RUBIN SAYS MEETING OF GLOBAL FINANCE MINISTERS PLANNED

[USIA]

USIS Washington File

21 January 1998

TEXT: RUBIN SAYS MEETING OF GLOBAL FINANCE MINISTERS PLANNED

(Asian financial crisis will be a key focus) (4,560)

Washington -- U.S. Secretary of the Treasury Robert Rubin says that a
meeting of global finance ministers will be held within the next
several months to address issues of global financial stability,
including recent events in Asia.

"We will convene a meeting later this spring with finance ministers
from around the world to share our views ... and to begin a consensus
on further steps," Rubin said in January 21 remarks at Georgetown
University on the Asian financial situation.

Rubin said the meeting will focus on improving the notification and
publication of country financial data, strengthening the role of the
international financial institutions, examining how the private sector
can bear an appropriate share of the burden during times of financial
crisis, and strengthening the regulation of financial institutions in
emerging economies.

The U.S. treasury secretary said that the effects of the Asian crisis
on the U.S. economy are so far relatively moderate and that solid U.S.
growth with low inflation are still projected for the next year.
However, he warned that should the crisis in Asia spread more broadly
to other emerging markets, "the impact on American workers and
businesses could be much greater."

"Simply put, we cannot afford to stand back and gamble that the crisis
will resolve itself," he said.

The key element in a global program of support for Asia is
International Monetary Fund supported programs of structural and
financial reform, he said. These programs, in some cases, must be
supported by temporary financial assistance.

"Without this, these countries face the risk of default, either by the
sovereign or systemically in the financial sector, which could readily
result in deep and prolonged distress in these countries, possible
contagion effects for emerging and developing countries around the
world, and potentially serious impacts on the industrialized
countries, including our own," Rubin said.

Rubin said that so far both global efforts and actions by the Asian
nations have succeeded in limiting the contagion effect.

"While nobody can say for certain what will happen, the countries in
Asia have great underlying strengths, such as high savings rates, firm
commitments to education, and strong work ethics and, with a sustained
commitment to the necessary reforms, they are well positioned to
re-establish strong economic growth and sound currencies going
forward," he said.

Following is the text of Rubin's remarks as prepared for delivery:

(begin text)

Today I would like to discuss the financial crisis in Asia; why the
United States must protect its vital economic and national security
interests by working to help restore financial stability and economic
growth to that troubled region; and why acting promptly and
effectively to do so protects the economic interests of every
American.

To begin, I think it is important to place the recent events in Asia
in the context of the emergence of the global financial system. Over
the last several years, we have entered a new era for global financial
markets and the global economy -- an era of interdependence,
complexity and opportunity. Expanding economic ties through greatly
increased trade and vastly increased capital flows has brought
tremendous benefits to the American people through greater exports,
more high-paying jobs, and higher standards of living and through
lower inflation than would have been expected with the strong growth
we've had. And countries in the developing world and emerging markets
have also benefited enormously from this environment, which has
allowed them to attract previously unimaginable flows of private
capital for investment. That investment has helped foster growth and
lift millions out of poverty.

Yet just as this era brings great opportunities for the United States
and the rest of the world, so does it present new risks. In recent
months, these risks have been brought home as financial instability in
Asia has shaken the region and affected markets around the world. Just
a few years ago, it would have been unimaginable for the fluctuations
of the Thai baht, or the fortunes of the Korean stock market to impact
U.S. markets to be printed on the front page of newspapers every day.

In the face of this challenge, our first job is clear: to help
stabilize the immediate crisis. Yet, to make the most of the
opportunities and limit the risks of the new global financial system
and to have a viable situation for the years ahead, we must also
modernize the architecture of the international financial markets that
we helped create and that has served us so well for the last fifty
years. This will be a long and complex process -- which we actually
began several years ago -- involving both great intellectual effort
and extensive international coordination, yet it is imperative for the
strength of our economy and the prosperity of our citizens as we enter
a new century.

The United States has enormously important economic and national
security interests at stake in promoting restoration of financial
stability in Asia. When we act to resolve the Asian crisis, we act to
protect and benefit the American people.

The countries in Asia are our customers, our competitors and our
security partners. Financial instability, economic distress, and
depreciating currencies all have direct effects on the pace of our
exports, the competitiveness of our companies, the growth of our
economy and, ultimately, the well-being of American workers. Thirty
percent of U.S. exports go to Asia, supporting millions of U.S. jobs,
and we export more to Asia than Europe. In states like California,
Oregon and Washington, exports to Asia account for more than half of
each state's total exports.

Thus far, the effects on our economy, though real, are relatively
moderate and the most likely scenario for the next year is continued
solid growth and low inflation. However, the risks in this crisis are
not just confined to the Asian countries now most directly involved.
Roughly forty percent of our exports have been going to emerging
markets around the globe. If the crisis were to spread more broadly to
other emerging markets, then the impact on American workers and
businesses could be much greater. Simply put, we cannot afford to
stand back and gamble that the crisis will resolve itself.

The United States also has critical national security interests in
seeing a restoration of financial stability in the region. We have
100,000 troops based in Asia, 37,000 on the Korean peninsula alone,
where we have spent 45 years keeping the peace, and where North and
South Korea have only just begun negotiating a possible end to their
conflict. History has shown that economic distress and financial
instability can threaten political stability and security. A stable
and prosperous Asia is more likely to be a peaceful Asia.

Action on a global scale is not easy, but the United States cannot
turn its back on this crisis in the hope that we will remain insulated
from its effects and markets alone will cure the problem. It's neither
desirable nor possible to save countries from the consequences of
structural deficiencies and bad policies, but we can work to support
an international effort to help countries that help themselves, and
that is very much in the interest of the American people. By
reestablishing financial stability and economic well-being, these
countries will once again be strong markets for American goods, will
have stronger currencies that will help the competitiveness of our
goods in world markets, and will enjoy the economic conditions
conducive to political and social stability. There are no guarantees
for success, and even with success, these countries' financial and
economic difficulty will persist for some while the reforms take hold
and lead to renewed confidence and a return to solid growth. But we
must do everything sensible to help address this crisis, because the
alternative of doing nothing will lead to far deeper and far longer
financial instability and economic duress.

Before I discuss the steps the United States has taken to confront
this crisis, let me offer a few thoughts on what has happened in Asia.

While each of these countries enjoyed decades of strong growth and
rising standards of living for their people, they also had deep seated
common and individual problems. At the core, for all of them, close
links between governments, banks and corporations led to fundamentally
unsound investments by corporations funded by unsound lending by
banks. Their financial systems lacked transparency, which masked the
extent of the problem. They had inadequate financial regulation and
supervision. In short, the essential underpinnings to a modern
financial system were weak or did not exist. Additionally, several
economies had large current account deficits, fixed exchange rates and
inadequate monetary policies -- an unsustainable combination.

Foreign investors injected an extraordinary amount of capital into
these flawed systems without due weighting of the risks involved. From
1990 to 1997, foreign capital inflows quadrupled in the region. Anyone
who has spent substantial time enmeshed in markets, as I have,
appreciates that financial markets tend to go to extremes, including
the market for bank credit extension -- and when they reverse, they
sometimes do so with great force.

In Asia, massive amounts of capital flowed into banks, which then
extended unsound loans, including a fundamental mismatch between short
term bank funding in foreign currency and lending on long term
projects of questionable merit.

No single factor that I have described would likely have produced a
financial crisis. While economies usually adjust in a relatively
orderly fashion to market swings, in this case the combination of
factors proved combustible. When these crises began, foreign investors
started to withdraw capital, local companies sought to hedge hard
currency exposures, exporters stopped bringing their export earnings
home, and citizens moved their savings abroad. I think it has now
become accepted that most of the pressure on these currencies came
from local sources and not foreign investors. This process brought
stock prices and land values down sharply across the region, imposed
severe strains on Asian banks and companies, and led to acute
depreciations of exchange rates and greatly reduced or negative
economic growth.

The international community has been involved in a major effort to
focus countries on these underlying problems, and to assist them in
addressing them. These issues have been a central focus of the IMF in
all its many interactions with these countries as well as our
interactions with these countries both bilaterally and
multi-laterally. And as I will explain later, the United States has
been working actively to strengthen the architecture of the
international financial system to help better prevent and better
manage financial crisis that could threaten our interests. However,
before a crisis occurs, we have the capacity to advocate but not to
force sovereign countries to take actions they do not believe to be in
their interest.

From the very beginning of this crisis, we at Treasury, in close
cooperation with Chairman Greenspan and the staff of the Federal
Reserve Board, have been deeply involved in crafting an international
response involving the countries in the region, the G-7, the World
Bank, and the Asian Development Bank -- all working with the
International Monetary Fund. The President's national security team
including Secretary Albright, Secretary Cohen and National Security
Advisor Berger, have been integrally and critically involved in this
effort.

The program we have supported has focused on four key elements:
supporting reform programs in individual nations; providing temporary
financial assistance when needed; encouraging strong action by Japan
and the other major economic powers to promote global growth; and
fostering policies in other developing and emerging economies to
reduce the risk of contagion. Let me describe each of these elements.

First, and most importantly, our approach requires that these
countries take the concrete steps necessary to reform their economies.
These programs, which are designed with the IMF, address the specific
causes of each nations' crisis and can be adapted as the situation
changes. The fundamental objectives of these reforms are to restore
financial stability and confidence, promote stronger and more stable
exchange rates, attract new flows of capital, and restore economic
growth. These reform programs have at their core strengthening
financial systems, improving transparency and supervision, eliminating
the interrelationships between banks, the government, and commercial
entities, opening capital markets, and appropriate monetary and fiscal
policies. If countries don't take these steps, no financial assistance
is made available.

These are not austerity programs. These are primarily programs of
structural and financial reform. However, in financial crises like
these, where confidence is critical, some fiscal and monetary
tightening is necessary to stabilize the currency and restore
confidence. It is the crisis and the ensuing loss of confidence -- not
the reform programs -- that leads to economic hardships for the
population. The reform programs are the best and probably the only
viable way for these countries to limit the degree and duration of
economic distress and reestablish confidence, stability and growth.

The second element of our approach is to support these programs of
reform with temporary financial assistance if necessary. When a
nation's financial stability is at risk, this money provides the
breathing room for a nation to establish the conditions to restore
economic confidence, attract private capital and resume growth. These
programs of financial assistance allow the external debt to be
refinanced over a longer period of time. Without this, these countries
face the risk of default, either by the sovereign or systemically in
the financial sector, which could readily result in deep and prolonged
distress in these countries, possible contagion effects for emerging
and developing countries around the world, and potentially serious
impacts on the industrialized countries, including our own.

The central provider of this financial assistance is the International
Monetary Fund, with additional support from the World Bank and the
Asian Development Bank. In addition, the United States has joined
other industrial countries in indicating its willingness to provide
supplementary financial resources in some situations if a country
fully adheres to the reform program and further resources become
necessary. Up to this point, we have not actually dispersed any of
this money, and those dispersals -- to the extent they occur -- will
be in the form of short term loans whose payment is guaranteed by the
borrowing government.

While the temporary financial assistance is an important part of an
effective response to these problems, let me stress, no amount of
official money alone can solve these problems and official money is
not the key. Only when sound policies are pursued, will confidence --
and capital -- return.

Private financial institutions have an important role to play in
solving these problems. In the case of Korea, for example, we stated
that the United States would provide funds only in the context of
international banks addressing Korea's immediate financing needs. This
linkage has helped produce a short-run rollover by bank creditors in
Europe, Japan and the United States which has helped calm Korean
markets more recently. What is important now is that the private
financial institutions move forward on a voluntary basis to negotiate
with Korea a longer-term financing plan to help reestablish financial
stability. And an approach like this can be an important part of any
viable response to similar crises in the future.

The third element of our approach is to encourage the major industrial
countries to act to strengthen their own economies and take the steps
necessary to promote the strong economic and financial environment
globally which can contribute to resolving the crisis in Asia. The
policies pursued by the United States over the past five years, which
have produced lower budget deficits, lower interest rates, low
inflation, and strong growth have made a major contribution to
supporting growth around the globe. But we cannot play this role
alone.

In Europe, whose economies, when combined, are larger than the United
States, and where growth is starting to rebound, it is very important
to undertake structural reforms and other policies necessary to
strengthen this recovery so that Europe, too, can be an engine of
global growth.

Japan, the second largest economy in the world, has an especially
crucial role to play. It is absolutely critical that Japan take the
steps necessary to deal with the issues in its financial system, to
generate solid growth in domestic demand and to open its markets. A
weak Japan is a source of weakness for the region. A strong Japan
would be a source of strength for the region. Strong actions by Japan
are vitally in the interest of Japan, the Asian region and the global
economy.

China also plays a critical role in Asia's economic stability. I want
to welcome the statements by Chinese officials made in recent weeks
reconfirming their commitment to exchange rate stability and to
dealing effectively with the economic challenges that they face.

Fourth, and finally, we have worked closely with the IMF to encourage
other emerging markets to make policy adjustments to reduce their
vulnerability to contagion from the countries now in crisis. From the
APEC finance ministers meeting in April to the meeting of global
finance ministers and central bank governors in Hong Kong in September
to the meeting of Latin American finance ministers in Santiago last
December, we've worked closely to promote structural, financial, and
macroeconomic policies that are critical to stability. We have also
worked closely with Russia, Eastern Europe and other transitional
economies to help reduce their risk of contagion.

At the beginning of the crisis in Asia, there was widespread concern
that it might spread throughout emerging markets around the globe. But
thus far, the strong efforts to re-establish financial stability in
Asia, and reform measures in many developing countries elsewhere have
succeeded in limiting the contagion effect after the initial impact.

The IMF is the right institution to be at the center of these support
programs. This institution, which was established at the initiative of
the United States fifty years ago, has long benefited Americans. The
core mission of the IMF has always remained the same -- to promote
financial stability, trade and economic growth.

The United States has worked forcefully to help the IMF meet the new
challenges of the modern financial system, and there is simply no
other institution capable of performing its mission. With tremendous
expertise and technical resources, the IMF has the ability to shape
effective reform programs. As a multinational organization, it is able
to require an
economically distressed country to accept conditions that no
contributing nation could require on its own. Finally -- and
critically important -- the IMF internationalizes the burden during a
global financial crisis by using its pool of capital instead of the
United States having to bear that burden alone.

The American people should also know this: over the past fifty years
our contribution to the IMF has not cost the taxpayer one dime. When
the IMF draws on our commitments, we receive a liquid, interest
bearing offsetting claim on the IMF. There are no budget outlays. Our
contribution does not increase the deficit, or divert resources from
other spending priorities.

Support for our periodic pledge to the IMF, and support for a new
emergency fund, the New Arrangements to Borrow, which supplements the
IMF's resources to deal with crises such as this one, is critical.
This funding is absolutely necessary to enable the IMF to respond
effectively if this crisis were to spread and intensify -- which we
all want to avoid event -- and to deal with future crises that could
similarly affect the interests of the American people. Moreover,
failure to provide funding could reduce our leverage in the IMF, and
could shake confidence in American leadership in the global economy at
a time when confidence is so important in re-establishing stability in
Asia.

There is no question that the approaches to crisis prevention, and to
dealing with crisis when they occur, must advance to meet the new
challenges of the international financial system, and we have been and
are working energetically toward that objective. But we cannot afford
to wait for these extremely complicated issues to be resolved to deal
with IMF funding. The United States needs an IMF that is financially
equipped to help protect U.S. interests right now. If we close the
door on the IMF, we hurt ourselves.

The financial instability in Asia involves enormously complicated
problems and presents challenges the global financial system has never
faced. While there are specific dimensions in each of these programs
that could be debated, I am confident that overall these are strong
well-crafted programs and the best and probably the only viable way to
help these countries re-establish stability and confidence. Moreover,
these problems are going to take time to resolve, and we must proceed
energetically but with patience, and with determination.

A number of concerns have been raised with respect to these programs.
Let me try to respond to them.

First, some have said that it's not in our interest to help countries
that are seen as our competitors, especially when falling currencies
make their products cheaper. The exact opposite is the case. Without
support, it is highly likely that these countries will have much
deeper recessions and much weaker currencies, hurting U.S. exports and
our competitiveness with far greater damage to American businesses and
workers. With support, these countries have the best chance to restore
growth, restore the capacity to buy more of our goods, and restore
currency values.

A second criticism has been that these programs do not require nations
to take specific steps to promote the environment, protect core labor
standards and ensure human rights. Let me be clear: these issues are
critically important to the United States, and we are pursuing them
actively through other initiatives and in other fora. And there is no
question that financial stability, growth and prosperity provide an
environment most conducive to advancing these objectives, while
instability and economic duress are inimical to these objectives.
Moreover, designing and obtaining sustained adherence to programs to
restore financial stability is extremely difficult. To add these three
objectives -- however important -- would vastly complicate this effort
and greatly reduce its chance of success. Also, if these objectives
were added others would clearly seek to add still more objectives, and
the whole undertaking would become impossible.

Third, some have said that providing financial assistance to these
countries shields investors and countries from the consequences of bad
decisions and sows the seeds of futures crises. This problem -- often
called the problem of moral hazard -- has two dimensions: the impact
on the behavior of countries, and the impact of the behavior of
investors and lenders. For the countries, it should be obvious that
they are not now shielded from the effects of their bad decisions.
They may receive temporary financial assistance, but they also
inevitably go through a very difficult economic period before recovery
takes hold. No country would opt to go through what Mexico went
through, or what various Asian countries are going through now.

As to investors and lenders, the problem is more complicated. Let me
just say that I would not give one nickel to help any creditor or
investor. And, in fact vast numbers of investors and creditors have
taken large losses in Asia. Foreign banks and other creditors to
corporate and other borrowers throughout the region now have many
troubled or bad loans, real estate investors have almost universally
sustained large asset depreciations, and investors have suffered the
consequences of stock markets that are down more than fifty percent
from their highs. Just today three major U.S. banks -- J.P. Morgan,
Chase, and Citibank -- have reported that developments in Asia have
had a substantial negative impact on their profits. The crisis in Asia
has clearly taken its toll on American investors and creditors.

To those who argue that we must ensure that all creditors take a loss,
my answer is this: The reality of the situation is much more complex.
A byproduct of programs designed to restore stability and growth may
be that some creditors will be protected from the full consequences of
their actions. But any action to force investors and creditors
involuntarily to take losses, however appropriate that might seem,
would risk serious adverse consequences. It could cause banks to pull
their money out of the country involved. It could reduce that nation's
ability to access new sources of private capital, and, perhaps most
tellingly, it could cause banks to pull back from other emerging
markets.

Having said this, it is critically important that we work toward
changing the global financial architecture so that creditors and
investors bear the consequences of their decisions as fully as
possible, while minimizing adverse consequences. But devising such
architectural changes is difficult and complex. We cannot wait until
that work is complete to take the steps necessary to deal with the
crisis at hand that so powerfully affects our interests.

Fourth, some say that doing nothing would be best, because markets
would ultimately solve the problem on their own. Let me say as someone
who spent 26 years on Wall Street and who has an enormous belief in
markets, there are problems that markets alone simply cannot solve. In
this country, we recognized that long ago, with measures such as the
Federal Reserve System, the Securities and Exchange Commission and
deposit insurance. Laws and institution support healthy free market
activity by dealing with issues beyond the ability of unfettered
markets to handle. There is simply too much risk that markets alone
will not resolve these problems of financial instability, and
therefore given our stakes in Asia we must try to help get these
countries back on track.

The global economy needs architecture as modern as the markets. That
is why, even as we have tried to confront the immediate crisis in the
Asian region, we have also begun an intensive effort to improve the
global financial system to both better prevent crises from occurring
and better deal with them if they do occur. President Clinton began
this effort four years ago at a G-7 meeting in Naples. At the summit
that followed in Halifax in 1995, we launched a broad international
effort to strengthen safeguards in the global financial system. Two
important parts of this initiative are an international program to
strengthen disclosure and the development of core principles for
supervision in emerging market financial systems.

To build on these efforts, we have begun an intensive internal effort
with the Federal Reserve Board and others, to identify and analyze
possible mechanisms for dealing with new challenges to the
international financial system. As I have said, this is a very complex
undertaking which will take time and, while there have been some
suggestions which may look attractive on their face, there are no easy
answers. We also will be working with our G-7 partners and others on
this issue, and at President Clinton's initiative, we will convene a
meeting later this spring with finance ministers from around the world
to share our views on this subject and to begin to develop a consensus
on further steps.

This initiative will focus on four objectives: improving transparency
and disclosure; strengthening the role of the international financial
institutions in helping to continue to deal with the challenges of
today's global markets; developing the role of the private sector in
bearing an appropriate share of the burden in times of crisis; and
strengthening the regulation of financial institution in emerging
economies.

This is a period of considerable uncertainty and challenge for the
global financial system, and for the countries most directly involved
in the crisis. As I said earlier, even under the best of
circumstances, these crises take a time to abate. The process is bound
to be a difficult one for the people of these countries. But the
approach I have described today is the best and most likely the only
viable way to succeed. While nobody can say for certain what will
happen, the countries in Asia have great underlying strengths, such as
high savings rates, firm commitments to education, and strong work
ethics and, with a sustained commitment to the necessary reforms, they
are well-positioned to re-establish strong economic growth and sound
currencies going forward.

The United States has enormous economic and national security
interests in a strong and vibrant Asia. Financial instability in Asia
is a threat not only to the region, but to economies all over the
world, and even ourselves. We cannot ignore these risks. We must act
to best protect and promote our interests.

As I said at the beginning, we are at the frontier of a new era. When
America has entered new eras in the past it has done so with vigor and
determination. Our leadership is critical to guiding the global
economy into the 21st century, and to protecting the interests of the
American people. This is no time to turn our back. We must confront
the crisis today, and build for tomorrow. The actions we take now are
critical to our economic well-being today, and for the future. Thank
you very much.

(End text)