Financial Post G7 Record

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Financial Post, Weekly edition, Sat 17 Jun 95, page 13

Keywords: International finance Economic summits International financial centres Gold Finance International Monetary Fund

G-7 CALLS FOR GLOBAL VIGILANCE: The Mexican peso crisis and exchange rate volatlity have put industrialized nations on guard. Amid fears of slowing economies, the G-7 members are calling on global economic watchdogs to be more vigilant.

Alan Toulin

A push by the G-7 leaders to reform the International Monetary Fund will help stabilize world financial markets, Prime Minister Jean Chretien said at the conclusion of two days of talks on economic issues.

In their communique yesterday, the G-7 leaders set an agenda for the IMF to more closely monitor economic data, and to improve the quality of some countries' reporting.

They also committed to expanding the IMF's financial resources to deal with crises and perhaps to provide debt relief for the world's poorest countries.

Chretien, as chairman of this year's G-7 summit, made reform of international financial institutions the centrepiece of his diplomacy. Mexico's currency crisis early in the year gave impetus to IMF reform, although the G-7 does not call the shots for the IMF, which has 178 member countries.

The G-7 leaders, however, backed away from proposals to directly intervene in markets to prevent the kind of speculation that led to the peso crisis. This stems from agreement that good domestic economic policies anchor the international financial system.

''Reforming the IMF, this will give a lot of stability to world financial markets,'' Chretien said at a news conference to release the G-7 economic communique The leaders believe the initiatives will lend confidence to private markets, which now turn over US$1 trillion in daily capital flows.

The leaders called for a doubling of the basic line of credit available to the IMF, the General Agreement to Borrow (GAB) which currently stands at US$28 billion. They also agreed to an ''emergency financing mechanism'' to provide faster access to funds for countries experiencing runs on their currencies.

As a way of preventing such crises, the IMF is urged to establish benchmarks for countries to publish key economic data, and to identify the countries that comply with these standards.

The IMF should also provide sharper and more frank recommendations to countries that are not meeting appropriate economic policy standards.

''We have a shared interest in ensuring the international community remains able to manage the risks inherent in the growth of private capital flows . . . and the accelerating pace of financial innovation,'' the communique said. The full IMF is expected to deal with the G-7 recommendations in October at its next annual meeting.

A number of concrete ideas for further exploration were set in motion, including a larger membership of countries in the GAB. It now has 11 members, including Canada, Saudi Arabia, eight European countries and Japan. Countries that could join - and have the largest financial reserves - are the fast-growing Asian economies, including Taiwan which, with more than US$100 billion, has the largest reserves in the world.

Whether the IMF should borrow in private markets is also open for discussion. But G-7 officials cautioned that while such borrowing is feasible to backstop the fund's financial capability, it would not likely help in a crisis such as the run on the Mexican peso.

There are to be further talks on the idea of creating a kind of bankruptcy regime for countries in trouble, giving them relief from creditors until their finances are stabilized or restored. However, officials said there are immense legal and political complexities to implementing such a program.

The G-7 leaders talked about the need to bring the international supervision of financial markets into sharper focus, particularly to include emerging financial centres such as Singapore and other far Asian markets.

Chretien noted that the leaders agreed to the IMF using all its assets to provide more liquidity to resolve the debt problems of the poorest nations. But the possibility of selling the IMF's gold reserves to provide relief caused a split, with Canada, the United States and Britain pushing the idea of gold sales, while Germany and France were opposed.

Canadian officials said gold could be sold in exchange for interest-producing bonds and the proceeds could be used for debt relief. German officials made the case that all the IMF's gold should be sold and used for the immediate debt relief of impoverished countries.

The G-7 leaders also pointed to other international financial institutions, such as the World Bank and various United Nations development agencies, as being in need of reform.

They said there is duplication and overlap among international agencies and their roles should be re-examined.


G-7 leaders said that while there has been some slowing in growth, major economies remain strong and inflation is under control.

Warning that currency problems could jeopardize economic stability, G-7 leaders called for increased financial resources for the International Monetary Fund to deal with currency crises such as the Mexican peso collapse.

The U.S-Japan auto-trade dispute was a dominant issue in the corridors but informal meetings failed to break the deadlock.

The seven governments pledged to continue trade-liberalization policies through the World Trade Organization, focusing next on financial services and telecommunications.

A special jobs summmit is to be held in France in 1996 before the next G-7 meeting at Lyon.

The leaders joined in a strong call for warring parties in the former Yugoslavia to disengage, a statement issued hours ahead of a United Nations vote to establish a force for military intervention.

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Revised: June 3, 1995

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