Mr. Macfarlane comments on the future international financial architecture  (Central Bank Articles and Speeches, 14 Oct 98)
Central bank: rba | Type: speech | Date: 1998-10-14

Mr. Macfarlane comments on the future international financial architecture Talk by the Governor of the Reserve Bank of Australia, Mr. I.J.

Macfarlane, to the EEconomic Summit in Singapore on 14/10/98.…In my ten minutes here I will try and cover what I see as the main chan perspective about what we formerly termed the Asian crisis, and then say a few words future international financial architecture.- The main change is that since August this year we no longer think of an crisis but we now think of either an emerging markets crisis or a genera financial crisis.- A second important change is that the western policy establishment ca longer

believe

that

the

root

cause

of

the

problem

is

the

inadequacy financial

infrastructure

and

governance

of

some

formerly

rapidly

gro Asian countries.

Of course, not everyone used to believe this, but ther some very influential institutions that thought this way.- Everyone is now aware that contagion is a much stronger force than form thought.

Contagion is an essentially irrational force which tars large g countries with the same brush, and causes fear to overrule reason.- Given the bigger role for contagion, more and more people are asking whe the international financial system as it has operated for most of the basically unstable.

By now, I think the majority of observers have come conclusion that it is, and that some changes have to be made.With

pretty

well

everyone

now

conceding

that

changes

have

to

be

made,

y would think it would be a relatively simple matter to move on to the next step.

But it because there are still big differences of opinion about how serious the problem is.- One school of thought held that the main thing required to restore stabi to

improve

transparency,

particularly

the

Government's

transparency

to private sector - e.g. by more frequent and accurate publication of fig international reserves.

This school of thought also gave a fair bit of improving the quality of bank supervision in emerging market countries. explains the motivation behind two of the three working groups set up b G22 in April.- But an increasing majority think something more is required, and the promising approach here goes under the general title of burden sharing the private sector (the G22's third working group).

I would like to say more about this because I think it will be necessary if we are to mak progress.If we go back and think of the Thai, Korean or Indonesian crises, we can s problem if there is no formal system of burden sharing.

Once the currency doubts start term

lenders

knew

that

if

they

could

get

their

money

out

fast

enough

they

would

mi currency losses and loan losses.

So when each loan had to be rolled over it was not ren capital

flowed

out.

Each

day

this

happened

the

exchange

rate

came

under

further

dowpressure, which encouraged further capital flight.

Everyone wanted to be out before the reached where the exchange rate was so low, interest rates were so high, and insolvenc so rife, that those who could not get out of the door would be big losers.

This process maximum fall in the exchange rate.Something clearly has to be done in terms of managing the crisis to redu incentives

for

everyone

to

try

to

be

the

first

one

out

of

the

door.

Some

system

of followed by an orderly workout involving rollovers, reschedulings and, in extreme cas equity swaps is clearly required.

No country wants to be the first one to do this, an action could cause panic in other countries à la Russia.

What is needed is a system th cooperation between the host country, private lenders and the IMF.

We saw an example o effective this can be for Korean bank-to-bank debt late last year.Ideally, this should not be on an ad hoc basis, as it was in Korea, but s thought

out

well

in

advance,

with

the

possibility

of

such

workouts

included

i documentation.

This,

of

course,

would

increase

the

cost

of

borrowing

by

emerging

m economies, but that would be no bad thing.

One of the problems over the last five years it became too cheap and too much of it was done.

It would be better than excessive followed by capital flight as we have seen over the past few years.This is all becoming reasonably conventional thinking now and, as I said contained in the third Working Party Report of the G22.

But it was not that long ago suggestions

along

these

lines

were

greeted

with

the

response

that

it

was

out

of

th because it involved interfering with the free movement of capital.I would like to conclude by mentioning two other things that have changed the past year.

## First, hedge funds.As recently as three months ago if you complained about the activities of funds you were regarded as paranoid and you received a sermon on the dangers of shooti messenger, etc.Now, no one has got a good word to say for them, and they are likely to so brought into either:- the disclosure net, or- some form of supervision via their connections with banks.Second, I see a clear improvement in future crisis management in the way the is talking with Brazil.Unlike the Asian crises, I don't see any country in future putting itself in of the IMF without knowing pretty clearly beforehand what the IMF conditions will b doesn't like the conditions, for example, because they are too wide-ranging, it will n Fund.

If it is comfortable with the conditions, it will be able to sign up from day oneThis way, we should be able to avoid the long periods of semi-public hag over conditions that characterised the Asian crises and did so much to frighten the ma pushing exchange rates down excessively.