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OECD Economic Outlook 63 Projections
April 9, 1998
Lockup Arrangements
April 22, 1998
OECD Economic Outlook 63 Projections
April 9, 1998
Lockup Arrangements
April 22, 1998

16 April, News Conference

Transcript No. 6

Hon Peter Costello MP

News Conference

Thursday, 16 April 1998
The Willard Hotel, Washington, DC

SUBJECTS: IMF and G-22 meetings, financial reform

Treasurer Costello: I think the meetings that have been held today in the IMF and also the meetings with the G-22 will be important steps in strengthening the world financial system in the wake of the Asia crisis. In particular, this has been the first opportunity for the world community to gather to assess progress in relation to those IMF programs which are already in place in Korea, in Indonesia, and in Thailand.

And the focus of the preventative measures, which will be put in place to guard against problems in the future, will be: enhancing disclosure, with the IMF taking a greater role in encouraging countries to disclose the situation in relation to both financial reserves and fiscal policy; promoting codes of good practice, not just in relation to financial matters but in other areas of economies, such as corporate governance, accountability, and insolvency systems; and providing appropriate burden sharing between the official and the private sector in relation to these crises as they develop. I think Australia has been well placed in relation to all of these areas, particularly in relation to disclosure on fiscal policy.

Our Charter of Budget Honesty is probably state-of-the-art legislation, international, requiring as it does, publication of four-year predictions updates on a twice-a-year basis, a pre-election statement, costing of Opposition and Government proposals during an election campaign. And it is a model, I think, which other countries will be able to look to. And our financial sector reforms, coming as they do in the wake of the Wallis report on financial sector reform. Again, I think we’re at the leading edge of international best practice.

So I think we’re well-equipped, not only in relation to those recommendations which are coming out of this conference, but we’re well-equipped to provide an example and a model in many of the areas which will be the outcome of the discussions over the course of this day.

Q: Treasurer, as you leave here, do you think you are more or less optimistic about the impact of the Asian crisis in the region?

Treasurer Costello: The IMF report on the world economy is, I think, what I’d call cautiously optimistic. The IMF has downgraded its forecast for global growth. But, although it expects dips in the ASEAN four nations and indeed in Korea in 1998, it’s expecting recovery in 1999. In relation to our own situation, the IMF is forecasting growth of about 3.2, 3 and a quarter, which of course is along the lines of the forecast we’d put out for 1998-99. These will be amongst the fastest growth rates of any developed country in the world, notwithstanding the Asia crisis and the effect that it has had on Australia. I think that there was a lot more optimism about Korea than there was, say, at Christmas time. There is now an agreement between the IMF and Indonesia, which has just been concluded in the last week or two. There is of course some concern about Japan and that has been a focus of the discussions here. But, I think the tone of the IMF overall, the outlook of the tone overall is one of cautious optimism. And that’s certainly the way we’d be looking at the international scene at the moment.

Q: Treasurer, how do you assess the will of other people, of the other treasurers and other ministers who are in town, to actually deal with disclosure, to deal with some of the issues and change the financial system in the wake of the Asian crisis?

Treasurer Costello: There’s never been a better time for reform than now. This has been our view. In those countries that have been affected, if they take the opportunity to engage in structural reform, and they can come through the immediate crisis, it will set them up for longer-term sustainable growth the other side of the crisis. From our Government’s perspective, although our financial system, our equities markets, have performed very well throughout this period – we’ve hardly skipped a beat throughout this whole period – we actually think now is the time for reform to drive home the comparative advantage. That’s the way we’re approaching it. So if your financial system’s performed well, that’s great. But we want to take it up a notch, by improving the regulatory arrangements in our financial system, which is what the Wallis reforms are all about. And I would say to finance ministers nothing more than we’d say to ourselves, which essentially is this – that it’s a good time to reform. There are virtues and rewards in good policy. And if you get the policy right, the consequences will be positive and rewarding. And that would be my message.

Q: Treasurer, what do you do to stop banks lending on very thin margins, in great amounts, in countries like Indonesia – when they know in effect the IMF will potentially bail them out? Shouldn’t they have to bear the responsibility for those bad loans?

Treasurer Costello: Look, I think a big part of the outcome of this is going to be what we call burden sharing. That is, that the private sector is going to have to bear some of the burden. Now, let’s take the situation in Korea, for example. In Korea, the private sector was very successfully harnessed to rollover short-term debt. So successful enterprises, probably they didn’t want to do it. But the fact that it was harnessed and it was done jointly with success, they have born some consequences but we would say, its only right that they bear some consequences. In the long term, they probably got out of it better than would have been the case otherwise. The same in relation to Indonesia. I think there has to be some burden sharing for the private sector. And I think the private sector can’t expect if they make unwise decisions that the international community will bail them out. In fact, that would be a moral hazard if they did believe that. Now, what the private sector can say in return, I think this is right, is that if they are going to be expected to engage in burden sharing, they are entitled to full information before they make their decisions. Hence, the importance of the disclosure and transparency points. Once you’ve done proper disclosure and transparency, it’s caveat emptor. And you’re in a strong position to then say to the private sector, you’ll be expected to bear your share of the burden if things go wrong.

Q: Treasurer, do you think the reform program recommended at theses meeting this week will prevent another crisis?

Treasurer Costello: I don’t think you’ll ever prevent any crisis from ever occurring. Or let me put that the other way. I’m sure sometime in the future these will be crises. The important thing is that we prepare for them as best we can, we minimise the number, and we minimise the extent, and we minimise the duration. Now, if important structural reforms can come out of this and principally, these reforms will have to be done at the national level, it will have to be national regulators that enhance the dissemination of standards on fiscal policy, that enhance disclosure in relation to reserves and monetary policy, that enhance corporate good governance requirements. But the role of the international community will be to give them advice and assistance and technical expertise and encouragement and, if need be, a little bit of a prod as well. And if that can be done, then I think that’s the best step that you can take towards minimising the number, the frequency, and the duration.

Q: Treasurer, in that context, do you support the idea of some sort of joint international surveillance unit?

Treasurer Costello: Well, I think one of the things that’s got support and certainly would have my support, would be the current international institutions exercising all the resources at their disposal to enhance surveillance and disclosure. I’m not sure that we need a new organisation. We’ve got the IMF, we’ve got the World Bank, we’ve got IOSCO, we’ve got the Bank of International Settlements. We have some regional groupings and I think the regional groupings can certainly be beefed up a bit, particularly in our region. We now have a Six Markets group, and we have an EMAP, and our Reserve Bank is engaging in discussions with its counterparts. I think the regional peer surveillance can be improved. I’m not arguing that we need more organisations, but I do think enhancing and marshalling and corralling the resources of those current institutions toward those policy objectives would be a welcome and positive step forward.

Q: Treasurer, my name’s Emily Schwartz. I’m a reporter with Bloomberg News, based here. I’d like to hear you speak briefly about your views on the Indonesian plan. Do you think those reforms introduced will be carried out and when do you think the bail out will begin?

Treasurer Costello: Well, an agreement – a new agreement – has now been signed between the IMF and Indonesia. We welcome that. We always thought it was important that the two parties stay engaged, and agree on a program which is politically sustainable in Indonesia and will be carried through, and will accomplish structural reform, and will get international confidence. I think the big part now is Indonesia’s part. What the international financial community will now be looking for is action on that program, and I think they’re entitled to look for action on that program. Provided there is action on that program, the IMF will be advancing money, and provided that there is action on that program, Australia will be advancing money as part of second-tier financing. But it’s going to be a question of action-review-advance, action-review-advance, to ensure that the program is implemented. Now that it’s agreed, I think we know the direction. What we now want to see is a movement down the track.

Q: Treasurer, the IMF got a lot of criticism for its actions in Indonesia… do you think it made any mistakes in its handling of Indonesia (inaudible)… or the program and approach were good?

Treasurer Costello: From our point of view, the area that we were worried about – and I want to make this clear – the area we were worried about, we were always worried about, was that part of the program which required early cessation of food subsidies and cooking oils, and in our view could have made food more expensive in a troubled nation which had a food shortage and was facing social instability. That was our key concern. And I think it was also a concern of the IMF. The negotiations, which continued in relation to that, I think have borne fruit. The current package is much more understanding of that point and, as a result, I think is going to be much more politically sustainable. And at the end of the day, I think less harsh, particularly in relation to those people that were facing poverty and food problems.

Q: Do you agree with criticism that it was not the IMF’s business to get into things like monopolies…..

Treasurer Costello: It was the IMF’s business to try and stabilise the exchange rate – the IMF’s business to take a lead in getting international confidence. But I think part of getting international confidence in Indonesia was to show that there could be substantial economic reform. Let me make this point clear – if you got into a financial crisis and money was advanced and you got out of the crisis, the crisis might have passed, but the underlying problems may not have been addressed. These programs are always designed to get countries through immediate problems but on the understanding that changes will take place which will remedy the problem. Extending liquidity is not changing the fundamental structural problem which has caused the immediate crisis. Extending liquidity will get you through the crisis but long term it’s the structural changes that are important. If countries can accomplish the structural changes themselves, well and good, in this particular case I think the IMF was pretty prescriptive but at the end of the day all I’d say is the important thing is that the structural changes are accomplished. Whether they are accomplished because they were suggested by the IMF or whether they were accomplished because the Indonesian authorities realised the importance, the point I’m trying to stress here is that those structural changes are accomplished.

Q: The Department of Treasury here makes it pretty clear that one of the problems in Indonesia…. crony capitalism. Do you share that concern?

Treasurer Costello: We don’t support crony capitalism.

Q: Was that what was going on?

Treasurer Costello: We don’t support it anywhere in the world because we think that free and open markets are the best way of stabilising an economy. As I’ve said in relation to Indonesia, I think structural changes will, long-term improve the Indonesian economy. Our concern in relation to the Indonesian second package was, as I said, principally subsidies in relation to food and cooking oils which would have imposed on poor people where there were food shortages, very strong price hikes. And that was our problem. We thought that that would not be sustainable. We thought it could be unnecessarily harsh.

Q: …you mentioned some might need prodding, what do you mean by a prod?

Treasurer Costello: Well I hope that things end up with more and more countries engaging better and better disclosure and more informed markets, putting the private sector in an informed position. As I said before, less crises, less frequency with less the duration. When I said a prod I was trying to convey to you the idea that good policy has its own rewards but sometimes people can be prodded into good policy. And I had in mind, encouragement and advice, and as much as anything peer group pressure. I think peer group pressure is going to be a very important part of it. In our part of the world I think that there is now an understanding of the importance of regional pressure. We had a meeting in Manila. We laid down what’s called the Manila framework in relation to all three packages. I make this point. Aside from Japan, Australia is the only country in the world which is engaged in all three financial packages and in all three of those packages the region has pledged as part of the second tier financing. I think that gives the region the status to engage in that kind of peer review.

Q: You said it is a good time to look at reform…what have you seen here in the US that you would take back home and look at?

Treasurer Costello: Well I said earlier that we lead the world in relation to requirements of fiscal disclosure. We have a charter of budget honesty which is enacted, which governs the government, which requires the highest standards of fiscal disclosure, by law, that you are going to find anywhere in the world. Our Reserve Bank is well advanced in its disclosure and we’ve started publishing on a monthly basis forward positions which is another thing that has been heavily under discussion here. But have we accomplished all of the reform in Australia, no, there’s plenty to go. There’s no shortage of areas for us to concentrate on. We now have in the Parliament the first wave of the biggest rev-up of financial regulation that we’ve had in Australia. We are going to form a new prudential regulator because, whilst people are looking at the moment at the prudential situation of banks, we’re thinking up the next stage, which is the prudential regulation of superannuation funds and non bank deposit taking institutions. It’s always been the poor relations side. We’re setting up the Australian Prudential Regulatory Authority – APRA – which is going to apply all of the lessons which are now coming to the fore in relation to banks, in relation to non-bank deposit taking institutions and superannuation. We are also going to have a consumer protection agency – The Australian Securities and Investment Commission – ASIC – which is going to take over the regulation of all financial productions and enforced disclosure. Not just again in the banking area but in life and in cash management trusts and all of those areas. We are going to clean up the overlapping jurisdiction in relation to non-deposit taking institutions, like friendly societies. This is huge reform, this is big reform. We’ve got the first instalment in the Parliament and we’ve got to get that through the Parliament. Then we’ve got to start introducing the second reform which goes in conjunction with what we call our Corporate Law Economic Reform Program, which is getting right back into good government. Another point thats been raised here is good government. So we’ve got to up the ante in relation to good governance and corporate regulation as well. That’s all in the financial and regulatory areas. And there’s much more we can do in Australia as well. Industrial Relations is an area that we’re working on at the moment. Privatisation is an area that, provided we can get a mandate in the next election, there’s more work to be done there. I’m not worried about the lack of areas to be addressed in Australia.

Q: …the G7 expressed concern about the outlook for Japan, …zero growth this year, what kind of impact is that likely to have on the region?

Treasurer Costello: I think that Japanese growth is certainly going to be below one per cent and it could be zero. We would all like to see a stronger Japan. Part of it is going to be fiscal stimulus and as you know they have recently announced a fiscal stimulus package. There’s been a lot of discussion about that. The other part of it that I’d like to highlight though is the financial system. One of the things that is giving negative sentiment, internationally, and I think probably also in Japan, is the view that there is this heavy weight of non-performing loans. Nobody can tell you precisely how many. That has made the banks shy about advancing credit and it has contributed to a very pessimistic view of Japan. And I think dealing with those non performing loans and getting them off the balance sheet of financial institutions, getting the financial system back into a healthy state where if feels confident about its role and its position, will be a big part of getting Japan moving. I know the government is conscious of this. It has set aside a fund of public monies which can accomplish this goal and I hope it is taken up. I hope it works.

Q: Do you think that the G7 should have taken steps to consider joint intervention to help the yen?

Treasurer Costello: Well I’m not going to comment on exchange rates.

Q: Can you give us a preview of tonight’s G-22 meeting and what do you expect to be the main outcomes?

Treasurer Costello: I think it’s going to go along the lines which I’ve described, and we’ve had a very good discussion in the interim committee for most of the day, and I think that the G-22 meeting will be a continuation along those lines.

Q: Just briefly, looking back briefly to Australia – the waterfront…..? you’re remaining fairly adamant that you’re in the right. Are you getting any feedback from over here about the international reaction?

Treasurer Costello: I think that this will be viewed as a positive thing. We’re an island nation and we’re a trading nation. That means our exports go out through the waterfront and our imports come in through the waterfront. And to have an unproductive waterfront is like having an artery which is being blocked up by cholesterol. It’s giving you less life, its not pumping the way it should be. And cleaning up the waterfront is like clearing out those arteries. More life, more vitality, better exports, better imports. I think the world recognises that. The world has thought for a long time why is it that Australia has such poor productivity on its waterfront and I think the world now says we understand why a government determined to build better living standards for its population would want to do something about it. It’s like cleaning your arteries, it gives you a new lease of life and a lot more vitality.

Thanks very much.