Ministers to decide on crisis plan

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The Independent Online
A new report financed by the Treasury and Bank of England on how to deal with international financial crises, published today, is likely to win backing from finance ministers meeting in Washington this weekend.

Drawing on the lessons of the Mexican crisis at the beginning of this year, it suggests reforms of the process for restructuring a country's debts.

The report concludes that one of the key improvements would be to stop the "rush for the exit" - the flight of capital when a country first runs into trouble.

Every investor has an incentive to be one of the first to bail out before the country's financial markets collapse too far. But all would be better off if the stampede leading to the collapse could be prevented.

The authors, Barry Eichengreen and Richard Portes of the Centre for Economic Policy Research, propose allowing the International Monetary Fund to impose a payments standstill.

They also suggest countries offer new types of bond contracts, backed by the IMF, which would prevent a few investors refusing a debt restructuring desired by the majority.

A second problem addressed by the report is that debt restructuring can be a painfully long process. It suggests a new agency to supervise negotiations with creditors and transmit information.

Thirdly, it suggests improved procedures for reacting to a crisis. The response of the international financial community to the Mexican problems early this year was confused and ad hoc, the authors argue.

It also relied on the happy chance that the IMF had plenty of funds in its coffers at the time. Since the IMF and World Bank mid-year meetings six months ago plans to increase the Fund's emergency resources have been in progress.

This weekend's meetings are likely to bring an agreement to increase the "General Arrangements to Borrow" - the IMF's overdraft facility with its shareholder countries - and formalise the emergency financing mechanism.

Some G7 countries such as Germany will not be persuaded easily that there is a need to interfere with the financial markets.