Mervyn A. King
The official sector has been working actively on crisis resolution issues since at least the Rey Report in 1996. Since then, crisis resolution has remained near the top of the agenda of a number of official sector bodies, including the IMF, the G22, the G20, the G10 and the G7. Recent crises in Turkey, Argentina, Uruguay and - most recently - Brazil have, if anything, given that work added impetus.
Partly in response to these crisis events, some new ideas for dealing with crises have been put forward by, among others, the IMF and the US Treasury - and indeed by the Bank of England, working in collaboration with colleagues at the Bank of Canada. There are tentative signs that some of these words have begun to be put into action. The G7 Action Plan, announced at the time of the IMF Spring Meetings in 2002, was recognition of that.
But where is this implementation effort best directed? What are the "missing links" in the international financial architecture? And can we be confident these measures will lower the incidence and costs of crisis in the future?
First, the theory. Any crisis resolution framework needs to balance two objectives: minimising the costs of crisis when they happen, on the one hand; and minimising the chances of inducing further crises in the future, on the other. So the official initiatives currently on the table should be assessed not only on their capacity to clean up a problem, but also on their likely effect on incentives. Otherwise, resolving today's crisis will merely sow the seeds for tomorrow's.
Meeting the second objective means designing an international architecture which gets incentives right: the incentives of debtors, ensuring they meet contractual payments when they are able to do so, but that they promptly address payments problems when these arise; the incentives of private creditors, ensuring they assess and price the risks they take