SUNS  4315 Tuesday 3 November 1998


FINANCE: G-7 REFORMS PUT BRAZIL'S PACKAGE ON FAST TRACK

Washington, Oct 30 (IPS/Jim Lobe) -- The leaders of the Group of Seven (G-7) industrialised countries have endorsed proposals to reform the International Monetary Fund (IMF), including creating a mechanism to rush new loans to countries threatened by the ongoing financial crisis.

The first beneficiary of such a facility likely would be Brazil. The government of newly re-elected President Fernando Henrique Cardoso announced a $84 billion austerity package earlier this week
and was expected to intensify negotiations with the IMF for an emergency loan package of at least $30 billion in coming days.

A deal, which could reach as much as $45 billion, may be concluded as early as mid-November, according to officials who were awaiting the arrival here Friday of Brazilian negotiators.

"This line of credit gives us a powerful new tool that can be used when it will do the most good, at the lowest cost before the trouble starts," said U.S. President Bill Clinton.
He hailed the G-7 accord as "very, very important" in dealing with the succession of crises brought on by the sudden and massive movement of so-called "hot money" first in and then out of emerging
markets.

A 10-page communique released in London Friday by the British government, which currently chairs the G-7, also endorsed a series of other key reforms which were discussed at the IMF-World Bank Annual Meeting in Washington earlier this month.

Many of them echoed an appeal by Clinton in mid-September to "adapt the international financial architecture to the 21st century." The G-7 called for increased co-operation among countries in regulating capital flows across borders; working out common rules for disclosing key national data on financial information and macro-economic policies; and encouraging private creditors to
participate in bailouts of countries which get into trouble.

The communique called for increased regulation of hedge funds and other off-shore institutions by the G-7 nations themselves as well as other countries which participate in global capital markets.
These hedge funds have accounted for an growing share of private capital flows in international markets.

The communique also included - albeit vaguely - the key demands of the Republican leadership in the U.S. Congress which, earlier this month, approved $18 billion for the IMF on condition that the G-7 agreed to push for certain policy initiatives on the IMF's executive board.

Of these, the most important included charging higher interest rates and setting shorter repayment periods for most IMF loans and requiring the IMF itself to become more transparent in its operations.

"We call upon... all international financial institutions to adopt a presumption in favour of release of information, except where this might compromise confidentiality," the G-7 communique said.

Of the $18 billion approved by Congress earlier this month, $14 billion is Washington's share of a pending IMF quota increase which, once completed, will add $90 billion to the Fund's lending
resources.

That money has been seriously depleted over the last year by the large number and high costs of rescue operations it has had to carry out to cope with the Asian and Russian financial crises.

Congressional approval of the US. contribution will trigger action by the other member-countries. "We welcome the positive steps that have been taken toward the implementation of the IMF quota
increase... we call for these to be implemented as soon as possible," the G-7 said.

Treasury Secretary Robert Rubin told a news conference Friday that the quota increase should be sufficient to deal with new threats. "With the resources we have now, the IMF is... well-positioned in
terms of resources to do what they need to do," he said.

U.S. officials stressed that by issuing a communique, only a few weeks after the annual meeting, demonstrated the urgency with which top western policymakers have acted to contain the financial crisis which began in 16 months ago.

"The act of the leaders themselves issuing and agreeing on a statement outside of the context of the annual G-7 meeting is itself a virtually unprecedented step, yet extraordinary times require this type of extraordinary focus by the leaders themselves," said Gene Sperling, Clinton's top economic adviser.

Rubin stressed that the crisis had yet to be overcome - despite the fact that global markets were bolstered in recent weeks by cuts in interest rates in the United States and Europe, Congress'
approval of the IMF money, Japan's bank-bailout programme and some indications of an improving economic picture in East Asia.

The G-7 proposals, however, will not take effect immediately. For those provisions which change current IMF rules, such as the creation of the new "precautionary" facility, the Fund's executive
board, which represents all member-states, will have to meet and approve them.

Once approved by the board, that facility, according to Deputy Treasury Secretary Lawrence Summers, will provide a "credit line (to countries)... to provide a reinforcement to confidence and a
kind of backstop that could support the normal flow of private sector capital." He said it "could possibly find application in Brazil, although that, of course, will depend upon how the situation in Brazil progresses."

Rubin called Cardoso's austerity plan "a strong reform programme" but added that "there obviously are issues that still need to be dealt with."

Global markets reacted generally favourably to Cardoso's re-election and economic plan which he unveiled earlier this week. But some analysts have expressed concern about the election of leftists to powerful state governorships whose co-operation Cardoso needs to implement his programme.
Some economists, like Harvard professor Jeffrey Sachs, also criticised Cardoso for sticking the real to a fixed exchange rate at a time when it is overvalued by as much as 30 percent.

If the real comes under concerted attack by speculators, the 30-45 billion dollars to be provided by the IMF and other sources under the new mechanism, may not be enough to avoid a panic,  according to Sachs and others who believed Cardoso should let the Brazilian real
float.