Chapter

Opening Speeches

Author(s):
International Monetary Fund
Published Date:
September 2005
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Opening Remarks by Rodrigo de Rato y Figaredo, Managing Director of the International Monetary Fund: The IMF at 60—Evolving Challenges, Evolving Role

Introduction: Welcome and a Few Words on the IMF’s Mission

Ladies and Gentlemen, on behalf of the IMF, let me welcome you all to this conference, which has been organized jointly with the Bank of Spain. Thank you all very much for your presence here in Madrid, where 10 years ago we celebrated the 50th anniversary of the IMF and the World Bank.

This is of course a very timely conference from my personal point of view, and I look forward to hearing your ideas on how the IMF can do its job better. I see the IMF’s main job as promoting financial stability and thereby improving the prospects for sustained growth. By doing so, the IMF also helps the international community in the global war on poverty.

An Institution with a History of Responding to Challenges

Safeguarding financial stability has always been at the core of the IMF’s mandate. It is why the institution was set up 60 years ago. But what it takes to promote financial stability has changed markedly over these 60 years because of global developments. The IMF’s tools—surveillance, lending, and technical assistance—have been developed and constantly adapted in response to these changes.

The breakdown of the Bretton Woods system, and the adoption of floating exchange rates in many countries, marked a radical departure from the world of pegged exchange rates that the IMF was set up to monitor. The IMF’s member countries amended the Articles of Agreement to give the institution a mandate to carry out a regular, comprehensive analysis of the economic situation and policies of each member country. This remains the essence of the Fund’s surveillance function.

Around the same time, the oil shocks of the 1970s, combined with macroeconomic instability in much of the industrialized world, created balance of payments problems of unprecedented severity for a large proportion of the IMF’s membership. It was at this time that developing countries became significant borrowers from the IMF, and that it became clear that many balance of payments problems were structural rather than cyclical in nature. This led to the fashioning of new lending policies and instruments geared at helping developing countries with these problems.

Recent Challenges to Financial Stability: Promise and Perils of Global Capital Flows

Over the last decade or so, the major challenge to promoting financial stability has come from the growth in the size and sophistication of international capital markets. A large number of countries have gained access to these markets. In many ways, this financial globalization is a welcome development. It provides opportunities to channel large-scale private capital flows to finance investment and growth in countries where they can be used most productively. Capital market integration also, in principle, provides a way for countries to adjust to external shocks with reduced reliance on official funds.

But this promise of the gains from financial globalization has yet to be fully realized. In fact, in many emerging market countries, capital flows have themselves been a source of volatility. This has added a new breed of shocks—capital account shocks—which have proved much harder to manage than the current account imbalances with which the IMF traditionally dealt. Arresting a reversal of capital flows requires measures that restore investor confidence, supported in some cases by substantial financial help from the official sector.

Financial globalization has also raised the risks of contagion. It has added new channels—in addition to the traditional linkages through trade—through which one country’s vulnerabilities can spread through the global economic system.

The IMF’s Response: Improved Surveillance and Better Crisis Prevention and Resolution

As in the past, the IMF has been adapting its tools to cope with these latest challenges to global financial stability. The lessons learned from the financial crises of the last decade are being used to improve the IMF’s performance of its key task, namely, surveillance and crisis prevention.

Surveillance remains at the heart of the IMF’s work. Imbalances and vulnerabilities must be identified and corrected before they can harm not only the country itself, but other countries and the global system. Surveillance should tell us when economies might be headed for trouble. It should cover the right issues for each country and the system as a whole. The findings of this surveillance, as reflected in the conclusions of our Executive Board, should be expressed clearly: they should signal potential problems with countries’ economic policies both to its policymakers and to markets.

Under my predecessors, Michel Camdessus and Horst Köhler (now President Köhler), there has already been significant progress toward better crisis prevention. Transparency has taken a quantum leap in the last decade. The Fund and its members publish more and better information than ever before. This is promoting greater accountability and helping markets assess risks more accurately. Intensive health check-ups of financial sectors are being carried out through a new program, the Financial Sector Assessment Program. Active monitoring of international capital markets is now a big part of our surveillance. And the Fund has sharpened its analytical tools to assess vulnerabilities and risks faced by countries and regions. Assessments of balance sheet risk and debt sustainability figure more prominently in our surveillance than in the past.

But however good our surveillance, it is unrealistic to expect that crises will disappear. Indeed, a dynamic market economy will face occasional crises—and the Fund’s role must then be to help mitigate their impact and shorten their duration through its policy advice and financial support. This sometimes requires the commitment of substantial amount of Fund resources. But in most cases, this investment has paid off: it has supported strong domestic reform programs and helped to limit or avoid contagion. The IMF’s loan to Korea in December 1997—$21 billion—was a very large loan by any standards. But it helped restore financial stability by early 1998 and strong growth the following year. And Korea repaid the IMF ahead of schedule. That was a case where large-scale support was appropriate and successful. The Fund played a similar role in Mexico in 1995 and Brazil in 1998.

Of course, we do need guidelines for large-scale access to IMF resources, but these cases also show that exceptional situations can call for exceptional steps to resolve them.

In short, over the past 60 years, the IMF has risen to the challenges faced by its members. I do not mean to suggest that it has always been right. And the description of the reforms already undertaken by the Fund is not meant to suggest that we are at the end of the road. After all, ten years ago here in Madrid, Michel Camdessus spoke of “strengthening Fund surveillance” and “adapting the Fund’s financing facilities to a world of globalized markets.” So this is an ongoing process of adaptation and change, and many challenges lie ahead.

Promoting Financial Stability: Dealing with the Challenges Ahead

In the area of surveillance, success cannot rely on early warning alone; it must also prompt early action. There is substantial room for improvement here. IMF surveillance still consists to some extent of confidential policy advice, coupled with peer pressure from other countries in the international community. But peer pressure can also mean peer protection. There is a need to sharpen the incentives for countries to take IMF surveillance seriously.

Moreover, with increasing financial integration, surveillance must focus not just on crisis-prone countries but increasingly on the stability of the system as a whole. Even if a country is not itself at risk, it may be contributing to global imbalances and placing the rest of the world at risk. The Fund, as the impartial voice of the international community, has a particularly important role to play here in highlighting major economic challenges that the world has to tackle. This is why, despite the controversy our advice often provokes, the IMF calls on the United States, Europe and Japan to contribute to more balanced and sustained global growth. This means active efforts by the United States to reduce its deficit, and by the European Union and Japan to promote sustained growth through structural reforms. Surveillance of the major industrial countries is critical, and multilateral surveillance, including of global capital markets, needs to be constantly strengthened.

We may also have to adapt our surveillance further in anticipation of some of the likely developments in the world economy in the coming decades. Current trends imply that financial globalization will intensify. Emerging markets will represent an even larger share of the world economy than they do today. The future emerging market giants, India and China, may pose particular systemic challenges. And the aging of industrial country populations may also imply higher cross-border capital flows, which will require monitoring.

In the area of crisis resolution the challenges also are daunting. Even in cases where we have managed to help resolve crises relatively quickly, the economic and social disruptions have sometimes been enormous. And the crux of the problem of large-scale IMF lending—namely, how to provide large-scale financial support in a way that imparts incentives for sound economic policies—is still unresolved. Abandoning large-scale financial support entirely is undesirable in view of the volatile character of international capital flows and the needs of our membership.

Some large IMF-supported programs raise concerns because they appear to suggest that a country’s geopolitical importance or other such factors play a role in IMF loan decisions. It is important that IMF lending decisions reflect the principle of uniformity of treatment of member countries in comparable circumstances. But the institution has an array of financial arrangements to take into account the specific situation facing each country. In most cases, our normal access policies leave room for the Fund to provide adequate financial support to ease the adjustment process. And, as in the case of Korea that I mentioned, in rare cases, exceptionally large access to Fund resources can be necessary to guard against risks to the global financial system. While such cases draw a lot of attention, the Fund has also given major support to countries whose situation does not pose systemic risks or which may not rank high on the geopolitical agenda of our largest shareholders. For example, our financial support to Uruguay has been quite substantial in relation to the country’s GDP and to its IMF quota. In short, the Fund continues to be a lender that countries can turn to when they have balance of payments needs, and when other financing options are drying up.

That said, we also clearly need a Fund that can say “no” selectively, perhaps more assertively, and, above all, more predictably than has been the case in the past. The prospect of the Fund declining to provide financial support would help strengthen the incentives to implement sound policies, thus avoiding the need for Fund support in the first place. To do this, we may have to think of ways of linking access to Fund resources more explicitly to a country’s policy efforts before the crisis, and perhaps to its responsiveness to the surveillance process and its adherence to standards and codes. The Fund’s proposal for contingent credit lines took some steps in this direction but it was not found useful by the membership. But the issues of the design of precautionary arrangements and contingent access to Fund credit remain on the agenda.

The IMF’s Role in the Global War on Poverty: Progress and Challenges

Let me turn now to our role in the global war on poverty, where of course we work closely with the World Bank. The IMF’s mandate here has been shaped partly by the expansion in our membership over the past 60 years. In the 1950s and 1960s, newly independent countries in Asia, the Middle East, and Africa became members of the IMF. As a result, by 1970 there had been a four-fold increase in the IMF’s membership. Then, in the 1990s, there was a further expansion to include countries of Eastern Europe and the former Soviet Union. The concerns of this expanded membership brought the issues of structural transformation and poverty reduction into the IMF’s domain.

The UN conference in Monterrey in 2002 gave some coherence to global efforts to meet the challenge of reducing world poverty. Under the “Monterrey Consensus,” developing countries acknowledged that they must help themselves through good governance and sound policies. Developed countries in turn recognized their responsibility to provide a helping hand through increased trade and aid. The Monterrey Consensus provides a common stage—and the Millennium Development Goals a common script—to enable the many actors involved in the fight against poverty to play their roles better.

Within this broad framework, the IMF has taken steps to ensure that while focused on its core responsibilities of macroeconomic stabilization, it is also actively helping our members achieve their development goals. The IMF is working to ensure that our financial support to low-income countries is based on a development and poverty reduction strategy devised by the country’s policymakers after consultation with its stakeholders. The IMF is examining how its concessional lending window, the Poverty Reduction and Growth Facility, can help countries get started on the right track, and stay on it, without the need for prolonged or large-scale financial assistance from the Fund. And, working closely with the World Bank, the IMF is helping with the global monitoring effort to assess the progress countries are making toward achieving the MDG.

The many challenges that low-income countries face make rapid progress difficult to achieve. But where governments have established stable macroeconomic frameworks and pushed ahead with structural reforms we have begun to see encouraging results. Tanzania and Uganda, for instance, have seen a sustained improvement in economic performance. Growth rates have also picked up in other African countries that have made progress in curbing inflation and establishing better control of the public finances.

But, as with our work on crisis prevention and resolution, we are not at the end of road in strengthening our work in low-income countries. We are just getting started. Many of the Fund’s initiatives in this area are quite new. They need to be assessed and course corrections made as required. Our Independent Evaluation Office’s forthcoming assessment of this new approach to helping low-income countries will be very useful in this regard.

Coming out of these assessments, I would hope to see greater clarity in what the role of the Fund should be in low-income countries. We need better coordination of our work with that of other institutions—the World Bank, the UN and its agencies, regional development banks, and the WTO—so we fulfill our core responsibilities while giving our member countries the full range of assistance they need. This challenge of defining clearly what we are trying to achieve when we help a member country—and ensuring that we have the right tools to achieve it—is present in our work with all countries. But it is especially important for our work in low-income countries, where we are only one partner among many in helping them achieve their longer-run development goals.

Conclusion

I have only just begun as Managing Director of the IMF. I am proud to lead an institution that has strong traditions of successful international cooperation, of learning from research and from experience, and of constantly adapting its tools to meet the needs of a changing global environment. We cannot foresee the changes that lie ahead in the next 60 years, but I am certain that the keys to an effective IMF response will be rigor in our analysis, even- handedness in our treatment, and a cooperative spirit among our member countries. I am confident these will continue to be the hallmarks of the IMF.

Opening Remarks by Pedro Solbes, Second Vice-President of the Government and Minister of Economy and Finance of Spain

Introduction

Dear Governor, dear Managing Director, ladies and gentlemen, let me first welcome you all to this seminar on the sixtieth Bretton Woods anniversary, which I have the pleasure to introduce. I would like in the first place to thank the Spanish Central Bank and the International Monetary Fund for their efforts in organizing the event.

As you know, the Bretton Woods Meeting in 1944 gave birth to an economic, monetary and financial system which has, beyond doubt, played a vital role in promoting both economic and financial stability while contributing to global welfare and poverty alleviation. As a matter of fact, international economic and financial events over the past years cannot be analyzed without considering the leading role of the Bretton Woods institutions.

So first and foremost I would like to express my congratulations to the World Bank and the International Monetary Fund. Thanks to them we have learnt important lessons from economic globalization and crisis resolution, let alone the strong relationship between economic growth, macroeconomic stability and poverty reduction.

I am quite sure that this seminar will provide us all with a good opportunity to better understand the evolution and changes within the structure of the international financial architecture. I am also convinced it will allow us to gain insight into the future global response that should help avert the perverse effects of systemic crises in the world economy. I will focus my intervention on three aspects that I consider especially relevant. First I will very briefly share with you my views about the evolution of the world economy and the Bretton Woods institutions in these last 60 years. Second, I will briefly address the role my country has played within the Bretton Woods institutions, a role that we intend to intensify in the future. Third, I will refer to the challenges that, in my opinion, still lie ahead of us.

Developments of the World Economy and the Bretton Woods Institutions

When the 44 country delegations met some 60 years ago, private financial flows were much more limited, in both scope and importance, than they are now. Then, the financial events that occurred from the 1960s onwards and, in particular, the emergence of the eurodollar and other offshore financial markets and the continuous globalization of capital movements, hammered out a quite different financial system. And, by the 1990s, international capital flows had already become an essential source of finance for both industrial and emerging market economies.

Today, financial markets are much more interconnected than they were in the central decades of the twentieth century, and this clearly improves resource allocation in terms of the so-called intertemporal trade. At the same time, however, it also increases concerns about contagion effects and reversal of capital flows.

This new framework brought about various effects on the way the Bretton Woods institutions do their job. I will mention just a few: first, a stronger relationship between the Bretton Woods institutions and the private sector in terms of what we know today as “private sector involvement”; second, the introduction of new financing policies able to provide the emerging market economies with faster and more powerful responses to external shocks and potential coordination failures linked with systemic crises; and finally, the consideration of a new approach to the relationship between economic growth and macroeconomic stability.

Role of Spain in the Bretton Woods Institutions

But let me also briefly refer to the role that my country has played in the financial institutions that emerged from Bretton Woods.

In 1958, Spain joined the Bretton Woods institutional system and became a member of both the International Monetary Fund and the International Bank for Reconstruction and Development. Spain was then an isolated and developing nation, about to start a process of liberalization of its economy and its trade. A process that, one could say, ended in 1986 with our accession to what at that time was called the Common Market of the European Union.

It is easy to understand that the role of Spain in the international financial architecture has changed significantly since 1958. Such a transformation is related to two main factors: first, the already mentioned evolution of the international financial architecture and the role of the multilateral institutions, and second, the overhauling process within the Spanish economic structure, coupled by a prolonged period of growth. According to the latter, in the early 1980s Spain became a creditor country and, since then, it has intensified its participation in the global financial system.

The Spanish quota in the World Bank and the Fund is well below its theoretical value and we are all aware of the problems this poses. But our contribution to some initiatives, such as the Highly Indebted Poor Countries (HIPC initiative, is quite a bit higher. In fact, Spain is, in global terms, the seventh largest donor country under the HIPC initiative, just behind six G-7 countries.

In the last few years it has assumed a debt relief burden which represents some 3.89 percent of the total debt relief provided by the industrial countries and our per capita contribution ratios are even higher than those of the main G-7 countries. Besides, Spain has undertaken bilateral debt relief actions beyond the relief provided under the Cologne treatment within the Paris Club framework. Along the same line, the Spanish contribution to the Poverty Reduction and Growth Facility Trust Fund amounts to 4.5 percent, fifth among the donor countries.

Spain has also provided regular funding to other World Bank Group institutions such as the International Development Association, and to other key initiatives, such as the Global Environment Facility and the Global Fund to Fight AIDS, Tuberculosis and Malaria. Other important contributions have also been made to the International Financial Corporation and the World Bank Institute, while three Consultancy Trust Funds have been opened within the same group. Moreover, similar actions have been carried out in other regional development banks.

Additionally, Spain provides some emerging and poor countries with technical assistance accounts, which will contribute to promote economic growth and strengthen the poverty reduction strategies in the destination countries. Along this line, it is worth mentioning the aid planned to some Central American countries under a Special International Monetary Fund Technical Assistance Account for Costa Rica, El Salvador, Guatemala, Honduras Nicaragua and Panama.

To close my intervention, let me finally address the issues I think will be pivotal in the near future. The first would be the need to continue to improve the work of the international financial institutions, developing a more pre-emptive stance and developing new and better targeted financial instruments. The second relates to low income countries and how we can improve their financial conditions.

Future Challenges

In the future, the multilateral financial institutions will need to deepen the reform process as a reaction to the new challenges posed by the size and speed of global capital flows, especially with respect to those issues related to emerging market economies and low income countries.

The systemic changes within the international capital markets have underscored the role of emerging market economies as destinations for capital flows, both in the short and in the long term. Thus, multilaterals must know to focus not only on crisis resolution but also on enhanced prevention mechanisms. To this end it is my view that surveillance must be strengthened, in particular in those areas related to external and public debt sustainability. This approach should be coupled with the implementation of stronger transparency criteria and with wider surveillance on the financial sector.

Let me also say that in my view there is a clear need for multilateral institutions to intensify efforts in terms of both transparency and accountability. By doing so they will be allowing the general public to better understand the vital role these institutions play in the international financial system. A role, let me remind you, that is especially crucial for low-income countries and emerging economies.

On the one hand, and concerning crisis prevention and resolution, I feel that the international community must define a predictable framework for exceptional access to IMF resources. The debate about exceptional precautionary access must also be firmly dealt with.

In this respect I understand that, in order to prevent currency markets from speculative attacks, an ex-ante or ex-post financial support from the IMF could make a difference. Of course, in order to avoid potential moral hazard problems it is important that some conditions are met. Namely, first, the country concerned should not have debt sustainability problems and therefore should be in a good position to fulfil its obligations with respect to the IMF. Second, a clear definition of the exceptionality criteria is also of great importance. And third, it would also be necessary to retain some degree of tailored level of access so the IMF continues to be able to help the countries concerned in the design of their macroeconomic policies.

In this very same vein, I think that the debate about future reforms should take into account the possibility of rewarding the implementation of sound economic policies in circumstances where the threat of contagion is present. In this sense, the discussion on a new policy framework aimed at replacing the already expired contingent credit line and at providing correct incentives in favor of sound policies might also bear some interesting fruits in the future.

On the other hand, crisis resolution mechanisms must be strengthened via promotion of both collective action clauses in sovereign emissions, the use of which should be broadened, and the Code of Conduct. Nonetheless, both tools have their shortcomings, too, and I believe that further analysis of some other options should not be put aside.

Undoubtedly, crisis resolution is strongly related to macroeconomic stability, but surveillance on microeconomic and structural reforms must not be weakened. This is particularly true given the strong relationship between flexible and competitive internal markets on the one side, and economic growth together with better response to shocks on the other.

Finally, technical assistance should be included as a key plank of the multilateral institutions’ policy framework, since good governance and institution building-related assistance have a very positive effect on credibility. This would, in turn, ease country access to international markets. Moreover, those reforms would help restore market confidence and trigger new external direct investment inflows, the benefits of which are known by all of us.

As I mentioned before, the second challenge of the future financial architecture will be to address the financing of development in low-income countries. In this regard, I would distinguish three main aspects:

  • i) First, debt sustainability analysis should be a key issue of the multilaterals’ strategy. In this sense, the access to fresh international credit, even under concessional conditions, should be graduated in order to avoid feeding unsustainable progress. From this perspective, the latest initiative by the International Monetary Fund and the World Bank aimed at developing new instruments to set reference thresholds on a case-by- case basis is worth mentioning. When it comes to the outstanding stock of debt, there is little doubt that its size must be adjusted when necessary through debt relief in order to permanently eliminate the burden on growth for these countries. On the other hand, it is important that a preemptive stance also be adopted here in order to avoid possible incentives to excessive indebtedness stemming from implicit bailout clauses. Having this in mind, I think that the global volume of grants by the multilateral financial institutions should probably increase, especially for low-income countries. This increase, of course, should always by accompanied by a serious study of the debt position of the countries involved in order to avoid the adverse incentives already mentioned.

  • ii) Second, we should bear in mind that even if we consider the exit for the debt burden problem of low-income countries one of our main priorities, these countries do also, in many cases, lack solid and credible institutional and regulatory systems. Consequently, the Bretton Woods institutions should enhance their approach to technical assistance and keep refining their conditionality in these areas.

  • iii) Finally, the technical assistance activities of the multilaterals should continue to converge in order to maximize progress in the area of trade liberalization. This is a basic step towards a realistic elimination of external financing gaps in low-income countries. And it should all come together with an important effort in developed countries to deepen the removal of trade barriers and subsidies, culminating the Doha Round and allowing for renewed impulse in the fight for growth and poverty alleviation. In this sense I would like to finish my intervention by inviting other developed countries to follow the example of the European Commission and show enough flexibility so that we can indeed culminate the Doha Round in a successful manner.

Opening Remarks by Jaime Caruana, Governor of Banco de España

Mr. Managing Director of the IMF, Mr. Second Vice-President of the Government and Minister of Economy and Finance, ladies and gentlemen, it is a pleasure for me to welcome you all to the Banco de España and to the inauguration of this conference, which is jointly organized by the International Monetary Fund and the Banco de España in commemoration of the 60th anniversary of the Bretton Woods agreements. For our country, which previously hosted the annual meetings of the Fund and the World Bank on the occasion of the 50th anniversary of these agreements, in autumn 1994, it is a source of satisfaction that this meeting should be held ten years later in Spain. I am also particularly pleased to welcome our distinguished audience—both from Spain and abroad—of representatives from official institutions, from academia and the private sector, who are going to participate in the busy sessions scheduled over the next two days.

The Banco de España and the International Monetary Fund are tied by long-standing and deep-rooted links. Not only have we worked hand-in-hand for many years on various matters; we also share a similar mission and vocation, as well as similar concerns in many respects.

The world has changed in the past 60 years, and the transformations that both institutions have undergone bear witness to this. We have moved from a system of fixed but adjustable exchange rate parities to one where floating is the norm. Economic integration has made enormous headway during these years, both multilaterally and through regional agreements, the European Union being perhaps the most advanced. From a world of widespread capital controls and multiple exchange rates, we have moved to a very different one in which enormous cross-border flows take place daily in the form of a wide array of financial instruments, among them derivatives, which were virtually non-existent at the end of the Second World War.

Undoubtedly, free capital movements have contributed to a significant improvement in the allocation of global saving to more profitable uses, although they have also entailed a swifter transmission of financial shocks across highly integrated markets, a phenomenon behind some of the recent crises. Economic policies—fiscal, monetary and structural—have been increasingly geared to providing a framework of stability and appropriate incentives for decision-making by agents. In addition to contributing to smoothing cyclical fluctuations, these policies help set in place the right conditions to achieve sustained economic growth based on flexible, competitive and efficient markets where comparative advantages are tailored to the changing circumstances of international markets.

The International Monetary Fund has adapted to these changes, seeking to respond in its capacity as the guardian of international monetary stability to the new problems that have arisen. It has evolved from focusing essentially on monetary stability and on countries’ external transactions and the management of their exchange rates, to areas more related to the overall quality of macroeconomic policies and to the design of structural policies and sound institutions. More recently, the Fund has devoted particular attention to financial stability.

To a certain extent, central banks have also undergone changes similar to those at the Fund. Developments in macroeconomic theory and the experience built up over the years have forged an increasingly broad consensus on the need to apply stability-oriented macroeconomic policies and, in particular, to conduct an independent monetary policy with the primary objective of achieving and maintaining price stability, which is vital for sustained economic growth. Central banks have also focused increasingly on financial stability issues, both in countries where the central bank is the supervisor of the banking system and in those where such functions are entrusted to a different supervisory agency. In the case of the Banco de España, these transformations have also been induced by far-reaching changes in our environment and in the role of the central bank, including most notably the adoption of the euro as the single currency for an ample group of European Union countries.

Spain’s relationship—and that of the Banco de España—to the International Monetary Fund is certainly today very different from what it was in 1958, when our country joined the Bretton Woods institutions. In the early years of its participation in the Fund, Spain received financial and, most importantly, technical assistance from this institution, as part of the process of external openness and liberalization that allowed its economic take-off in that period. The Fund’s excellent technical guidance in this process supported those economic sectors in favor of liberalization, which nevertheless met notable resistance in pushing through their program of reforms. I believe that Spain, since then, has a considerable debt of gratitude with the International Monetary Fund.

Currently, the framework for our relationship to the Fund is very different. As part of the euro area, monetary policy discussions take place in a broader context spanning the whole of the euro area. As a member of the Eurosystem however, the Banco de España remains deeply involved in such discussions. In other realms, relations with the Spanish authorities remain on a bilateral footing, as is notably the case with the close contact each year on the occasion of the analysis of the Spanish economy via the Article IV report. That said, the European dimension is becoming increasingly important. Beyond the single monetary policy, there are various areas of European coordination in IMF-related matters, although, as is well known, the different European states are represented on an individual basis in the Bretton Woods institutions.

Spain, which adhered to the New Arrangements to Borrow (NAB) since their creation in 1998, is today an IMF creditor country. And though we continue to benefit from the Fund’s excellent technical advice, we also provide technical assistance, in some cases in collaboration with the Fund, to other countries in the process of implementing systems or procedures in which we have a certain comparative advantage. Moreover, the Spanish authorities and, in particular, the Banco de España, cooperate increasingly closely with the Fund on matters relating to national and international financial stability. As I indicated earlier, this issue is becoming more and more important, and the objectives and the interests of the Fund tend to coincide in this connection with those of the competent national authorities.

The reasons why national and international authorities pay greater attention to financial stability can be found in the crises a significant number of countries have undergone in recent years. These have highlighted the complex linkages between the real sector and the financial sector and the risk that the latter may not only be a source of instability, but also amplify the imbalances or shocks generated in other sectors of the economy. The links between exchange rate crises and banking crises—the so-called twin crises—and the feedback mechanisms between the two are, along with the propagation and contagion channels from one country to another, matters of particular importance here.

National regulators and supervisors, in addition to their initial aim of safeguarding the solvency of individual institutions, have given increasing importance to combining the presence of flexible, efficient financial markets and intermediaries with the absence of excessive volatility on financial markets, and to preventing the so-called systemic risks—which affect the whole of the financial system—from materializing. International financial institutions have also become increasingly oriented towards the need to ensure a proper functioning of international financial markets and to limit the transmission of shocks from one country to another in a world of ever deeper and swifter linkages.

The relationship between national and international financial stability is obviously all the more important for countries, such as Spain, whose banking system has a significant presence abroad. The expansion of Spanish banks into Latin America explains why the Banco de España has, in recent years, promoted the monitoring and analysis of financial stability problems in this region in particular, and in the emerging market economies in general, an area in which the role of the International Monetary Fund has become increasingly important.

Key lessons may be drawn from the recent crises that have affected emerging economies—though not only them—which should be borne in mind when designing mechanisms to reduce their frequency and cost. They include, most notably: the need for a sound and well-designed institutional framework that protects property rights, prevents excessive public or private sector debt from accumulating and ensures economic stability; the importance of ensuring consistency between the exchange rate regime and the domestic economic policies and institutional framework; the risks entailed by the vulnerability associated with exchange rate instability processes for the balance sheets of different sectors in the economy, especially when there is a high degree of polarization; the marked sensitivity of emerging market economies to potentially very volatile capital flows, the direction of which can change suddenly due, at times, to factors that may even be exogenous to the country experiencing them; the importance of an appropriate regulatory and macro-prudential supervisory system to prevent crises generated in the financial system and to alleviate the ensuing costs if such crises finally occur, and to cushion the effects of shocks stemming from the real sector of the economy; and, finally, the importance of distinguishing, to the greatest extent possible, between liquidity and solvency crises in countries’ external debt and in governments’ public debt, as a first step towards applying suitable remedies for resolving each type of crisis.

As a result of these crises, and in collaboration with other international agencies and with national authorities, the Fund conducted a far-reaching review of the so-called “international financial architecture.” Numerous initiatives were adopted over recent years with the aim of lessening the frequency and cost of crises and of improving the stability of the international monetary system. Accordingly, there has been a notable effort to increase the transparency of member countries’ economic policies and to improve the information at the disposal of economic agents and, in particular, international financial markets so that the latter may exert market discipline more effectively. Specific measures have been adopted to reinforce financial systems. And it has also been sought to improve the crisis prevention and crisis resolution mechanisms available to the international financial community, including those particularly difficult cases in which sovereign debt restructuring proves inevitable. Moreover, instead of relying on exhaustive international regulations which, as experience has shown, are difficult to approve and even harder to implement, all these reforms have relied on voluntarily mechanisms, based frequently on the adoption of codes of best practices, international standards and systems that offer incentives for their application.

Over the next two days the Conference will address these and other matters of interest to us all, among them the risks associated with the persistent imbalances between the current account positions of the main economic areas; the consequences of adopting different exchange rate regimes in the current environment of free capital flows; the problems that arise from excessive public debt levels both in the emerging and industrialized countries; and the role of the Fund in the face of the challenges of economic and financial globalization.

All these issues have interested authorities, the private sector and the academic community for many years, although the way to deal with them has evolved in step with changes in the international economy. In what is an exceedingly dynamic environment, then, it is crucial to identify the root of the problems and possible solutions for them, which is precisely the chief aim of conferences such as this.

We have an intense and fascinating agenda for discussion. It highlights, once more, the need for national authorities, international financial institutions and the academic community to work together in areas of common interest, taking advantage of their experience and comparative advantages and with the degree of technical excellence these matters require. I trust that these sessions will shed light on how to improve the functioning of the global economy and, in particular, the international monetary system.

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