G-7 endorses IMF credit line that could rescue Brazil Leaders target financial turmoil

Global economy

October 31, 1998|By BLOOMBERG NEWS

WASHINGTON -- The Group of Seven large industrial nations endorsed yesterday a U.S. plan to create a new line of credit at the International Monetary Fund that could be used to head off a financial crisis in Brazil.

In a joint statement, leaders of the G-7 countries -- the United States, Japan, Germany, France, Britain, Italy and Canada -- embraced recommendations for changes in the way international financial transactions are regulated to prevent future economic crises, such as the one that began with the collapse of Asian currencies and stock markets in mid-1997.

Along with the IMF credit line, proposed last month by President Clinton, G-7 leaders endorsed a new loan facility for the World Bank to ease social suffering when crises occur.

"The world's leading economies have linked arms to contain the financial turmoil that threatens growth not only in emerging markets, but in all markets of the world," Clinton said.

Brazil, which has suffered a capital outflow because of a swollen budget deficit, is likely to be first in line for the new IMF "pre-crisis" loan program, a departure from current IMF lending rules that require countries to be in economic danger before loans can be made.

The new backstop line of credit would make it easier for countries attempting economic reforms to convince investors that they can pay their obligations.

The Asian slump, which was highlighted by a 66 percent slide in the Indonesian rupiah since August 1997, was followed by a Russian default this August on foreign-currency denominated government debt worth $40 billion and a 60 percent devaluation of the ruble.

That triggered a slump in Western stock indexes that have since regained part of their losses. The Dow Jones industrial average, for instance, is about 10 percent below its July 17 peak. Brazil's Bovespa index is down 39 percent.

Investors generally supported the G-7 announcement. Although "lacking substance, it offers potentially big positive changes in the world financial system," said Peter Botoucharov, head of research at Bank of Boston Corp. in London.

hTC The new line of credit "should improve investor sentiments," he said.

Britain had been drafting the G-7 statement the past two weeks, and final details were negotiated in telephone calls among finance ministers Thursday night.

The statement endorsed reforms at the IMF demanded by the U.S. Congress in return for additional funding, including greater openness in the IMF's dealings with member countries.

The endorsement clears the way for other countries to contribute an additional $67 billion to the IMF, replenishing the lending agency's depleted coffers. The G-7 nations are the IMF's main contributors.

The reforms will require future borrowers to pay higher interest rates, and loans would be advanced for shorter periods than usual.

The chairman of the G-7 finance ministers, British Chancellor of the Exchequer Gordon Brown, said at a news conference in London that the group is more concerned about world economic growth than about inflation.

As a result, he said, the G-7 nations are committed to creating "strong domestic demand growth." He did not say how that would be achieved.

Pub Date: 10/31/98

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