I am most pleased to have this further opportunity of addressing the Bretton Woods Committee,
           and I would like to thank you for this further evidence of your interest in and support for the IMF,
           so effectively demonstrated recently in very demanding circumstances for the Fund.

           It is a little over a year since I last spoke to you. Since then the world has passed through a period
           of deep turbulence. This led to determined and at times controversial action by governments and
           institutions around the world. Possibly before I elaborate on my topic today, you would like to
           hear briefly from the horse's mouth, what is the outlook now. Certainly, the worst of the emerging
           market crisis seems to be behind us. In Asia, the countries at the heart of the crisis are close to or
           even past the turning point: Korea in particular is seeing an upturn in activity, obliging us to revise
           upward our forecast to 4 percent perhaps more.

           But we also have good news from Thailand, as well as the Philippines which shielded itself pretty
           well against the worst of the crisis by implementing courageously their kind of precautionary
           program with the IMF. And the news is also good from Indonesia where the positive effects of the
           program were delayed by political imbalances but where we are happy to see now, not only the
           first truly free, peaceful, and orderly elections in more than 40 years, but also that, this year growth
           is expected to become positive, with inflation falling to the single digit level. This, together with
           stability of the exchange rate, would allow the reduction of interest rates, further improving
           prospects for recovery, while market confidence.

           Let us have no illusion. All of this is still extremely fragile and requires increased vigilance so that
           complacency does not reappear. But let me state that there are now good prospects for these
           countries to resume growth-high-quality growth-on a more sustainable basis than before the crisis.
           A heavily damaged financial system, a gravely weakened corporate sector, many structural
           rigidities, not to mention corruption, cronyism, and nepotism, were key among the underlying
           causes of the crisis. By dealing with these issues up front, governments restored confidence in
           economic policy and laid the basis for a resumption of high-quality growth. We helped them in
           doing that, we do not apologize for that, and we are grateful to our membership who supported us
           in these difficult and, at times innovative, but indispensable steps. I would say the same about the
           measures of social progress, particularly for the core labor rights our dialogue with the authorities
           has helped to provide.

                                               * * * * *

           There is no need to speak about Brazil and other countries. More generally, the question is
           whether this tentative recovery can be extended into a new era of high-quality global growth, in
           which the emerging markets will play a dynamic role once again? That will depend, not just on
           skillful macroeconomic management, but also on whether the international community can advance
           convincingly with the challenge, on which it has embarked, to overhaul the architecture of the
           international financial and monetary system.

           And in this debate, no topic has proved more challenging than the question of how to "involve the
           private sector in forestalling and resolving crises". You have invited me today to address this
           question, in this session entitled "Bailing in the private sector in debt crises." In my remarks today I
           shall not try to review the whole range of reform issues that are being debated by the international
           community, but instead will reflect on what should be expected of the private sector creditor and
           debtors, touching where necessary on the implications for their relationships with their
           governments. But two remarks in starting. First, "bailing in" carries connotations of "bailing out",
           and I do not accept that this is either the purpose or the effect of IMF or other international
           packages of financial support. Some in this audience may be able to attest at first hand to the
           losses that many investors have suffered as a result of the crises in the emerging markets. Second,
           rather than focus only on crises, my message is that "an ounce of prevention is better than a pound
           of cure", and that the bulk of our attention should be focused on strengthened national and
           international systems, even when there is no hint of crisis. Of course, crises cannot be avoided
           altogether, and therefore part of our work is to develop measures that will facilitate the resolution
           of crises if they occur.

           If there is any characteristic distinguishing this series of crises from others, it is the prominence of
           the private sector-financial institutions and corporations-on both sides of the equation as creditors
           and debtors. It is instructive to contrast the recent round of crises with earlier ones, especially the
           debt crisis of the 1980s. With the explosive growth and increasing integration of the capital
           markets during the past decade, a number of notable trends stand out, all of which have tended to
           increase complexity:

                · The domestic private sector-both banking and corporate-is typically a much more
                significant player now. Domestic financial and capital markets have sprung up around the
                world. Who would have forecast a decade and a half ago equity markets in Beijing,
                Warsaw, Prague, or Moscow?

                · The "foreign investment community" is far more diverse: direct investors, portfolio
                investors, banks, bondholders, and other creditors have all become major players.

                · The different types of investment have responded to crisis in very different ways. Even in
                this most difficult of periods, flows of direct investment have not flagged: they rose strongly
                in 1997 and held fairly steady in 1998. By contrast, banks having been the largest source of
                net inflows in 1996, had become major recipients of net outflows by 1998, the first full year
                of crisis.

                · It is too simple to conceive of nations as belonging to one camp or the other: debtor or
                creditor. There are powerful flows in many directions. For instance, the largest source of
                direct foreign investment in Asia is Asia. Korea, Hong Kong, Thailand, Taiwan Province of
                China and, of course, Japan, are all important sources of foreign investment within the
                region, and remain so despite having been at the heart of the crisis.

           These very selective observations point to some simple truths about markets. For much of the
           1990s the markets were doing what they do best: seeking opportunities. The crises that appeared
           first in Mexico in 1994/95 and re-emerged with greater virulence during the past two years
           revealed that market players, regulators and policymakers had not fully perceived the risks,
           including some that were of systemic proportions, that accompanied those opportunities. And so,
           the second half of the 1990s, especially the past two years, have been devoted to seeking
           measures that aim to reform the critical features of the international financial system that were
           associated with the crises.

           Inevitably, early attention has focussed on the resolution of crisis. The severity of the situation
           demanded an immediate response, but this was a new breed of crisis for which precedents were
           quite limited or only relatively relevant. Therefore we have in effect been developing a still
           incomplete body of "case law" based on the different experiences we had to go through. If there is
           one clear lesson to emerge from the experience it is that the diversity of country situations means
           that there is no "silver bullet", no "one-size-fits-all" solution. The circumstances and workouts of
           debt in each of the major crisis countries during the past two years have differed substantially-from
           the "concerted rollover" of a large volume of short-term debt in Korea, to the "consultative
           approach" adopted by Brazil, even though there was no intention and no need to consider debt
           restructuring. In Thailand and Indonesia different approaches were taken again. In all of these
           cases the cooperative approach stands in sharp contrast with Russia's disorderly and highly
           disruptive suspension of debt service.

                                             * * * * *

           What kind of conclusions can we draw at this stage? Let me start with the obvious, if we are to
           build a more durable, integrated international financial system, the foundation for successful crisis
           resolution should exist long before crisis strikes. Quite simply, it should consist of the basic and
           effective market structures, practices and relationships that should exist under normal conditions.
           We need to foster a mature market, which is based on stable relationships among players that rely
           on enlightened self-interest, and in which official involvement can be limited to establishing strong
           legal, regulatory and supervisory frameworks.

           What should we expect from the players, regulators, and supervisors in this market? As I review
           some of these expectations, I think you will quickly recognize that what I am calling for are the
           simple, basic values of good governance, transparency and cooperation.

           I. Let us first think of the responsibilities of debtors. At the top of the list, clear and unambiguous,
           is the principle that contracts must be honored. I emphasize this at every opportunity, since it is the
           very foundation of the successful operation of mature markets. Proposals for involving the private
           sector, far from encouraging countries to take their commitments less seriously, must ensure that
           obligations are honored.

           If there is an equivalent singular responsibility of governments, then it is the obligation to pursue the
           macroeconomic policy objectives of stability and growth within a transparent economic and
           financial policy framework, including the dissemination of comprehensive, accurate, and timely
           data.

           Other obligations involve elements of a shared responsibility, and call for extensive cooperation
           and consultation:

                · A strong legislative framework-including a workable bankruptcy law-and an independent
                judicial system;

                · Adoption and adherence to internationally accepted standards of disclosure and
                governance. Even if some of these standards are still "work-in-progress", there are many
                that can be adopted already;

                · The development of a robust regulatory and supervisory framework for the financial
                sector;

                · Policies and practices that promote sound debt management and the high-frequency
                monitoring of private external liabilities, a key aim of which should be to avoid excessive
                short-term debt.

           II. How can creditors, in other words the private sector-and their governments-contribute to a
           better system?

           The first area is risk assessment and risk management. You do not need me to tell you that
           investment of any kind involves risk, carrying with it the obligation to develop adequate techniques
           and practices for assessing, pricing and managing risk. Many investors have taken substantial
           losses in the past two years, and are increasingly interested in and capable of differentiating among
           countries. But investors would do well continually to keep their practices under review, and
           national regulators should ensure that this happens.

           Second, creditors can play an important role in encouraging adherence to internationally
           recognized standards. Not only should they themselves expect to adopt them-for instance by
           attaining high standards of disclosure-but they can also encourage borrowers to adopt good
           practices by factoring this into their investment and pricing decisions.

           Third, creditors should accept that national authorities need to adapt the principles and standards
           that support their regulation and supervision of national financial systems. One practical suggestion,
           which has gained widespread support, is to reflect more adequately the risk of lending to emerging
           markets by increasing the risk weights assigned to short-term lending in the balance sheet of
           creditor banks under the Basle Core Principles. On this, we welcome the consultation document
           released by the Basle Committee last week. More generally, I am happy that the activities of
           offshore funds, and highly leveraged institutions-including hedge funds and the similar operations of
           other financial institutions-and the role of short-term credit, will be the subject of the first studies
           by the recently established Financial Stability Forum.

           Fourth, private creditors can help-and in a few cases already are helping-countries to preserve
           their foreign exchange liquidity when there is a threat of contagion by establishing contingent
           financing arrangements that can be activated if crisis looms.

           Fifth, since cooperation is vital, debtors and creditors need to establish and activate good lines of
           communication during normal times. Some recent cases of debt workouts-for instance
           Indonesia-have pointed to the importance of timely and effective consultation among debtors and
           creditors. Here countries may consider emulating Mexico's practice, established after the 1994/95
           crisis, of regular consultation with international financial market participants, and Brazil's
           consultative approach to its creditors in the context of securing a voluntary rollover of interbank
           and trade related credit lines.

           III. How can the IMF contribute? Less than two months ago the Fund took an innovative
           decision, which will enable it to offer financial resources to support crisis prevention, through the
           mechanism known as Contingent Credit Lines. These lines are designed to help countries that are
           in a relatively strong situation-with sound macroeconomic management, strong financial systems,
           and making progress in applying internationally recognized standards-withstand the pressure on
           their balance of payments that might arise from a sudden loss of confidence through contagion
           from developments elsewhere.

           This will not divert us from our traditional activities. As a matter of fact, a defense in preserving the
           stability of the international financial system will always be our bilateral and multilateral surveillance,
           it is important for us to strengthen this function. And indeed, we are broadening the coverage of
           our surveillance:

                · our consultations with members now routinely encompass financial sector issues, in
                collaboration with the World Bank and other agencies; and

                · responding to the mandate given by the Interim Committee, we have begun to develop
                approaches that will promote the dissemination and application of standards and codes of
                good practice, among the entire membership.

           All of this notwithstanding, we continue to update the technical assistance and training we offer to
           help countries build up their institutional capacity to manage their economies and to handle changes
           in their financial systems. And we continue to offer financial assistance to countries that have
           encountered balance of payments difficulties and are taking active steps to overcome the
           underlying causes of the imbalances. Business as usual, if I may say so.

                                             * * * * *

           In spite of that, of course, occasionally crises will occur and, we need to be ready with measures
           to assist in their resolution. This requirement entails a delicate balance among the objectives of
           preserving countries' market access in normal times, ensuring equitable treatment of creditors if
           crisis strikes, and avoiding debtor and creditor moral hazard. All of that of course through
           market-based and market-friendly solutions. In particular, making sure, to start with, that
           measures intended to resolve crisis avoid the perverse effect of precipitating them.

           The complexity of the issues arises because workable arrangements must consist not only of ex
           ante measures that are ready in case the threat from contagion develops. They should also offer
           mechanisms-or at least some principles-for resolving "extreme situations", where crisis has
           deepened to such an extent that normal payments can no longer be sustained.

           Among ex ante measures and without further mentioning due attention to management of risk, I
           refer again to contingent financing arrangements from private lenders that could be an early
           recourse if crisis develops. This is one of the few ideas that can actually be said to be in place and
           workable, even if it is on a modest scale; three countries-Argentina, Indonesia, and Mexico-have
           concluded such arrangements. This deserves to be encouraged. But what when, as in a number of
           recent cases, it does not appear feasible to address the crisis by mobilizing new resources? Many
           questions arise then, including whether sovereign bonds should be included in comprehensive debt
           restructuring. We probably still have a lot to learn from the present case-by-case approach. But
           broadly speaking, bondholders must be viewed as a category of investors at par with others,
           needing to assess and price risk, and who, just like other creditors, cannot expect public funds
           from the international community to shield them from adverse outcomes. This being said, no
           debtor would wish to take default lightly, since, no matter how careful an approach is taken,
           debtors will perceive that their credibility has been most severely undermined and investors'
           confidence shaken. However, investors and debtors may have to accept that in extremis, a
           country may have no orderly way out of the crisis other than a comprehensive debt restructuring
           that includes bonds.

           These issues again highlight the critical importance of debtors and creditors maintaining a dialogue
           that is established in good times, and is sufficiently robust to continue through periods of stress.
           Given the very large number of creditors that now typify many emerging market situations, one
           promising avenue is to introduce collective action clauses into new bond contracts. Rescheduling
           could then take place with the consent of a predetermined large majority of creditors rather than
           requiring unanimous consent as currently is the case in many contacts. This is an approach that
           may well require industrial country borrowers to lead the way, an issue that is currently under
           consideration.

           And lastly, we must recognize that there may be a few instances in which, despite good faith
           efforts by countries to reach agreement with their creditors, agreement cannot be secured and
           default cannot be avoided. In such cases it will be important to keep proper working relations:
           debtors should seek to reestablish good faith negotiations with their creditors promptly, and both
           sides should be able to do so without finding that the process is blocked by a handful of dissident
           creditors. This has raised the questions whether and how the international community might
           introduce a temporary stay on legal action by creditors during the negotiations between a country
           and its creditors. One option-in the interest of both creditors and debtors-is to reach agreement on
           an interpretation or an amendment of the Fund's Articles of Agreement to allow it to declare such
           a stay. This suggestion has given rise to lively debate and consensus is not yet in sight, but I see it
           as an avenue worth pursuing, as-I repeat-both creditors and debtors have a distinct interest in an
           orderly process.

                                             * * * * *

           I conclude this review of the framework for a mature relationship between creditors and debtors,
           by suggesting that we need to be prepared for exactly those extreme cases that such a mature
           relationship should make highly infrequent. This is precisely our objective in joining forces for crisis
           prevention. As a matter of fact, you may observe that I have covered a number of rather technical
           topics. I have not unveiled any kind of grand design, and my suggestions in this central field of the
           role of the private sector in strengthening the international financial architecture could be seen as
           quite down to earth. But let me view them for one last minute in the broader context we are
           striving to establish, which is an environment where:

                · Governments should be convinced to pursue sounder macroeconomic, financial and
                structural policies;

                · Central banks should be convinced to establish more appropriate exchange market
                arrangements;

                · Prudential authorities should adapt their supervisory methods, rules and cooperation to the
                ever-evolving financial activities;

                · All actors would be encouraged to accept the golden rule of transparency and the new
                sets of standards and codes of good practice currently being elaborated by various
                international bodies;

                · All countries would move forward in an orderly but ambitious progress toward capital
                account liberalization.

           Then one can see that, yes, a new architecture is patiently being established, a new framework is
           taking shape where your institutions and countries could deepen their cooperation in their mutual
           interest, in pursuit of a more stable, safer, and more prosperous world.