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Washington, April 20, 2002
2002-034

G-7 Finance Ministers Adopt Financial Crises Action Plan

Related documents:

• Framework for Crisis Prevention and Resolution.
• Reforming the Global Financial Architecture: A Chronology.

Finance Minister Paul Martin today welcomed the adoption by G-7 finance ministers of an action plan for a framework that will help prevent financial crises in emerging markets.

"This is a great step forward. The framework will be a powerful tool for preventing and managing financial crises," Minister Martin said. "It will create greater predictability for emerging markets and private sector investors."

Minister Martin pointed out that the international community will be better positioned to find solutions for debt problems in a timely way and with significantly less social disruption for debtor nations.

The Minister was especially gratified to note that the plan reflects an approach that Canada has been advocating for the last four years. The new action plan includes:

• using cooling-off periods – or standstills – for rescheduling or restructuring debt;
• introducing clauses in debt contracts to improve the ability of creditors to renegotiate debts in a coordinated way; and
• working with the International Monetary Fund to improve the quality, transparency and predictability of decision making.

"Preventing and managing financial crises alone is not enough to make globalization work for all," Minister Martin said. "But without a stable and predictable international financial system, emerging and developing countries have little chance to provide the basic necessities – health, education and opportunities for growth."

This new plan will help emerging markets meet those challenges while simultaneously strengthening the international financial system.

"Today we have agreed on a major step towards a comprehensive approach to crisis prevention and resolution," the Minister said. "Going forward, the challenge will be to ensure that the G-7 framework is put into effect."

G-7 finance ministers and central bank governors are meeting in Washington this weekend. Minister Martin is this year’s chair of the G-7, which includes Canada, Italy, France, Germany, Japan, the United Kingdom and the United States.

Backgrounders are attached.

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Framework for Crisis Prevention and Resolution

Washington, April 20, 2002

The G-7 framework for the prevention and resolution of financial crises is designed to reduce the financial, economic and, most importantly, social costs of financial crises. Canada has led these efforts, beginning with the Halifax Summit in 1995, which followed the Mexican financial crises.

The framework announced today is intended to provide greater clarity to borrowing countries, their private sector creditors and the international financial institutions on how future financial crises will be resolved. It has three key elements: greater discipline in adhering to limits on official financing in crisis situations; encouraging the use of innovative clauses, such as collective action and standstill clauses, in sovereign debt instruments; and improved crisis prevention through strengthened policy "surveillance."

Ideally, payments problems would be resolved at the earliest possible stage. Past experience suggests, however, that it is difficult to get debtors and creditors to the table if there is the possibility that the country will simply be bailed out through large-scale official lending. And, in addition to often delaying necessary restructuring, large-scale official lending distorts international capital markets, creating the conditions for more crises. Credible limits on official financing will provide much-needed clarity to both debtors and creditors on how financial crises will be handled and thus encourage prompt and cooperative solutions to payments problems.

To help achieve this, Canada has supported the adoption of collective action clauses and other covenants that can help promote the orderly resolution of financial crises. Canada has led by example, introducing collective action clauses in its foreign currency debt.

No country ever seeks to default on its foreign debts. The costs are simply too great. But this reluctance to seek a restructuring of debts can lead a country to delay negotiating with its creditors. Too often the result has been that the costs of the crisis are higher than they needed to have been, both to the country concerned and to its creditors. A temporary "breathing space" from debt-servicing obligations, in which needed policy changes to correct the payments problem can be implemented and that allows the debtor to negotiate in good faith on a sustainable debt-servicing plan with its creditors, would be beneficial to the debtor country and its creditors alike. The Emergency Standstill Clause that Minister Martin proposed in September 1998, and which the G-7 has endorsed today, would provide this "breathing space."

Of course, the first-best outcome is to prevent financial crises in the first instance. For this reason the G-7 framework calls for improved IMF "surveillance," or review and assessment, of countries’ policies with a view to identify at an early stage potential problems that could lead to more serious problems.

Reforming the Global Financial Architecture: A Chronology

December 1994 – Mexican financial crisis begins, leading to an international assistance package of unprecedented magnitude.

July 1995 – Summit of G-7 Leaders at Halifax: Based on the recommendation of G-7 finance ministers, G-7 leaders call for a number of measures to improve the stability of the global economy. These include better economic and financial data, and providing greater resources to the International Monetary Fund (IMF) through the establishment of New Arrangements to Borrow.

May 1996 – The G-10 "Rey Report" recommends the adoption of collective action clauses (CACs) as a measure to facilitate debt restructuring.

July 1997 – Asian financial crisis begins (when Thailand devalues its currency).

August 1998 – Russian financial crisis begins.

September 1998 – Meeting of Commonwealth Finance Ministers in Ottawa: Finance Minister Paul Martin calls for a better mechanism to involve private sector investors in the resolution of financial crises, including through the adoption of Emergency Standstill Clauses in all sovereign cross-border debt contracts.

October 1998 – The G-22 Working Group on International Financial Crises calls for the expanded use of CACs, and for official support for temporary debt suspensions (standstills), where warranted.

November 1998 – Brazilian financial crisis begins.

June 1999 – Speech to the Chicago Council on Foreign Relations: Minister Martin repeats his call for standstills and notes the advantages of CACs.

June 1999 – Summit of G-7 Leaders at Köln: G-7 leaders endorse the G-7 finance ministers’ Report to Heads on Reforming the International Financial Architecture. This report outlines a framework for the involvement of the private sector in the prevention and resolution of financial crises, including the use of standstills in certain cases.

July 1999 – Speech to the Conference of the Canadian Institute for Advanced Legal Studies, Cambridge, U.K.: Minister Martin outlines the need for new international rules of the game, in the form of a legal framework analogous to domestic bankruptcy regimes.

April 2000 – Speech to the Institute for International Economics, Washington, D.C.: Minister Martin calls for the adoption of CACs and announces Canada’s intention to lead by example by introducing CACs into its foreign currency debt.

September 2000 – International Monetary and Financial Committee meeting in Prague: The Committee endorses a framework for private sector involvement that is market-oriented and based on voluntary solutions, to the extent possible. The Committee recognizes that extraordinary access to IMF resources should be exceptional and, in extreme cases, a standstill may be unavoidable.

November 2001 – Address to the National Economists Club, Washington, D.C. – IMF First Deputy Managing Director, Anne Krueger, proposes the establishment of an international bankruptcy mechanism for sovereign debts, analogous to domestic regimes.

December 2001 – Argentina’s financial crisis begins.

February 2002 – Meeting of G-7 Finance Ministers and Central Bank Governors at Meech Lake: Under the chairmanship of Minister Martin, ministers and governors agree to examine ways in which the Prague crisis management framework could be improved.

April 2002 – Meeting of G-7 Finance Ministers and Central Bank Governors in Washington, D.C.: Ministers and governors adopt an integrated Action Plan to help reduce the frequency and severity of financial crises. The Action Plan includes encouraging the adoption of new contingency clauses in debt contracts; generally limiting official sector lending to normal access levels; improving the quality, transparency and predictability of official decision making; and supporting further work by the IMF on new approaches to sovereign debt restructuring.