G7 wants IMF to publish liquidity gauges

G7 wants IMF to publish liquidity gauges
REUTERS

FUKUOKA, JULY 9: The Group of Seven leading industrial nations said on Saturday they wanted the International Monetary Fund to start publishing national liquidity indicators to help markets judge countries' financial health.

The recommendation was contained in a report on measures to strengthen the international financial system that G7 finance ministers issued at a day-long meeting on Saturday in this southern Japanese city. The report, prepared by deputy finance ministers, will be submitted for approval by G7 leaders at their summit in Okinawa, southern Japan, later this month.

The report calls for a "substantial qualitative shift" in the nature and the scope of the IMF's surveillance work in light of globalisation, large-scale private-capital flows and an emerging G7-sponsored framework of internationally agreed codes and standards.

The thrust of the G7's efforts is, via intensive monitoring of economic trends and financial flows, to provide an early warning of imbalances that could trigger a repeat of the financial crisis that swept Asia in 1997 and went on to affect Russia, Brazil and other emerging markets. The G7 said the IMF should take a particularly hard look at structural issues in the financial sector that could trigger economic instability.

"The IMF should continue to work to develop and make systematic use of indicators of national liquidity and balance sheet risks as a key part of the surveillance process. We believe that the IMF should begin publishing such indicators regularly together with relevant explanatory material," the report said.

The G7 also backed plans to make the IMF's Contingent Credit Line (CCL) cheaper and easier to access. The CCL is a new weapon in the armoury against financial crises. The idea is that a country can line up IMF cash in advance that it could tap to shore up its balance of payments in the event of a shock to its economy. To date, though, countries have shunned the CCL, reasoning that markets would regard the need for a safety net as a sign of weakness, not strength.

To encourage countries to use the facility, the G7 proposed abolishing a commitment fee for the CCL, reducing its initial charge below that of another loan window, the Supplemental Reserve Facility, and making its activation more automatic.

To deter prolonged borrowing from the IMF and to encourage countries to attract private capital, the G7 also recommended that the longer the IMF loan, the higher the interest rate should be.

The G7 sidestepped the vexed issue of voting power on the IMF board. Japan is keen for a reallocation of quotas, or membership contributions, so that Asian nations have more say in the Fund, and new IMF Managing Director Horst Koehler has expressed sympathy for the proposal.

The G7 agreed that quotas need to reflect changes in the world economy but decided merely to "take note" of the efforts under way to examine the complex formula for calculating them.

On the question of unregulated highly leveraged institutions (HLIs), such as hedge funds, which borrow heavily to finance big speculative market bets, the G7 reaffirmed its existing policy that direct regulation would be considered if improved disclosure and oversight measures prove inadequate.