Bailing In The Banks.

• Author: STARK, JURGEN

A top central banker gives his prescription for involving the private sector in the resolution of debt crises in emerging countries.

As a consequence of the Mexican debt crisis of 1994-95, and subsequent crises in other emerging markets, the international official community has launched a broad-based initiative to improve the functioning of the international monetary and financial system, and thus, to stabilize growth and employment in the world economy. From the outset, backward-looking proposals aimed at "throwing sand in the wheels of international finance" have rightly been discarded from the agenda. The thrust of current efforts is to ensure that the financial markets function more efficiently. This strategy should help foster more stable flows of private resources towards emerging market economies.

The components of this crisis-prevention approach can be grouped under two headings: improving economic fundamentals and increasing transparency. Everyone agrees on the need to strengthen crisis prevention by means of sound economic policies. This includes an appropriate sequencing of capital-account liberalization, the choice of well-suited exchange-rate regimes, and the improvement of debt-management policies aimed at avoiding high levels of short-term foreign currency-denominated net debt, in particular. Moreover, deep-seated fragilities in the financial systems of debtor countries should be eradicated as quickly as possible to reduce both the dependency of those countries on foreign capital and their vulnerability in the event of a crisis. Here, strengthening banking supervision has the highest priority.

Beyond economic and financial reforms, more needs to be done to enhance the transparency of markets. More disclosure of relevant facts should enable creditors to discriminate among debtors more effectively. As a first step, information on the results of International Monetary Fund surveillance is now made public on a regular basis, while respecting the confidential character of the dialogue with member countries. Moreover, the Financial Stability Forum, established early in 1999 on the initiative of former Bundesbank President Dr. Hans Tietmeyer, recommended assessing countries' performances against a number of international standards adopted by all countries. The objective is to improve policies, market infrastructures, and data dissemination. On a voluntary basis, the IMF will review and publicly report on compliance with the most...