All talk and little action

Last week's Washington meetings were long on good intentions but short on results. So where do
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PERHAPS it was a signal, or perhaps it was just a mistake. But the music that wafted out from the speakers as the International Monetary Fund prepared for its closing press conference was the 1812 Overture by Tchaikovsky, complete with crashing cannons.

Was it really so smart to allude to Napoleon's catastrophic retreat from Moscow as Michel Camdessus, the French head of the IMF, addressed the world? For it was the collapse in Russia and the vast global outflows of capital it inspired that confronted the world's financial leaders over the last week; and they found themselves in full retreat. There was plenty of noise, but there were few achievements as they scuttled to patch up the mess. And for Mr Camdessus, despite his bonhomie, it cannot have been an easy week as he tried to rally the troops.

Part of the problem is that there is little co-ordination of the many nations and diverse organisations that gather for these jamborees. Two institutional dynamics preclude much forward movement: the desire of each organisation to preserve its own agenda, and the overwhelming pressure to maintain the impression of unity, especially at moments of tension. Both helped to ensure that this was a meeting largely based on a lowest common denominator. It was not that nothing was achieved and no answers supplied; they were. But time is running out for bright ideas.

As the waiters filled glasses and ferried around the canapes at the British Embassy reception a week ago, one World Bank official said that it had been a good week for the institution. Well, he explained, it had been a good week for the Bank's narrow political goals - avoiding entanglement in the IMF's problems, escaping demands for large-scale bail-outs of developing countries, ensuring that development was moved up the list of priorities - but on a larger scale, what had been achieved, he asked?

In the same way, the desire to paper over the cracks meant that few of the potentially important debates ever surfaced. The causes of the crisis, the rights and wrongs of the IMF's approach to stabilisation and the role of the private sector were all discussed, but everyone wanted to avoid shocking the markets. The meeting's motto might have been pas devant les enfants.

If money was the litmus test of the meetings then there was scant result. Although talks continued over the proposed package to bail out Brazil, nothing was finalised. There were encouraging signs of a deal, but it will be weeks before Brazil delivers an economic package for which the IMF can sign up. Finance ministers of the Group of Seven industrialised nations agreed on the need for some of them to cut interest rates, but the result was a quarter-point reduction in Britain. America may act again, Alan Greenspan, chairman of the Federal Reserve hinted - but action could take time.

President Bill Clinton's proposed new scheme to allow developing countries access to cash before they hit trouble as a pre-emptive measure won approval, but until the US Congress finally agrees to allow extra cash for the Fund, it is just a nice idea. And the idea of getting the World Bank to cough up money faster to help nations in trouble with financial sector reforms and social safety nets is also yet to be agreed, although it is likely to materialise.

Equally, there were interesting ideas on how to cope with financial crises that went further than expected, challenging some shibboleths of the international system.

But they are even further away. The working group on international financial architecture, convened a year ago, suggested turning the tables on the private sector in the interests of giving nation states more leverage in the market. The IMF might give financial support even to countries that had suspended payments to their creditors, the report said. It should encourage clauses in bond contracts that make creditors work together in crises, rather against each other.

There was even a nod - a cautious one - in the direction of capital controls, admitting that in some circumstances they had a role to play. "In some cases governments facing the need for a comprehensive restructuring of debt payments arising from an extreme international financial crisis have imposed temporary capital and exchange controls," the report said. "The use of such controls should be considered only in exceptional circumstances, and in conjunction with IMF-sponsored programmes of policy adjustments to create the conditions required for the restoration of financial and macro economic stability and the ultimate restoration of currency convertibility." In other words: do it if you must, but be careful.

All of this is interesting, but it is institutional tinkering, it is gradualist and it is still some way off happening. The dynamics of the meetings were such that perhaps no more was to be expected, and certainly Mr Camdessus was in self-congratulatory mood at his closing press conference. "We are seeking consensus and agreeing, forcefully, on what is our basic approach," he said, summing up a week of more talk than action. James Wolfensohn, of the World Bank, was a little more frank, edging towards admitting that little of real substance had been decided, and that he disagreed with the Fund over its insistence on sticking to an agenda of austerity and orthodoxy.

There was one other truth-teller at the meeting: the hedge fund maestro, George Soros, who has sufficient money not to care who knows what he thinks and enough brains to make his thoughts compelling. Mr Soros believes that if something is not done, and soon, then the world financial system is in jeopardy. "You have to find some way to arrest the reverse flow of capital and provide credit guarantees to the countries from which capital is now fleeing," he said.

The most urgent need, as Mr Soros pointed out, is to turn on the taps again and get cash flowing to the emerging markets. "We have got to provide liquidity, but providing it at the centre will not help the periphery," he said. This point was underlined by Mr Wolfensohn. "You have a huge liquidity problem," he said, referring to the way interest rate spreads made capital markets no-go zones for many emerging economies. "It's not just a question of 2,000 or 3,000 basis points; it's a question of access." Many nations now have no way of finding external funding at all. "The medium-sized countries that are not in crisis will be in crisis unless we can provide the necessary financing," he added.

Capital has to be reversed, to end the retreat from Moscow, Bangkok, Jakarta, Seoul, Buenos Aires and Brasilia. But as Napoleon knew well, once an army is moving in one direction, it is very hard to turn it around quickly. In a crisis, every second counts.