Rethinking the international lending institutions and the organisation of global financial markets : LUSENET : Initiativkreis Wirtschaft : One Thread

Dear friends,

I open this group in English, since I hope that at some point people may join the discussion who feel more comfortable with it.

I'd like to discuss the following questions:

What do we learn from the financial crises in Russia, Asia and Latin Amerika that have ocurred during the past two years, and from the responses of the international community (IMF, G7, etc.)?

Does the IMF and other international lending institutions require reform, and if yes which direction should reform take?

Is there a point for capital controls (on inflows or/and outflows)? For international agreements and coordinated action concerning exchange rates?

Is the extended lending facility that the IMF recently came up with to provide armoury to fundmentally sound countries finding themselves at risk of financial contagion a good idea?

What about "bailing in" the private sector in currency- and banking crises? Is this desirable, and if yes how can it be acchieved?

These are difficult but highly relevant questions; and I am sure we can find some food for thought here.


Johannes Wiegand Centre for Economic Performance London School of Economics

-- Johannes Wiegand (, April 25, 1999


> Is the extended lending facility that the IMF recently came > up with to provide armoury to fundmentally sound > countries finding themselves at risk of financial > contagion a good idea?

Good question.

Pro: protecting the innocent is an especially good idea since moral hazard shouldn't be a problem.

Con: moral hazard is still there: economic links to countries with unsound institutions are implicitly subsidised.

So is a gullibility fund a good idea? Probably yes, but its far from obvious.


-- Jakob von WEizsaecker (, April 28, 1999.

The Rethinking of the international institutions is a vital question indeed. So first of all thank you for raising it in that forum.

Considering the question should take into account two things: First of all the changes in the financial markets itself. Secondly the process by which the IMF and World Bank do fund (or bail out) specific countries.

ad 1: Undoutably, the financial markets have changed a lot. Modern communication technology has facilitated shifts in financial capital allocation around the globe within seconds. What remains unchanged is that the investment decision is still based on the ratio of return on investment and the investment risk. What seems important is that on both sides of the ratio expectations matter. And expectations themselves are build on the available information. My point is that reliable information is mainly a function of transparancy. Especially in the East Asian case transparancy was virtually none-existent due to intense, yet unpublished, relations between companies, banks, and governments. Thus expectations were flawed causing first a massive overstatement of the returns-risk ratio and in the course of the crisis a correction of expectations and a massive withdrawl of investment capital.

So the main point is: capital markets do function well, if transparency is well established. Unfortunately, it isn't.

Ad 2: The way the international institutions give money to specific countries and project is not (a least primarily) based on economic but on political considerations. E.g. credits to Russia are given on the argument "that it is too big to fail". That of course is flawed.

My suggestion: A bail out or further lending is absolutely justified but it should be tied to the condition that certain transparency standards are met. Otherwise it does invite moral hazard in the form of intentionally flawing expectations by some countries.

-- David F. Milleker (, April 29, 1999.

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