Amid a deepening crisis in Argentina, the world's leading industrial nations yesterday endorsed new approaches for containing future crises, including a U.S.-backed plan to prod countries and their creditors to adopt more-flexible loan terms aimed at averting catastrophic defaults.
The action plan, which was issued after a meeting in Washington of top economic policymakers of the Group of Seven nations, was one of the most important statements by global leaders on handling financial crises such as those that have devastated nations including Indonesia and Russia.
The plan stopped well short of more radical approaches, favored by some economists and policymakers, to change global financial rules and avoid the much-criticized, multibillion-dollar rescues of the past. The plan stated, for example, that the G-7 was "prepared to limit" the size of future International Monetary Fund bailouts, but that was qualified by a giant escape clause, "except when circumstances justify an exception."
The plan's disclosure came as one of the IMF's most embarrassing failures, the Argentine crisis, appeared to be reaching a new impasse. Top Argentine officials, who late Friday issued an order closing banks indefinitely to stem an outflow of deposits, met yesterday with members of the IMF's policy-setting International Monetary and Financial Committee to press their case for new emergency loans. The committee later made it clear in a statement that before receiving aid, Buenos Aires must go further in adopting reforms, including deep budget cuts.
At a news conference yesterday, IMF Managing Director Horst Kohler said that in talks with Argentine Economy Minister Jorge Remes Lenicov: "I strongly reiterated that the IMF is committed to concluding [an agreement with Argentina], but that this conclusion needs to be built on a sustainable approach." An IMF mission is to return to Buenos Aires next month to resume negotiations, he said.
Kohler dismissed concerns that it may be politically impossible for Argentina to quickly resolve one of the main sticking points in the talks -- the need for spending cuts by the nation's provinces. "It is clear that one of the root causes" of Argentina' current mess is overspending by the provinces, he said.
Remes Lenicov was quoted in Argentine newspapers yesterday as saying that bank closures could end as early as Wedneday, after the nation's congress approves legislation protecting the banking system from a runs on deposits. Depositors have been winning lawsuits against the government's restrictions on bank withdrawals, and the government wants to force such claimants to accept their money in the form of bonds rather than cash.
The bank closures and the new law risk triggering a renewed backlash among Argentines, who are furious about the impact on the economy and the banking system of the government's default and currency devaluation in January.
The G-7 meeting was one of the main events of this weekend's gathering of officials from the 183 member nations of the IMF and World Bank, which began without incident as protesters against corporate globalization demonstrated near the World Bank's heavily guarded headquarters.
The G-7 also issued a communique hailing evidence that "economic recovery from [last year's] slowdown is underway." Finance ministers also announced their first joint freezing of assets held by a group and individuals identified as having affiliations with terrorists; previous freezes were undertaken by the United States and followed by other nations.
Of a dispute among G-7 members over a U.S. proposal for the World Bank to provide half of its aid to the world's poorest countries in the form of grants instead of loans, U.S. Treasury Secretary Paul H. O'Neill said, "We're not quite at a final conclusion point, but we're in agreement that certain categories of aid should be in the form of grants."
The G-7 action plan on future crises handed a victory to the U.S. Treasury, which has argued that the best way to address the problem is for countries and their creditors to change the terms of bond and loan contracts.
In many cases, overly indebted countries that run into financial trouble are unable to restructure their debts because such moves require the unanimous consent of their creditors -- a handful of which can block the restructuring, thereby forcing the country into default. Under the U.S. plan, countries would issue new bonds and negotiate new loans with provisions allowing a super-majority -- 75 percent, for example -- of creditors to approve a restructuring.
The G-7 also said it "supports further work" on a rival plan, advanced by the IMF, that would establish a sort of international bankruptcy system that would give financially strapped countries protection from their creditors.
Echoing the Treasury's official position, the G-7 said that since the IMF bankruptcy plan would take considerable time, it "should not delay the expeditious implementation" of the proposal to change bond contracts.
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