Washington, 5 October 1998 (RFE/RL) -- A proposal from the finance ministers of the British Commonwealth nations for a new global mechanism to allow countries in financial crisis to be able to temporarily suspend repayments on debt without triggering a default has been quickly rejected by commercial bankers and financiers.
The commonwealth ministers met last week in Ottawa, Canada and proposed what they called a new way for a country to "stand-still" or suspend payments on debt without default or having to reschedule. They suggested this as another weapon to deal with the global financial crisis.
But the world organization of commercial financial firms, the Institute of International Finance (IIF), meeting in Washington on the weekend, said the idea would be counter-productive, causing crises to get worse not better.
The Institute's vice chairman, William Rhodes, who is also vice chairman of New York's Citibank, said Russia is a perfect example of why it is so important that countries in trouble talk to their creditors and work out an orderly restructuring of the debt.
That's not what was done in Russia, he said, where a unilateral moratorium and forced rescheduling of debt -- which amounted to a default -- was imposed. The result has been not only that Russia has no access to international credit markets now, but many other emerging market economies have been cut off as well because lenders and investors have withdrawn across the board, said Rhodes.
A special steering committee drawn from the institute's over 300 commercial bank, investment fund, and insurance company members, issued a preliminary report on the weekend with a series of immediate recommendations for dealing with financial crises and helping emerging market countries avoid the contagion.
Among its recommendations are that the global system still needs more transparency, especially of capital flows, and that countries need to push ahead on sound financial and economic policies.
To its own members, the IIF4s steering committee said private financial firms must make further improvements in their risk management programs. Experts generally agree that part of the Asian and Russian crises came about because some banks had been making huge, short-term loans without carefully assessing the true risk they faced. When they realized it, they panicked and withdrew.
IIF chairman, German banker Georges Blum, told a press conference that while they found a number of weaknesses in the risk assessment mechanisms many financial firms use, people should not think that all risk management failed because some banks and funds lost money in Russia.
Having lost money in Russia, said Blum, doesn't mean that the firm's risk management systems didn't work. In fact, he said, many of those banks decided intentionally to take a greater risk and knew they would have to bear the consequences of this greater risk appetite when the collapse came. They accepted in advance the level of losses they could absorb.
Still, said Blum, the institute is urging all of its members to deal with the weaknesses in their own risk management systems so that in future, investors and lenders understand the risks to which they are exposed.