OTTAWA -- The Group of Seven richest countries are edging toward a breakthrough that may come as soon as this weekend on the tricky issue of how to control international financial crises.
"If the Americans went a bit further, we'd have what I think would be a significant deal," one G7 source said.
"I think we're making pretty good progress," Finance Minister Paul Martin said yesterday in an interview, refusing to add details in case he "jinxed" the negotiations.
The G7 has been wrestling with ideas on how to manage financial crises in a calm way since Asia and Latin America shook capital markets around the world with their contagious crises in the late 1990s. Mr. Martin has been a prominent lobbyist for quick and decisive action on this front.
The G7 finance ministers meet today in Washington to discuss the state of the world's economy, and are expected to address potential resolutions to financial crises in their final communiqué.
Going into the meeting, six of the seven countries agree that countries being crushed by financial crises should be able to turn to an independent, international bankruptcy court to deal calmly and rationally with a debt restructuring -- the approach favoured and promoted by Mr. Martin. Under this proposal, a standstill of the crisis-country's capital markets would be imposed while the court restructures the country's debt.
The only G7 country not fully in support of this proposal is the United States, which has the largest financial stake in global crises through its contributions to the International Monetary Fund -- which frequently bails out crisis-ridden countries -- and through its private sector creditors, who hold large amounts of emerging-markets bonds.
A few years ago, the U.S. administration opposed even the notion of involving bondholders in the management of financial crises. IMF bailouts were the preferred approach, rather than involving the private sector in a formal debt restructuring.
U.S. Treasury officials have now entered the international debate about how to make sure the private sector bondholders shoulder part of the crisis burden. They propose including clauses in every single sovereign bond around the world, which would allow a majority of bondholders to authorize a debt restructuring.
Their proposal, however, does not go far enough for the rest of the G7 nor the IMF, which actively backs the international bankruptcy court idea.
Canada and other countries feel there is little incentive for emerging-market countries to actually add these debt-restructuring clauses to their bonds and contracts. What's more, the clauses would only apply to new debt.
Still, there's a compromise in the works. The G7 would agree to keep working on setting up an international bankruptcy court. In the meantime, the group would agree to promote the U.S.-led "contractual" approach. But -- and this is a big "but" -- the United States would also have to agree to limits on how big IMF bailouts should be in the future.
"The issue [for the G7 this weekend] is getting all these pieces together," said another G7 source.
With limits to IMF bailouts, emerging-market countries would have more of an incentive to include debt restructuring clauses in their bonds, and bondholders would have more of an incentive to make use of the clauses, Canada and other countries argue. Otherwise, the private sector will continue to assume the IMF will bail out a crisis-ridden country, at great cost to the IMF and country donors but at no cost to private sector creditors, who will recoup their money.
While the U.S. administration has been making encouraging noises lately about the compromise, other G7 countries aren't sure whether the United States is ready to sign on to an agreement this weekend, mainly because of its reservations about limits on IMF bailouts.
Still, U.S. Treasury Secretary Paul O'Neill has made it clear from the moment he took office that the IMF should not be bailing out so many countries.
For many G7 officials, the crisis in Argentina has underscored the urgency of agreeing on a crisis framework before another crisis breaks out.
But even an agreement this weekend will be too late to do anything for Argentina.
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