under carefully designed conditions and on a case-by-case basis. G 7 IMF Executive Directors report on progress by the 1999 Spring Meetings;
XXIV. IFIs to play a constructive role in the process of orderly opening of the capital account in emerging economies;
XXV. World Bank and other relevant institutions to produce an interim report on progress towards development of principles of good practice in social policy, by the 1999 Spring Meetings;
XXVI. IMF to continue including policies on trade liberalization, elimination of state-directed lending on non-commercial terms to favored industries, enterprises or institutions, and provision of non-discriminatory insolvency regimes, in its conditionality;
XXVII. All IFIs, especially the IMF, immediately to adopt a presumption in favor of release of information, except where this might compromise confidentiality. IMF to prepare a report on its approach on this issue, by the 1999 Spring Meetings;
XXVIII. IMF to prepare a progress report on the development of a formal mechanism for systemic evaluation of the effectiveness of the Fund's operations, programed, policies and procedures, by the 1999 Spring Meetings.
3. We have also agreed to take forward further work on a number of further issues areas to strengthen the international financial system, which are set out below. We will discuss progress on these areas during our meeting in Spring 1999, and will report to the Köln Summit:
XXIX. Assessment of proposals to strengthen the Interim and Development Committees of the IMF and World Bank;
XXX. Examination of scope for further strengthening of prudential regulation in industrialized countries;
XXXI. Further strengthening of prudential regulation and financial systems in emerging markets;
XXXII. Consideration of elements necessary for maintenance of sustainable emerging market exchange rate regimes;
XXXIII. Development of new ways to prevent and respond to crises, including new forms of official finance and improved methods to promote a greater role for the private sector in containing and resolving crises;
XXXIV. Assessment of proposals for strengthening the IMF, so as to improve its programed and procedures in crisis prevention and resolution, focusing in particular on conditionality issues;
XXXV. Encouragement of policies that protect the most vulnerable in society.
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