Lessons of the Financial Crisis for the Design of the New International Financial Architecture John B. Taylor Stanford University Keynote Address at the Conference on the 2002 Uruguayan Financial Crisis and its Aftermath Montevideo 29 May 2007

Global Financial Crises “ Their frequency and global spread set them apart from anything else that we have seen—at least since World War II” (Guillermo Calvo, Graham Lecture, Princeton University 2005

Eight Years of Crises or One Eight-Year Crisis? Mexico: Argentina: Thailand Indonesia Malaysia Korea Russia: 1998 Brazil: Romania: Ecuador: Argentina: Turkey: Uruguay: 2002 No Major Crises: present Tequila effect Asian Crisis Contagion Russian Contagion “First Crisis of the 21 st Century”

Latin America Russian Default (August 1998)

Africa Russian Default (August 1998)

Africa Argentine Default (December 2001)

The Unpredictability Problem Uncertainty about the “crisis resolution process” Example –The 2002 Uruguay crisis –The 1998 Russian crisis –The Asian crises Other issues and agendas complicate decisions Personalities, power structure Added risk, spreads high, capital flows down

Rules versus Discretion Analogy with domestic monetary policy –Policy rules, predictability, communication Could a similar approach be applied to the international monetary fund? Very Difficult –Guidelines hard to define and adhere to –“Time inconsistency” problem severe

Reform of Sovereign Debt Restructuring Process Two basic approaches –Contract-based Collective action clauses Decentralized –Statutory-based Direct analogies with bankruptcy within countries Bankruptcy court SDRM—role of IM

2003: The Year of the Clauses The experience of Uruguay After Mexico the CACs became the template with very few exceptions. Within a year many countries followed: –Brazil, Chile, Panama, Colombia, Costa Rica, Venezuela, Turkey, Belize, Guatemala, Korea, Italy, Peru, Poland, South Africa, Uruguay

The Exceptional Access Framework Countries need to satisfy criteria for exceptional access (2003) IMF must prepare exceptional access report So far EAF has held, but still needs to be “internalized” at IMF

Four Criteria for Exceptional Access

IMF Reviews: April 2004, May 2005

Russian Default (August 1998) Argentine Default (December 2001)

Further Reforms? “A Victim of Success?” –Loans down implies income is down IMF loans outstanding (0.65 SDR per dollar): –SDR 70 billion in 2003 –SDR 10 billion in 2006 Crocket report: –sell 1/8th of gold stock and invest in income-earning assets »Total: 103 million ounces of gold worth about $68 billion –charge fees for technical assistance operations –seek “voluntary contributions” from members Adjust Quota Shares Move toward more: –advice-giving –multilateral surveillance Accountability at the other IFIs