NB Official version is in Hansard

STATEMENT TO THE HOUSE OF COMMONS ON THE WORLD ECONOMY ON 2 NOVEMBER 1998

WITH PERMISSION, MADAM SPEAKER, I AM REPORTING TO THE HOUSE AT THE EARLIEST OPPORTUNITY AVAILABLE ON THE TERMS OF A NEW INTERNATIONAL AGREEMENT REACHED BY FINANCE MINISTERS AND CENTRAL BANK GOVERNORS OF THE G7 COUNTRIES TO REFORM AND STRENGTHEN THE INTERNATIONAL FINANCIAL SYSTEM.

A FULL COPY OF THIS AND A STATEMENT BY THE HEADS OF GOVERNMENT SETTING OUT AN AGENDA FOR FURTHER ACTION IS NOW AVAILABLE IN THE VOTE OFFICE.

TOMORROW I WILL PRESENT TO THE HOUSE THE PRE-BUDGET REPORT WITH ITS DETAIL ON THE DOMESTIC ECONOMY.

BUT THE FINANCIAL CRISIS THAT SWEPT ASIA LAST YEAR, AND REVERBERATED AROUND THE WORLD, HAS REVEALED LONG STANDING WEAKNESSES IN THE INTERNATIONAL FINANCIAL SYSTEM WHICH G7 MINISTERS AGREE MUST NOW BE ADDRESSED AS A MATTER OF URGENCY.

OUR PREDECESSORS HAD TO MEET THE CHALLENGE OF ENSURING ECONOMIC STABILITY IN AN ERA OF NATIONAL ECONOMIES. NOW OUR GENERATION MUST MEET THE CHALLENGES OF ENSURING STABILITY IN THE ERA OF THE GLOBAL ECONOMY, WHERE EACH INDIVIDUAL ECONOMY CAN DIRECTLY AFFECT THE PROSPECTS OF EVERY OTHER.

AND THE NEW WAY FORWARD FOR THIS NEW ERA IS SENSIBLE GLOBAL FINANCIAL REGULATION, CREDIBLE CRISIS PREVENTION, AND ORDERLY MECHANISMS FOR CRISIS RESOLUTION, WITH A SURE FOUNDATION IN MINIMUM STANDARDS AND BEST PRACTICE WHICH ALL COUNTRIES ADOPT TO PARTICIPATE IN THE INTERNATIONAL FINANCIAL SYSTEM.

AND THIS IS DIRECTLY RELEVANT TO THE UK ECONOMY. IT IS EVERYBODY'S BUSINESS, NOT ONLY BECAUSE WE ARE DEPENDENT ON TRADE IN GOODS AND SERVICES WITH OTHER COUNTRIES - FOR EXAMPLE, THE ASIAN CRISIS HAS IN ONE SINGLE YEAR CUT UK EXPORTS TO INDONESIA, MALAYSIA AND SOUTH KOREA BY AROUND 50 PER CENT AND TO THAILAND AND PHILIPPINES BY AROUND 60 PERCENT - BUT ALSO BECAUSE - AS WE HAVE SEEN - A WEAK FINANCIAL SYSTEM OR INAPPROPRIATE ECONOMIC POLICIES IN ONE COUNTRY NOT ONLY PUT AT RISK ANOTHER COUNTRY'S FINANCIAL SYSTEM, BUT WILL ALSO THREATEN PEOPLE'S SAVINGS OR INVESTMENTS AND EVENTUALLY THEIR COMPANIES OR JOBS.

THAT IS WHY IT IS IN EVERY COUNTRY'S INTERESTS TO SUPPORT A NEW MECHANISM FOR CRISIS PREVENTION AND RESOLUTION, A NEW TRANSPARENCY AND A NEW PROCESS FOR GLOBAL FINANCIAL REGULATION.

OUR STATEMENT REAFFIRMS THAT THE BALANCE OF RISKS IN THE WORLD ECONOMY HAS SHIFTED FROM CONCERNS ABOUT INFLATION TO CONCERNS ABOUT GROWTH. IN THE LAST MONTH INTEREST RATE POLICY HAS ALREADY BEEN ADJUSTED. IN JAPAN, THE UNITED STATES, CANADA, UNITED KINGDOM, SPAIN, PORTUGAL, IRELAND, DENMARK, ITALY, AND AGAIN IN THE UNITED STATES. THE G7 STATEMENT REAFFIRMS OUR COMMITMENT TO CREATE OR SUSTAIN THE CONDITIONS FOR STRONG DOMESTIC-DEMAND LED GROWTH AND FINANCIAL STABILITY IN EACH OF OUR ECONOMIES. THE AUTHORITIES WILL CONTINUE TO BE VIGILANT IN THE LIGHT OF THE SHIFT IN THE BALANCE OF RISKS ON A GLOBAL BASIS.

IN OUR STATEMENT EACH CONTINENT HAS AGREED TO MAKE ITS CONTRIBUTION TO CREATING THE CONDITIONS FOR STABILITY AND GROWTH - JAPAN WITH IMMEDIATE BANKING REFORM, EUROPE WITH STRUCTURAL REFORMS TO TACKLE UNEMPLOYMENT, AMERICA TO PROMOTE GROWTH WITH LOW INFLATION AND, IN THE CASE OF LATIN AMERICA, WE WELCOME THE POLICY COMMITMENTS THE BRAZILIAN GOVERNMENT HAS MADE AND WE WILL WORK WITH THE INTERNATIONAL COMMUNITY TO SUPPORT THEM. AND ALL OF US MUST ACT TO AVOID RETREAT INTO PROTECTIONISM.

REFORMING THE FINANCIAL ARCHITECTURE

BUT AS WELL AS MEASURES TO DEAL WITH SHORT TERM INSTABILITIES WE ALSO NEED ACTION TO REFORM THE FINANCIAL ARCHITECTURE.

FOR FIFTY YEARS OUR POLICIES FOR REGULATION, SUPERVISION, TRANSPARENCY AND STABILITY HAVE BEEN DEVISED AND DEVELOPED FOR A WORLD OF RELATIVELY SHELTERED NATIONAL ECONOMIES WITH LIMITED CAPITAL MARKETS. NOW THAT MARKETS TRANSCEND NATIONAL BOUNDARIES WE MUST CREATE FOR GLOBAL MARKETS, SYSTEMS FOR SUPERVISION, TRANSPARENCY, REGULATION AND STABILITY THAT ARE AS SOPHISTICATED AS THE MARKETS THEY HAVE TO WORK WITH.

AND G7 GOVERNMENTS HAVE THEREFORE CONCLUDED THAT THE INTERNATIONAL ARCHITECTURE DEVISED IN THE 1940S FOR THE ECONOMIES OF THE 1940S IS NO LONGER ADEQUATE TO THE CHALLENGES OF THE 1990S AND THAT WE NEED NEW RULES FOR THE GLOBAL FINANCIAL SYSTEM OF THE 21^ST CENTURY.

CODES OF CONDUCT

SO IN THE G7 STATEMENT EACH G7 COUNTRY HAS NOW AGREED TO ADOPT AND APPLY CODES OF CONDUCT FOUNDED ON MINIMUM STANDARDS AND BEST PRACTICE: NEW DISCIPLINES AND UNDERTAKINGS THAT EACH COUNTRY IS PREPARED TO ACCEPT AS A CONDITION OF ITS PARTICIPATION IN THE INTERNATIONAL SYSTEM.

IN MONETARY AND FINANCIAL POLICY WE ARE AGREED ON THE NEED FOR GREATER TRANSPARENCY AND OPENNESS, THAT EACH COUNTRY SHOULD SPECIFY ITS OBJECTIVES FOR MONETARY POLICY, AND IDENTIFY RESPONSIBILITY FOR ACHIEVING THESE OBJECTIVES AND FOR REPORTING AND EXPLAINING MONETARY AND FINANCIAL POLICY DECISIONS. AND WE ARE AGREED THAT THESE STANDARDS SHOULD BE SET DOWN IN AN INTERNATIONALLY AGREED CODE OF CONDUCT THAT ALL COUNTRIES ARE PREPARED TO ACCEPT.

THE G7 MINISTERS HAVE ALSO COMMITTED THEMSELVES TO COMPLY WITH THE CODE OF CONDUCT OF GOOD PRACTICE ON FISCAL TRANSPARENCY, THAT HAS BEEN DRAWN UP BY THE IMF.

SIMILAR STANDARDS OF TRANSPARENCY ARE REQUIRED IN THE PRIVATE SECTOR. BY SPRING NEXT YEAR THE OECD WILL COMPLETE WORK ON A CODE OF PRINCIPLES ON SOUND CORPORATE GOVERNANCE AND STRUCTURE. AND BY EARLY 1999 WE WILL ALSO HAVE IN PLACE A PLAN FOR INTERNATIONALLY AGREED ACCOUNTING STANDARDS.

THESE CODES OF CONDUCT IN MONETARY POLICY, FISCAL POLICY AND CORPORATE GOVERNANCE - WILL MEAN RADICAL CHANGES IN THE WAY GOVERNMENTS AND FINANCIAL MARKETS FUNCTION. THEY WILL HELP PRODUCE AN ENVIRONMENT IN WHICH FINANCIAL MARKETS CAN OPERATE BETTER. THEY SHOULD REDUCE THE RISK OF FUTURE FAILURES, AND MEAN THAT WHEN FAILURES DO OCCUR THE FINANCIAL SYSTEM IS ROBUST ENOUGH TO WITHSTAND THEM. BY IMPROVING PUBLIC UNDERSTANDING OF WHY AND HOW DECISIONS ARE MADE, AND MAKING SURE THE RIGHT LONG-TERM POLICIES ARE IN PLACE, THE CODES WILL HELP BUILD PUBLIC UNDERSTANDING AND SUPPORT FOR THE POLICIES THAT DELIVER ECONOMIC GROWTH AND PROSPERITY.

PROPER IMPLEMENTATION OF THE CODES OF CONDUCT SHOULD BE A CONDITION OF IMF AND WORLD BANK SUPPORT. IMMEDIATE ACTION TO PROMOTE TRANSPARENCY IN POLICY MAKING, FINANCIAL SECTOR REFORM AND CORPORATE GOVERNANCE SHOULD BE KEY COMPONENTS IN ANY REFORM PROGRAMME WHICH THE IMF AND WORLD BANK AGREE IN COMING MONTHS.

AND THE IMF AND THE WORLD BANK MUST THEMSELVES BE MORE OPEN AND ACCOUNTABLE, WITH A PRESUMPTION IN FAVOUR OF RELEASING INFORMATION AND EXTERNAL AUDIT OF THEIR PERFORMANCE.

AND THERE SHOULD BE NEW UNDERTAKINGS ON SOCIAL POLICY TOO. AN INJUSTICE ANYWHERE IS A THREAT TO JUSTICE EVERYWHERE AND THE G7 STATEMENT UNDERLINES THE IMPORTANCE OF POLICIES THAT PROTECT THE MOST VULNERABLE, THE REAL VICTIMS OF FINANCIAL CRISES, WHOSE PAIN IS VERY REAL INDEED. THAT IS WHY THE G7 HAS AGREED THERE SHOULD BE GENERAL PRINCIPLES FOR GOOD PRACTICE IN SOCIAL POLICY IN ALL COUNTRIES THAT WILL NOW BE SET DOWN BY THE WORLD BANK, AND SERVE AS A GUIDE TO BEST PRACTICE .

BUT WE ARE ALSO AGREED THAT THERE MUST BE, AS A MATTER OF IMMEDIACY , A NEW WORLD BANK EMERGENCY FACILITY, TO PROVIDE ADDITIONAL FUNDING ON SPECIAL TERMS TO THE MOST VULNERABLE GROUPS IN SOCIETY

FINANCIAL REGULATION

SECOND, GLOBAL FINANCIAL REGULATION. THE G7 MINISTERS ARE NOW AGREED TO SUPPORT THE ESTABLISHMENT OF A PROCESS FOR STRENGTHENED FINANCIAL SECTOR SURVEILLANCE USING NATIONAL AND INTERNATIONAL REGULATORY AND SUPERVISORY EXPERTISE, TO BE USED IN THE IMF'S REGULAR SURVEILLANCE OF ITS MEMBER COUNTRIES

TO THIS END, WE WILL BRING TOGETHER THE KEY INTERNATIONAL INSTITUTIONS AND KEY NATIONAL AUTHORITIES INVOLVED IN FINANCIAL SECTOR STABILITY, BETTER TO CO-OPERATE AND TO CO-ORDINATE THEIR ACTIVITIES IN THE MANAGEMENT AND DEVELOPMENT OF POLICIES TO FOSTER STABILITY AND REDUCE SYSTEMIC RISK IN THE INTERNATIONAL FINANCIAL SYSTEM AND TO EXCHANGE INFORMATION MORE SYSTEMATICALLY ON RISKS IN THE INTERNATIONAL FINANCIAL SYSTEM.

DR TIETMEYER, THE PRESIDENT OF THE BUNDESBANK, HAS AGREED TO CONSULT THE RELEVANT INTERNATIONAL BODIES ON THESE REFORMS AND I WOULD LIKE TO SEE AN INTERNATIONAL MEMORANDUM OF UNDERSTANDING, ESTABLISHING A PROPER DIVISION OF RESPONSIBILITY BETWEEN REGULATORS AND INTERNATIONAL AUTHORITIES AT THE INTERNATIONAL LEVEL.

IN THE G7 STATEMENT WE COMMIT OURSELVES TO STRENGTHEN THE REGULATORY FOCUS ON RISK MANAGEMENT SYSTEMS AND PRUDENTIAL STANDARDS IN FINANCIAL SECTOR INSTITUTIONS, IN PARTICULAR TO EXAMINE THE IMPLICATIONS ARISING FROM THE OPERATIONS OF LEVERAGED INTERNATIONAL FINANCIAL ORGANISATIONS, INCLUDING HEDGE FUNDS.

IN THIS AREA A FUNDAMENTAL PROBLEM HAS BEEN A LACK OF TRANSPARENCY AND POOR STANDARDS OF DISCLOSURE ON THE PART OF SOME FINANCIAL MARKET PARTICIPANTS. THIS IMPORTANT ISSUE WILL BE LOOKED AT BY THE BASLE COMMITTEE IN CONSIDERING AN INTERNATIONAL STANDARD OF BEST PRACTICE FOR TRANSPARENCY AND DISCLOSURE. AN AGREED INTERNATIONAL STANDARD OF BEST PRACTICE WOULD ACT AS A BENCHMARK, BOTH FOR FINANCIAL INSTITUTIONS AND THEIR REGULATORS.

THE UNITED KINGDOM IS CLEAR THAT THOSE FINANCIAL INSTITUTIONS WHO DEAL WITH HEDGE FUNDS MUST TAKE INTO ACCOUNT ALL PROPER PRUDENTIAL STANDARDS AND REQUIREMENTS OF DISCLOSURE. PROPER DUE DILIGENCE PROCEDURES ARE ESSENTIAL.

BRITAIN ALSO BELIEVES THAT, AS PART OF THE GENERAL REVIEW OF CAPITAL ADEQUACY RULES, THE BASLE COMMITTEE NEEDS TO EXAMINE THE APPROPRIATE TREATMENT OF BANKS' EXPOSURES TO HEDGE FUNDS SO THERE IS PROPER RECOGNITION OF THE RISKS INVOLVED.

AND, AS THE CHAIRMAN OF THE FINANCIAL SERVICES AUTHORITY, HOWARD DAVIES, HAS EMPHASISED, MANAGEMENTS OF FINANCIAL INSTITUTIONS HAVE A RESPONSIBILITY TO ENSURE THAT CIRCUMSTANCES CAN NEVER ARISE IN WHICH PERSONAL RELATIONSHIPS WITH POTENTIAL COUNTERPARTS GET IN THE WAY OF APPROPRIATE DUE DILIGENCE. HE SAID THAT THERE MUST BE COMPLETE TRANSPARENCY IN RESPECT OF SENIOR MANAGEMENTS' PERSONAL INVESTMENTS IN COUNTERPART FIRMS TO AVOID ANY SUSPICION OF CONFLICTS OF INTEREST. I FULLY ENDORSE THESE REMARKS.

THE STATEMENT FROM G7 HEADS OF GOVERNMENT SAID THAT THEY WOULD EXAMINE NOT ONLY THE IMPLICATIONS OF THE OPERATION OF HIGHLY LEVERAGED OPERATIONS OF OFFSHORE INSTITUTIONS BUT ALSO HOW THEY CAN ENCOURAGE OFFSHORE CENTRES TO COMPLY WITH INTERNATIONALLY AGREED STANDARDS. THIS IS A PARTICULAR ISSUE FOR THE UK BECAUSE LONG TERM CAPITAL MANAGEMENT WAS REGISTERED IN THE CAYMAN ISLANDS.

THIS GOVERNMENT IS COMMITTED TO IMPROVING STANDARDS OF REGULATION AND REGULATORY CO-OPERATION IN OUR OVERSEAS TERRITORIES AS WELL AS TO IMPLEMENTING THE EUROPEAN, G7 AND OECD INITIATIVES TO TACKLE UNFAIR TAX COMPETITION.

WE MUST NOT LET HIGH RISK HEDGE FUND SPECULATION BY A FEW, TRANSLATE INTO WIDER RISKS FOR THE MANY AND DESTABILISE THE FINANCIAL SYSTEM ON WHICH WE ALL DEPEND FOR PROSPERITY.

SO BY INTERNATIONAL EXAMINATION OF THESE ISSUES OF CONCERN - TRANSPARENCY IN HEDGE FUNDS, PROPER DUE DILIGENCE PROCEDURES, , TACKLING POTENTIAL CONFLICTS OF INTEREST AND DISSEMINATION OF STANDARDS TO OFFSHORE CENTRES - GOVERNMENTS CAN PLAY THEIR PART IN MINIMISING THE IMPLICATIONS OF FUTURE SUDDEN AND SYSTEMIC DISTURBANCES.

CRISIS PREVENTION

FINALLY, G7 MINISTERS ARE AGREED ON THE NEED FOR A NEW PROCEDURE FOR CRISIS PREVENTION, AND TACKLING CONTAGION.

-THE CENTRAL ELEMENT WOULD BE AN ENHANCED IMF SUPPLEMENTARY RESERVE FACILITY WHICH WOULD PROVIDE A CONTINGENT SHORT TERM LINE OF CREDIT FOR COUNTRIES PURSUING STRONG IMF APPROVED POLICIES. THIS FACILITY COULD BE DRAWN UPON IN TIMES OF NEED AND WOULD ENTAIL APPROPRIATE INTEREST RATES ALONG WITH SHORTER MATURITIES;

-THE FACILITY COULD BE COMPLEMENTED, IN INDIVIDUAL CASES, BY BILATERAL CONTINGENT FINANCING;

-AND THE FACILITY WOULD BE ACCOMPANIED BY APPROPRIATE PRIVATE SECTOR INVOLVEMENT;

AND THE G7 HAVE ALSO AGREED THAT THERE ALSO NEEDS BE A BETTER LONG TERM MECHANISM FOR INTERNATIONAL AUTHORITIES TO WORK WITH THE PRIVATE SECTOR AND NATIONAL AUTHORITIES IN HANDLING DEBT PROBLEMS ,INCLUDING DEBT RESCHEDULING, AT TIMES OF POTENTIAL CRISIS. WE ARE NOW ASKING:

THE PRIVATE SECTOR TO ADOPT "COLLECTIVE ACTION CLAUSES" TO FACILITATE MORE ORDERLY WORKOUT ARRANGEMENTS, AND WE WILL CONSIDER THE USE OF SUCH CLAUSES IN OUR OWN SOVEREIGN AND QUASI-SOVEREIGN BOND ISSUES;

WE ARE ALSO ASKING THE WORLD BANK, IN COOPERATION WITH THE IMF TO WORK WITH THEIR MEMBERS TO PUT IN PLACE EFFECTIVE INSOLVENCY AND DEBTOR-CREDITOR REGIMES; AND ;

THE IMF TO CONSIDER LENDING INTO ARREARS, UNDER CAREFULLY DESIGNED CONDITIONS AND ON A CASE BY CASE BASIS;

WE WANT THE PRIVATE SECTOR TO BUILD UPON ITS EXPERIENCE WITH SOME EMERGING MARKET COUNTRIES IN DEVELOPING NEW MARKET BASED CONTINGENT FINANCING MECHANISMS.

G7 GOVERNMENTS WILL NOW SUPPORT THE MORE ACTIVE USE OF LOAN GUARANTEES TO ENCOURAGE GREATER PRIVATE SECTOR INVOLVEMENT IN EMERGING MARKET FINANCING.

FOLLOWING THE WELCOME UNITED STATES CONGRESS DECISION, WE CALL FOR THE IMF QUOTA INCREASE AND THE NEW ARRANGEMENTS TO BORROW TO BE IMPLEMENTED AS SOON AS POSSIBLE. TOGETHER THEY WILL PROVIDE ADDITIONAL IMF RESOURCES OF 90 BILLION DOLLARS TO ENSURE THE STABILITY OF THE INTERNATIONAL FINANCIAL SYSTEM.

CONCLUSION

GLOBALIZATION HAS HAPPENED. WE MUST NOW MAKE IT WORK IN HARD TIMES AS WELL AS GOOD. AS WE HAVE SHOWN WE DO NOT NEED NEW INSTITUTIONS, BUT WE DO NEED NEW RULES AND NEW DISCIPLINES . AND I WANT TO THANK OTHER G7 MINSIETRS AND CENTRAL BANK GOVERNORS-AND HEADS OF GOVERNMENT WHO HAVE BACKED THIS WORK ALL ALONG - FOR WORKING THROUGH THIS NEW AGREEMENT

TAKEN TOGETHER THE REFORMS WE HAVE AGREED - GLOBAL FINANCIAL REGULATION, CODES OF CONDUCT, AND MECHANISMS FOR CRISIS PREVENTION AND CRISIS RESOLUTION - REPRESENT THE FIRST STEP AND NOW , SET THE AGENDA FOR THE MOST RADICAL RESTRUCTURING OF THE INTERNATIONAL FINANCIAL ARCHITECTURE SINCE ITS CREATION IN THE 1940S, MAKING US BETTER EQUIPPED TO TACKLE THE CHALLENGES OF THE 1990S AND THE CENTURY AHEAD.

AND I COMMEND THIS STATEMENT TO THE HOUSE.