IMFSurvey: The recent crisis in Latin America has shaken hopes that the international financial community finally has a handle—post-Asian crisis—on how to prevent and resolve financial crises. Aren’t we making any progress?
Geithner: We have made considerable progress. If you look around the world, you see countries that have invested in disclosing more, building more resilient financial systems and exchange rate regimes, and buying more insurance so that they have better shock absorbers against adversity. Those investments will have substantial returns in terms of reduced vulnerability. Already, financial markets are differentiating better among countries. But it’s not realistic to expect a world without crises. We still see a number of vulnerable countries. The combination of large financing needs, the damage to credibility of past defaults or periods of high inflation, and the uncertainty that comes with political transitions are a formidable challenge, particularly in a less benign global economic and financial environment.
IMFSurvey: Is there any hope of coming up with a way to forecast crises, so that policymakers can move more quickly to head them off?
Geithner: Most of the serious people who look at this question don’t have a lot of confidence that we are going to find models that can predict crises with accuracy. We need to assume that we’re in a world of substantial volatility and uncertainty. In this reality, the most promising reforms are those that encourage countries to put in place policies with stronger cushions—in terms of reserves, fiscal balance, liability-management strategies, and strong financial systems—as well as those that make the IMF better equipped to help countries deal with financial stress when it comes. Progress in these areas will, I believe, be more promising than putting vast resources into ever more sophisticated early warning models.
IMFSurvey: What is the IMF doing now that it didn’t do before to try to prevent crises?
Geithner: My sense is that there has been a lot of change over the past several years. For example, there is now a more systematic internal effort in place for continuous monitoring of vulnerabilities across the membership. The quality of the internal work on sources of risk and sustainability assessments is, I believe, better than that done anywhere else. There is also now more systematic use of diagnostic tools, like those in the Financial Sector Assessment Program and reports on standards and codes, to help strengthen institutions and policy frameworks. These changes have had a meaningful impact already, and they hold substantial additional promise.
IMFSurvey: What made the Latin American crisis different from the Asian crisis?
Geithner: The past decade of financial crises underscored the lesson that, if you are a general, you don’t want to think about future threats through the prism of your last war. In the 1990s, the causes of individual crises were remarkably diverse, from excessive exposures in private sector balance sheets to more classic unsustainable fiscal and debt positions. This is one reason why the IMF needs to have a stronger and more flexible set of instruments to deal with the diverse challenges its members face.
IMFSurvey: A recent in-house review said that our surveillance should be of higher quality, more focused, more effective. How can our advice have a greater impact on policies?
Geithner: The effectiveness of surveillance depends critically on the quality of our advice. It depends on how much we can bring to the table in terms of practical and compelling solutions, framed with a well-grounded knowledge of the domestic political constraints on policymakers. It depends on our capacity to integrate the lessons from cross-country experience into our advice. And, ultimately, it depends on what our members are prepared to do. These key elements can’t be achieved simply through better internal procedures and documentation guidelines in the IMF, though they can help.
IMFSurvey: To what extent is crisis prevention really a matter of politicians making the needed policy adjustments? And how can the IMF better adapt its policy advice to that reality?
Geithner: An assessment of the political environment that surrounds economic policymaking is at the center of any decision that the IMF makes. The IMF has in its resident representatives and mission chiefs some of the best resources around to assess the political dimensions of economic strategies. But we can always do more to make sure we draw on outside expertise in making our judgments, including with more systematic dialogue with a broader cross-section of people in politics, finance, and civil society in the context of missions.
IMFSurvey: Assessments of countries’ observance of international standards and codes are becoming increasingly resource intensive. Is it really contributing to crisis prevention? Without changing the size of the IMF, can we discharge this new mandate?
There is now a more systematic internal effort in place for continuous monitoring of vulnerabilities across the membership.—Timothy Geithner
Geithner: It’s still early, but the initial reviews suggest that—particularly in the core standards (on data, fiscal, financial, and monetary policy transparency, and the Basel Core Principles)—mission chiefs, country authorities, and the financial community have a growing appreciation of the value of these standards as diagnostic tools. As we move forward, however, we need to make sure the standards remain relevant, that assessments are as focused and concretely prescriptive as possible, and that we are equipped to do more systematic follow-up.
The better we are at explaining what we do and exposing people to the nature of the choices we have to make and the rationale for our decisions, the greater our credibility.—Timothy Geithner
IMFSurvey: At the Annual Meetings, financial leaders voted to move ahead on two new paths of crisis resolution—collective action clauses and a sovereign debt restructuring mechanism (SDRM). What are the next steps?
Geithner: We have a team of people working very hard to put together an operational design for the SDRM that can serve as a basis for further discussion with the IMF’s Executive Board, the financial community, and emerging market issuers. We hope to have a concrete proposal ready for review by the IMF-World Bank Spring Meetings. As for collective action clauses, there is an active effort within the financial and official communities to agree on a set of model clauses that ideally would become market practice in New York and other jurisdictions. The hope is that this would encourage emerging market issuers to adopt these clauses.
IMFSurvey: Cynics doubt these initiatives will be realized. What’s your view?
Geithner: This is a very complicated area, with many failed previous attempts at innovation. But, more than at any point during the past 10 years or so, there is now more ambition for change, more political will, and more innovative thinking on how to design a better system and a stronger legal framework for dealing with unavoidable restructurings.
IMFSurvey: The IMF recently announced new guidelines on the conditions it attaches to its loans. Will this change the way the IMF negotiates programs with borrowers?
Geithner: This initiative has already made a material difference in the way programs are designed and negotiated, the scope of conditionality, and the standards used to judge which measures are critical to a program’s success. Across a significant part of the membership, there’s been a substantial reduction in the number of conditions in IMF programs and an appropriate narrowing of the scope of IMF involvement. The guidelines themselves don’t provide a simple guide to what is critical to the macroeconomic objectives of the program and what is not, and they will not by themselves engender ownership where it has been elusive, but they will help.
IMFSurvey: How about those heavily indebted poor countries (HIPCs) that are receiving relief but now need a lot more money than originally anticipated, given weak commodity prices and the weak global economic picture?
Geithner: The HIPC framework was designed with a reasonable amount of flexibility to provide deeper relief at the completion point to make sure that debt relief can be increased to bring debt down to the levels targeted in the initiative. But it was not designed—and could not be designed—to insulate countries completely from the effects of future external shocks. The capacity to deal with those challenges was always going to depend more on policies adopted at the national level and, to some extent, on the size and concessionality of the rest of the aid envelope.
IMFSurvey: What other changes would you like to see in the way the IMF goes about its business?
Geithner: The credibility of the IMF depends mostly on the quality of its people and the quality of the decisions we make in individual circumstances. The better we are at explaining what we do and exposing people to the nature of the choices we have to make and the rationale for our decisions, the greater our credibility. We need to make sure we deliver on the extensive reforms set in motion over the past several years, but we also need to make sure that we continue to focus on the core elements that most affect the effectiveness of our policy advice, the substantive elements of program design, and our financial instruments and capacity to confront crises. It is also important not to take refuge in the fact that much of the criticism of the IMF is ill informed and comes from opposite directions—that we are systematically too tough or too indulgent, too interventionist or too market fundamentalist. We are more aware than most about where we are vulnerable to legitimate concerns, and that recognition can help shape our agenda for change. We can find ways to be responsive to legitimate concerns, without embracing what’s fashionable or expedient.
IMFSurvey: Your department was traditionally responsible for evaluating the IMF’s performance on policy advice and program design. How do you feel about the Independent Evaluation Office (IEO) and its first report on prolonged borrowing from the IMF?
Geithner: It’s an excellent report. Much of what it says and much of what it recommends is sensible and valuable. If the IEO’s future work meets this initial high standard then it can have a constructive impact on policy over time. Not everything in the IEO’s reports is going to be perfectly calibrated and perfectly fair to the constraints that the IMF faced when it made the decisions under review. But that would be a high standard for anyone to meet.
IMFSurvey: You knew the IMF pretty well before you joined. What have you learned about it since coming here that has surprised you?
Geithner: I had a lot of admiration for the institution and its people from my previous life. I am now even more impressed by the quality of the people than I was before, and by the difficulty of the decisions we face on an ongoing basis.
IMFSurvey: There has been some criticism that the U.S. administration got a bit too close to micromanaging the IMF when you were at Treasury. In hindsight, is there any truth in that?
Geithner: It’s not good for the IMF to be perceived as deferring too much to the views of individual shareholders. On the other hand, it is a reality that the IMF’s effectiveness depends on its capacity to engender a broad consensus, not just among—but importantly among—the major shareholders. We need to find a balance. The IMF does not have a monopoly on good ideas, and neither does any of the major shareholders.
IMFSurvey: Do quotas really matter if most decisions are taken by consensus?
Geithner: Since the Board tries to operate by consensus, individual chairs—including developing economies—can have a huge impact on the shape of the consensus. What matters is the quality of the idea, not just the number of votes. The effectiveness of the United States and the Group of Seven depends significantly on the quality of their ideas, the credibility of their proposals, and their capacity to engender support. When I was at the U.S. Treasury, we never had the capacity to move the consensus unless we were able to get a critical mass of countries, often from outside the Group of Seven to support the approach.
Since the Board tries to operate by consensus, individual chairs—including developing economies—can have a huge impact on the shape of the consensus.—Timothy Geithner