MONETARY FUND (IMF) ANNOUNCED AN AGREEMENT THAT SHOULD RETURN THE SOUTH INDUSTRIALISED COUNTRIES RELEASED A STUDY ON HOW BEST TO DEAL WITH MEXICO-LIKE FINANCIAL CRISES.

9:22 PM Apr 24, 1996

MONETARY FUND (IMF) ANNOUNCED AN AGREEMENT THAT SHOULD RETURN THE SOUTH INDUSTRIALISED COUNTRIES RELEASED A STUDY ON HOW BEST TO DEAL WITH MEXICO-LIKE FINANCIAL CRISES.
At a news conference at this week's annual spring meeting of the IMF and the World Bank, IMF Managing Director Michel Camdessus said a new, 1.4-billion-dollar standby-loan, likely to be approved next month by the IMF's executive board, should "restore international confidence"in Venezuela.

The loan is likely to be supported at least by another 1.6 billion dollars to be provided over the coming 12 months by the World Bank and the Inter-American Development Bank (IDB).

The widely expected announcement came as the Group of 10 (G-10) industrialised countries released a 10-month study on how best to deal with future financial crises similar to the one which resulted in the collapse of the Mexican peso in December 1984.

The G-10 report says that both creditors of debtor countries and debtor governments themselves should not count any more on major international interventions to shore up the value of their currencies, such as last year's 50-billion-dollar Mexican bailout.

Last February, the IMF put together an unprecedented package of emergency loans from its own resources, as well as those of the General Arrangements to Borrow (GAB) -- a money pool funded mainly by the G-10 -- and the U.S. Treasury.

"Neither debtor countries nor their creditors should expect to be insulated from adverse financial consequences by the provision of large-scale official financing in the event of a crisis," according to the G-10 report.

At the same time, the G-10 opened the door to the possibility that in similar crises, a freeze on debt payments of debtor countries could be approved.

"In exceptional cases, a temporary suspension of debt payments by the debtor may be unavoidable as part of the process of crisis resolution and as a way of gaining time to put in place a credible adjustment programme," the report concludes.

The possibility of such a "standstill"agreement was denounced last week by an association of almost 200 of the world's top international banks, which said that the IMF and the G-10 should not again mount such extraordinary rescue operations.

The director of the Institute of International Finance (IIF), Charles Dallara, said here that a Mexico-type rescue operation was "neither desirable nor repeatable."

The Institute says that the Mexican bailout was a one-of-a-kind happening due to both Mexico's proximity to the United States and the "world's perception of it as an exemplar of emerging markets reform."

"Since a repetition of these circumstances appears highly improbable, designing an approach based on the Mexican case is equivalent to fighting the last war. New procedures that could interfere with the functioning of the marketplace and undermine contractual obligations are wholly unnecessary," according to the Institute.

The Institute itself has urged the IMF to press countries to provide more information to investors about their economic performance in a more timely manner. More accurate, more timely information should reduce chances for a Mexico-type liquidity crisis, which sent the peso into a tailspin, according to both the Institute and IMF officials.

Indeed, the IMF Monday approved a new plan to improve the quality and timeliness of economic data by setting forth standards for monthly and quarterly disclosure. Key indicators -- which some countries are reluctant or slow to disclose -- include data about their foreign debt, reserves, and public-spending plan.

The announcement of Venezuela's return to the Fund follows months of intensive efforts by the IMF and the government of President Rafael Caldera to work out a austerity plan that would not provoke the kind of riots and civil unrest that greeted Venezuela's last major adjustment plan in 1989.

A key component of the plan includes huge increases in the price of gasoline, which has cost consumers only about three cents a litre in the oil-rich country.

During his campaign for election in 1993, Caldera had promised government intervention to keep prices low, especially for basic commodities. But as the country suffered capital flight and a major banking crisis, he reversed course.

Over the past year, he has lifted controls over key parts of the economy as he moved closer to the IMF.

World Bank and IDB financing will be directed primarily at easing the burden of adjustment on the poor, by supporting social projects; reforming and bolstering the country's banking system; and focusing on infrastructure projects in energy and transport.