The critical role the G-7 played in countering the 1997 Asian currency crisis and doing so in ways that extended democratic and market principles within Asian polities began only after the "Denver Summit of the Eight" in June 1997 (Kirton 1997a). At Denver, the G7 leaders had been preoccupied with welcoming Russia's Boris Yeltsin as a virtually full member of the Summit, leaving little time to focus on early signs of the coming financial crisis in Asia (Hajnal 1999). G-7 finance ministers discussed financial regulation at some length but with no sense of urgency. When Thailand devalued in early July, the European G7 members viewed Thailand as a regional Asian responsibility. In August 1997, when the US$17-billion package for Thailand was assembled, among the G-7 members only regionally-affected Japan contributed national funds.
The Asian currency crisis dominated the G-7 finance ministers gathering in Hong Kong in September. Meeting both separately and as part of the IMF Board of Governors, G7 finance ministers agreed to increase the IMF quota share by 45 per cent; to amend the IMF Articles of Agreement within the year to make the IMF responsible for capital account liberalization; to strengthen IMF involvement in banking and financial sector reform; to improve national governance by reducing corruption; and to expand the allocation of special drawing rights (SDRs).
The Hong Kong reform package showed the value of the G-7 as a concert of equals - where different members lead on specific issues and mutually adjusted to a new and effective consensus. On the IMF quota share increase, G-7 members pressed the United States, which feared congressional opposition, to accept a relatively large 45-per-cent addition. On capital account liberalization, a British initiative supported by the US, strong opposition from Canada, first evident in its views on the treatment of capital flows under IFI reform at the 1995 Halifax G7 Summit, blunted initial enthusiasm for a blanket grant of authority to the IMF for unrestricted liberalization. The United States, Japan, and Canada reinforced their initiative, begun at the G7 summit in Lyon in 1996, to emphasize banking and financial sector reform. A United States' desire to address governance issues was supported by Canada and succeeded when the IMF agreed to take up the question. On the SDR equity allocation, the IMF, in accord with the G7 position at Halifax, agreed to double the allocation and to devote the proceeds to the new members of the IMF. The G-7, affirming the principle of globalism over regionalism, also dissuaded Japan from instituting a regional support fund for Asia and made clear that the IMF would remain at the core of any rescue effort.
These reform measures were joined by increasingly decisive G-7 action as the Asian financial crisis spread. A support package for Indonesia created a 'second line of defence' of national funds to be deployed if those of the IMF and other international financial institutions (IFI's) proved insufficient. Now the United States joined Japan as a contributor. In November, all G-7 members met in Manila to formalize the second line of defence arrangement and ensure that all had the legislative authority to contribute.
The precaution proved timely. In early December, the G-7 countries agreed to support a beleaguered South Korea with a package of US$35 billion from the IMF, the World Bank, and the Asian Development Bank, reinforced if necessary by a second line of defence. To this second line Japan committed US$10 billion, the United States US$5 billion, each of the European G-7 members US$1.25 billion, and Canada up to US$1 billion.
A report early in December that South Korea's short-term foreign debt obligations were a much higher than anticipated US$100 billion panicked financial markets, driving the South Korean won into a freefall. G-7 members secured from their private banks an agreement that the banks would roll over and subsequently reschedule loans to South Korea, in return for activating the G-7 member government's second line. This agreement proved to be particularly valuable, given the difficulty the United States government was having in securing authorization from Congress for its contribution to the IMF quota increase. Through intensive consultations, G-7 deputies and IMF Executive Directors confronted the fact that they would have to draw upon the national contributions of the G-10 (the G-7 plus Belgium, the Netherlands, Sweden and Switzerland) and some Asian contributors. The United States Secretary of the Treasury, Robert Rubin, who had helped construct the second line on the assumption that a large package would calm markets and make actual disbursement unnecessary, agreed that if American dollars were needed, they would flow. With the United States prepared to commit its share (US$1.7 billion) by 25 December, the other G7 members joined in. The announcement on 24 December that national funds would flow was sufficient to stem the tide. In the end no national funds were actually expended in exchange markets.
The G-7's stabilization of South Korea lessened the pressure on the surrounding major currency countries, especially Hong Kong, Taiwan, and China, and reduced the threat of an assault on Japan's precarious financial system. It was primarily those few countries such as Indonesia which resisted the IMF's prescriptions that suffered further speculative attacks. As the situation in Indonesia continued to deteriorate, the United States, reinforced by Germany and supported by the G-7, intervened with the Indonesian authorities. On 15 January 1998, the IMF and Indonesia concluded a letter of intent under which Indonesia accepted revised economic targets and more far-reaching structural reform. Although subsequent resistance by the leaders of Indonesia and Malaysia and Congressional reluctance to authorize the United States contribution did some damage in the following months, the first, Asian phase of the crisis had been contained by just-in-time G-7 action. In a clear demonstration of the power of the G-7 members over markets, they were able to prevail without actually expending their national official funds. Instead, they induced the IFIs, banks, and other private-sector actors to provide the required additional liquidity.
A further threat to Asian economies, and a second opportunity for Canada to display structural leadership arose in April 1998. By this time it had become clear that
both South Korea and Indonesia, themselves now fully engulfed by the crisis, would be unable to meet their pledges, made in the summer of 1997, to contribute to the US $17 billion rescue package for still struggling Thailand. Indonesia's pledge amounted to $500 million. In April Canada moved to assume the Indonesian share, on the grounds that Thailand was honouring its program with the IMF and that it thus deserved the full amount they had been promised (Canada 1998c). Canada's contribution made it the only country from outside the Asian region to make a contribution. The US administration, worried about the Congressional reaction to a "bailout" and mindful of criticism over the use of the Exchange Stabilization Fund in the Mexican rescue package of 1994-5, refused to provide any funds. In contributing when the US, due to domestic Congressional restraints, was unable to, Canada became part of a first line programme. Its disbursements started to flow in June when Parliament passed the necessary implementing legislation. In the end Canada deployed a total of US$300 million as part of its newly assumed obligations to Thailand.
With the acute phase of the Asian financial crisis over, the G7 was able to move at its Birmingham Summit in May 1998 to deal with the need for underlying reforms which the crisis had exposed. With Finance ministers meeting in London the weekend before leaders, and the leaders themselves meeting at "seven" in Birmingham before joining Russia for a gathering of the new G8, the G7 set several important directions. It called bluntly on Japan to clean up its bad bank debts and deregulate its economy. G7 leaders also expressed their gratitude to the People's Republic of China for not moving to devalue the yuan and thus precipitate a major round of competitive currency devaluations in Asia.
Looking ahead, the G7 emphasized the need for improved transparency, early warning, and private sector burden-sharing (Bayne 1999). As part of these agreed-upon reform directions, Canada received an endorsement for the concept behind its major initiative - that of establishing a mechanism for the peer review of national banking and financial system supervisory authorities. Canada's proposal for peer supervision, which had its origins in Finance Minister Paul Martin's participation in a meeting of western hemisphere finance ministers in Santiago Chile in December 1996, had been unveiled at the April 1998 Washington Meetings of the IMF's Interim and Development Committees, in the form of a call for a new international supervisory authority (Canada 1998d). With Canada preferring a small new secretariat for assembling multinational teams of supervisory experts, France preferring investing the function in the IMF under its Article 4 consultations, and Britain preferring using a joint IMF-World Bank mechanism, the decision on how to implement the concept was left to the G7, IMF, and World Bank meetings in the autumn.
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