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OPERATOR:  This is recording of the James O’Connor teleconference of the Atlantic Council of the U.S., Wednesday, May 13th, 2009, at 12:30 P.M. Central time.

Excuse me, everyone.  We now have Atlantic Council board member and member of the Council of Business and Economics Advisory Group, Timothy Adams, and Egyptian minister of finance and chairman of the International Monetary and Financial Committee of the IMF, Dr. Youssef Boutros-Ghali, on the line.

Please be aware that each of your lines is in a listen-only mode.  At the conclusion of the Minister Boutros-Ghali’s presentation, we will open the floor for questions.  At that time, instructions will be given as to the procedure to follow if you would like to ask as question.

I would now like to turn the conference over to Mr. Tim Adams, managing director of the Lindsay Group and former undersecretary of the U.S. Treasury.  Mr. Adams will be followed by the opening remarks of Minister Boutros-Ghali.

Mr. Adams, you may begin.

TIMOTHY ADAMS:  Wonderful, thank you.  And thank all of you for dialing in today as part of the Atlantic Council’s Global Business and Economics program and the Deutsche Bank series.

The Atlantic Council launched this program in December of ’08.  It’s already had some very successful sessions.  We had a very good session here during the Bank Fund spring meeting just a couple weeks ago.

And as part of the Deutsche Bank Speaker Series, we had Dr. Ackerman, the chairman of Deutsche Bank, lead us through a couple of discussions about a week-and-a-half ago, sobering remarks about the challenges of the global economy and the implications of this crisis for not only the U.S. but a number of global players – some positive aspects, but many aspects which will keep us pondering possibly up late at night for a very long period of time.

As part of that series we are honored today to have with us Dr. Boutros-Ghali, the finance minister of Egypt, and someone who I’ve had the pleasure and honor or working with when I was back at my Treasury days.  We look to him as a real leader in the global community on financial issues, and he has done a remarkable job in Egypt on fiscal reform, tax reforms, trade issues.

There really isn’t anything that hasn’t happened in Egypt on economic issues that he hasn’t been a part of, and in fact he has been a real thought leader globally for almost a quarter of a century.

So it is with a great honor today that we hear from such a distinguished gentleman, who is also the chairman of the IMFC, the committee that is essentially overseeing the IMF’s policy-making apparatus, and is the first individual to chair that committee to come from an emerging market, which I think tells us a lot about where the Fund is today, but maybe more importantly, where the Fund is going and certainly needs to go into the future.

So with that I will turn it over to our esteemed guest, Dr. Boutros-Ghali.

YOUSSEF BOUTROS-GHALI:  Thank you, Tim, and thank you very, very much for these kind words.  I just came out from a session in parliament, as you might expect a minister of finance in parliament.  They were not exactly on the same wavelength as what you have just said, so I hope somebody will be listening in from there to be able to take some of that goodwill into the committee I’ve been testifying in front of.

The issue today is, where is the world economy going and what are the challenges ahead?  I will not delve into the issue that has become almost standard now – have we reached bottom or not?  Nobody knows.  The Financial Times today says we have bottomed out.  There are little curves showing a curly-Q pointing up or some that have flattened.  I, as an economist who has seen many such predictions, remain skeptical.

This is a crisis of monumental proportions.  It has features that we have not seen in any of the crises we have gone though in the past several decades, namely a coincidence of a financial collapse with an economic collapse.

Financial collapses alone are manageable: the crisis of the late ’80s in Wall Street and again in the early ’90s.  Even the crisis of Southeast Asia in ’97, which was mostly financial, spilled over into economic crisis but, in a sense, was contained.  So we have this first feature.

The second feature is that the business cycle has synchronized throughout the world.  Everybody is suffering.  Previously we had somebody at the bottom of the cycle and somebody else at the top of the cycle.  The one at the top would manage to pull up the one at the bottom.

Right now everybody is at the bottom and therefore it’s a subject of question: which of those at the bottom is going to start pulling the other up, or will we have to pull ourselves from our own bootstraps, something that is not very common or simple.

But this aside, it is important that we look at what lies ahead.  Bottoming out – we will bottom out eventually, either this quarter, next quarter, the one after.  Eventually something will turn north and things will start picking up.

My own suspicion is we will reach zero growth rate for industrial countries sometime in the last quarter or 2009, and we will start seeing either very mildly positive rates in that quarter or in the first quarter of 2010.  Unemployment of course will react to the latter and will peak at around the end of 2010 and therefore start declining by 2011.

Having said this, what are we faced with now?  We are faced with industrial countries, developed countries that have run up huge budget deficits and that are, at present, financing those deficits in the international marketplace.

We are faced with emerging market economies that want to introduce stimulus packages the same way as developed countries have done, but are faced with one new challenge, namely that of crowding out.

The huge deficits, budget deficits, and therefore the enormous financing requirements of developed countries in the international marketplace, have crowded out those of us who have the means of a fiscal stimulus and budget space, but the fiscal stimulus comes with foreign financing means, with balance of payment requirements.

These balance of payment requirements, either from the country – from the public sector itself or from corporates, will require borrowing in the international marketplace.  Who would go lend to an Indonesia or to a Mexico when he can lend to the U.S. Treasury – truly, it is true, at much less return but at significantly less risk?

And therefore we find the Mexicos, the Indonesias, the Brazils, the South Africas and, to a very marginal extent – Tim has been charged with saying I come from an emerging market economy – I come from a third-world economy.

We are barely emerging, and therefore our needs are commensurately smaller.  Even Egypt, if it should go to the international marketplace, would find itself crowded out by the huge elephants that are there sucking out most of the oxygen in these markets.

Our problem then becomes, how do we provide the funding necessary for allowing emerging market economies to get out of the mess they’re in, or they’ve been put in?  How do we avail funds for these countries to allow them not to be crowded out by the large borrowers, such as France, England, the U.S. and others?  The leaders summit in London has addressed this by coming up with 1 trillion (dollars) of additional funding to international financial institutions.

I just chaired a meeting of the IMFC, and we have managed, out of that 1 trillion (dollars), 500 billion (dollars) of which is to be borrowed from member countries.  We have pledges for about 400 billion (dollars).  Two-hundred-fifty (billion dollars) is to come from an SDR location.  This is a mechanical affair and the money is going to be distributed.

As all of you know, SDR is a fictitious currency.  It is resources but it is a currency that is structured in the Articles of the Agreement of the Bretton Woods Institution.  The remaining 250 billion (dollars) is to go for trade finance.  I have my doubts whether it will see its way to a trade finance institution, but I an actually hopeful person as far as these things go.

Therefore, the challenge that we have in front of us is how to make funds available for emerging market economies that want to institute stimulus packages but do not have the means to enter the international marketplace.

The second issue, and one that many may think premature but I think that it needs to be addressed now, is how, now that the catastrophe has happened and now that we are at the bottom or near the bottom of it, and now that we know how we’re going to get out of it – stimulus packages, et cetera, et cetera, eventually it will kick in – how are we going to deal with all this massive liquidity that has been pumped into the world economy?

Ben Bernanke is right in beginning to wonder what is he going to do to make sure that this does not occasion the same crisis that it did when the same situation prevailed in the early years of this decade – 2000, 2001, 2002.

I will remind you that in those early years there were huge deficits in the North American economies, namely the United States, matched by huge surpluses in Southeast Asia and other emerging markets economies, which occasioned a massive influx of liquidity, lowering the cost of that liquidity and pushing the international financial institutions to grab for yields, and therefore got us into the mess that we are in today.

We don’t want to repeat this, and therefore, all this massive liquidity will have to be marked back one way or the other.  The question is, how do we do that without choking up the recovery that we hope will be put in gear by the beginning of next year?

The third issue that we have facing us is an issue of mixed importance.  It is crucial for us to reform the international financial institutions.  Their inability to keep up with developments in the world economy, their inability to upgrade its surveillance mechanisms, to keep an eye on what’s happening in the world economy made it such that when the crisis happened, the international financial institutions were bystanders watching, like the rest of us, the crisis unfold, not being able to intervene either by know-how or by funding or by any other means to help the countries affected by this crisis.

These institutions need to be upgraded and they need to be upgraded in a way that makes them in tune with 21st century realities.  A lot of issues have been said that we need to improve surveillance, with the ultimate aim to be able to diagnose the elements of a crisis before it happens and do something about it.  Doing something about it means coordinating policy among countries or influencing the policies of large economies so that the crisis can be avoided.

Let me point out to you that the IMF has pointed out a major – or the major imbalance of earlier years of this decade, saying you have a huge, unsustainable current account deficit in the U.S. economy; something needs to be done about it.

Of course, the Fund then did not have much clout on the U.S. economy or on any large, developed economy, for that matter, and therefore nobody listened.  Had the Fund been able to influence U.S. policy, the deficit would have been addressed.

Had it been able to influence Chinese policy, the surface would have addressed, and maybe, maybe, we would not be in the mess we’re in today, or maybe we would be in that mess but a smaller mess.  Therefore, we need to increase the legitimacy and the credibility of international financial institutions, and in that respect, the IMF stands at the top of the institutions that need upgrade.

Second, we are beginning to talk about early warning.  However dubious the early warning exercise may be for some, if it produces results, it will produce results that will require that we coordinate a policy, a response to an early warning that avoids the catastrophe we’re warning against.  That requires an institution, a locus where we can sit around the same table and decide what we are going to do, in coordination amongst the main players, and consistently across borders, consistently across institutions.

In sum, we need to reform the IMF, but of course, in the middle of a crisis – in the middle of a fire you will tell me, let’s put out the fire and then worry about redecorating the living room later.  A valid point, but if we can’t decide on how to redecorate the living room now, in the middle of a crisis, we will not do so after the crisis has passed, because our living room is difficult to redecorate.

Our living room has many contending interests, many players that use that living room.  Each will have to desist from some of the power it has today and will not want to do so easily.  So, in the middle of a crisis we have to worry about fixing the international financial institution architecture.

Let me conclude.  I did not, purposefully, bring up reforming the international surveillance regulatory system.  There were failures of regulation, failures of supervision – failures of regulation and supervision across institutions and across countries.  This is being addressed.  We have established a process by which regulators would sit around the same table and start discussing how to regulate cross-border and cross-institutions.

It is going to be time-consuming but eventually it will lead to something.  There are thorny issues that need to be addressed in that respect, the most important of which is, is there a uniform set of rules that can be applied to all countries in the world?  Look at Belgian criteria.  They were uniform, they were applied to everybody, and they were wrong.  And therefore, all of us had the same problem and all of us followed the same rule that was wrong.

Now, is it feasible?  I don’t know.  Should we have regional coordination?  Should we have rules that are specific to each country but coordinated across countries?  All of these are issues that are now on the table that will need to be addressed.

To my mind, these issues have their own dynamic and eventually they will lead to a solution.  Others do not have their own dynamic and may lead us to a dead end that will make it such that we will get out of this crisis but we will set ourselves up for the next one without having changed anything fundamentally.

Thank you for your patience.

MR. ADAMS:  Wonderful.  Thank you, Mr. Minister – as always, very thoughtful and broad-sweeping.  I’d like to use the power of the chair to ask the first question.  Then we’ll open it up to our very patient and waiting callers.

One of the challenges that the Fund faces is the sense of legitimacy, and you touched upon that.  There is a large portion of the membership that feels that the institution doesn’t truly reflect their needs, their desires, their wants, but, more importantly, doesn’t fully reflect the changes that have occurred in the global economy – you said the global economy of the 21st century.

Are the reforms that are on the table now that our Congress is actually debating as of today, are these sufficient to meet the concerns and the needs of the emerging and developing world, or would you expect to see additional new reforms being tabled in the very near future?

MR. BOUTROS-GHALI:  No, the reforms that we need are not presently on the table.  The Congress is discussing reforms regarding the allocation of SDR and lending to the IMF, which concerns providing the IMF with necessary funding to be able to intervene by assisting those countries that are unable to access international capital markets, despite the fact that they have sensible and well-balanced macro-economic policies, such as Mexico, for example, who just went through a new facility, borrowing $47 billion from the IMF.  The reforms we are talking about are reforms of governments within the IMF.

Quotas.  How do we redistribute the quotas to reflect the relative power between countries?  How do we redistribute the voices of these countries to reflect 21st century realities as opposed to 1944 realities, as is the case now?  How do we make sure that the voting power of China is not equivalent to the voting power of Belgium?

This has become the classical example that is brought up every time we talk about this issue.  This is the more thorny part of governance, but there are other issues of governance.  How do we choose a managing director?  Do we leave the domain of Europe as it used to be or do we make it on a merit-based system?

How do we distribute the power of managing the institution between the executive board, which is a very well-meaning, very qualified bureaucrats, or do we give it a more extensive political coverage, whereby we can take decisions that matter at the level that is politically relevant.

How do we establish new facilities that make accessing the fund not attached to a monumental stigma of having the country at debtor’s door?  And, in fact, the new financial liquidity facility addresses this.  It gives money to countries without conditionality, the countries that have decent macroeconomic policy.

But what do we do with developing countries that have problems in the macroeconomic affairs?  What do we do to lower-income countries, to poor countries who are suffering from the crisis in relatively larger proportion than the developed countries?

In developed countries unemployment is going to lead to maybe the unemployed not going to have dinner outside – instead of five times a week we’ll do it once a week.  In developing countries or in poor countries, the crisis leads to death.  Children will go starving.  Under-nourishment will increase.  Mothers will not be able to take care of their children.

And so there is a question of life and death in these countries.  These are the issues that we need to address, and these are the issues that I had massive difficulties in putting on the table at the last meeting of the IMFC.  So we have a ways to go.

MR. ADAMS:  Well, I’m sure under your leadership we’ll make more progress than we would have under other steady hands, and I’m glad –

MR. BOUTROS-GHALI:  That’s very kind of you.

MR. ADAMS:  – that you’re there in the chair.

Operator Drew, why don’t you give instructions to the callers and we’ll open it up to the outside?

OPERATOR:  Thank you.  At this time we will open the floor for questions.  If you would like to ask a question, please press the star key followed by the 1 key on your touchtone phone now.  Questions will be taken in the order in which they’re received.

If at any time you would like to remove yourself from the questioning queue, press star 2.

MR. ADAMS:  I think we’ve got Doug Rediker, a dear friend and colleague, on the line from the New America Foundation.

Q:  Thank you, Mr. Minister.  I have two questions, if I may.  One, could you give us some insight into the reports that the Chinese contribution to the increased funding for the IMF is likely to take place via a bond as opposed to actually the NAB, and what that bond might look like.

And a second question, if I may, picking up on Tim’s initial question, which is has there been any discussion to an enhanced role of the IMFC relative to the G-20, which has no actual enforcement or legal stature or status but has obviously grown in the estimation of the world as a forum where the issues are being discussed, where the IMFC actually does have an executive role.  Has there been any discussion about maybe weaving in some of the G-20 into the IMFC, and what would be your response if that was put on the table?

MR. BOUTROS-GHALI:  Thank you, Doug, for the question.  Unfortunately I don’t have much insight as to what the Chinese will adopt as a position, but what I can tell you is that a number of countries have said that if they are to lend to the Fund, the legal procedures and the parliamentary procedures are different than if they were to purchase bonds as a matter of investment of their reserves at the central bank.

If they buy a bond, they would be buying an SDR bond the same way that they would buy U.S. Treasury notes or U.S. Treasury bonds, and therefore it would be simply an investment decision as opposed to a sovereign decision of lending funds to an institution.  Both of them you end up by lending, but one of them you’re investing your portfolio.  So that’s probably how the equation is being set up.

The other issue of enhancing the role of the IMFC, it is true; it is part of the government reform that we are requiring.  How much of the decision-making power of the executive board of the IMF today should be transferred to a ministerial council?  Now, I mention ministerial council and for some reason everybody gets very, very, very nervous.

So I have suggested to the membership of the IMFC to keep the IMFC as is and to enhance its decision-making powers.  As you know, the IMFC today has an advisory role, an advisory role that in practice has always been a decision-making role, because whatever the IMFC advised was taken up by the board.  We can make this more formal and give more decision-making powers to the IMFC gradually so as not to panic everybody.

As far as the relationship with the IMFC – between the IMFC and the G-20, all of the G-20 membership is in the IMFC – sometimes the same countries and sometimes other countries, but in the same constitution as the ones that are in the G-20.  Only six seats that are in the IMFC are not represented in the G-20.

So there are six seats that are not in the G-20, that are in the IMFC, either because – and that are important because they contribute to international law like the Nordic countries in Europe – Sweden, Denmark, et cetera, or Switzerland and a group of countries attached to it – or countries that deserve to be in that because they are developing countries of some importance, like African countries, which are represented exclusively by South Africa.

We are working at bridging the two, and we are working at making sure that the two are consistent with each other.  But the question is relevant and we hope to be able to address it soon.

Q:  Thank you very much.

MR. ADAMS:  Great.  Rod Hunter.

Q:  Hello?

MR. ADAMS:  Yes?

Q:  Oh, good.


Q:  Thank you, Mr. Minister.  Your comments are very interesting and helpful but I was curious about two elements in particular: your comments on the surveillance and the need for better surveillance, and second, early warning.

Having been in a White House before and having been in a White House during a political election –

MR. ADAMS:  We may have lost Rod as well.  Why don’t we – maybe he’ll key back up.  We’ve got Peter Rashish [phonetic] from McLarty and Associates.  Are you on there?

Q:  Yes, thank you.

MR. BOUTROS-GHALI:  Okay, yes?

Q:  Dr. Boutros-Ghali, I wondered if I could draw your attention just briefly to Europe.


Q:  I was referring to the comment several weeks ago by Nobel Prize winner Paul Krugman, who suggested that Austria – as you may know, that Austria’s banks may need a bailout because of the sector’s exposure to Central and Eastern Europe, which is somewhere in the neighborhood of 70 percent of GDP.


Q:  I was wondering if you could imagine – if you could imagine a scenario under which the Fund would intervene to assist a eurozone country like Austria, or do you think it’s much more likely that it would be a European Union institution that would respond in such a case?

MR. BOUTROS-GHALI:  Well, let me get into this hypothetical world, and I’m working on very thin ice here.

I would think the eurozone would want to rescue its own by itself.  Don’t forget, there is still a very, very large stigma attached to resorting to Fund financing, especially when you are in distress.

So I think that to maintain confidence in eurozone, to maintain confidence in the euro, the euro would probably keep it to itself, but then again, you never know.  The problem may be so large that assistance from the IMF could be required, either in conjunction with EU intervention or as a small sort of support to it.

Q:  So the history of the U.K. in the 1970s still has a role to play in how the core European Union countries may perceive an IMF role.  That makes sense.  Thank you very much.

MR. BOUTROS-GHALI:  Yes, and I think the U.K. has not recovered from the stigma that was attached to its resorting –

Q:  Right, right.

MR. BOUTROS-GHALI:  – in ’74 to the Fund.  So I don’t think anybody would come running to the IMF.

Q:  Good.  Thank you.

MR. ADAMS:  I think that’s absolutely right, Mr. Minister.

We have Mr. Domego Jurirych [phonetic] from the Croatian Embassy.

Q:  Hello.  Good day to everybody.  Hello, Minister.  Nice to talk to you.

MR. BOUTROS-GHALI:  Hi, how are you?

Q:  So let me be brief and maybe go to vision part and to question the role of the international organization today with this crisis.

In a world where everything is connected, the – (unintelligible) – of change, of turbulence, are likely to appear only when we look in unexpected places.  Considering this crisis, to resolve it, are we simply looking at the wrong places or trying to approach this new problem with the old tools that no longer apply?

What do you think about it?  Thank you.

MR. BOUTROS-GHALI:  No, it’s looking at the wrong places with the old tools that got us into this problem.  I think we’ve learned our lesson.  Now, we are looking at the right issues because the right issues are the ones on fire: bank balance sheets, toxic assets, credit seizures, money markets that have dried up, et cetera.

So we are looking at the right things, and we probably will end up by doing the right things, notwithstanding a few errors here and there.  The question is, do we set up a system that will keep us from doing the same mistakes that got us into this mess in the first place, and these are the issues regarding what to look at as a matter of daily routine.  Now, we know what to look at because what we’re looking at is the place that is on fire, but once the fire is put out – and, as you say, we could be looking at the wrong things.

I think we are learning the lesson and we are beginning to identify those elements that should form under surveillance, namely the transfer or risk across countries, the transfer of risk across balance sheets, across financial institutions, the opening of capital accounts across countries.  Do they do it too fast?  Do the do it in a way that promotes risk transfer from one country to the other?

The consistency between financial regulatory environments in different countries – do I regulate my banking system in a way that increases the risk in another banking system; outside of my borders, it’s true, but ultimately in a way that will fall back on me and cause problems in my own country.

How are the exposures of various financial institutions to each other, not in the first-degree sense, like a bank A in England being exposed to bank B in France, but bank A in England being exposed to bank C, that is exposed to bank B in France, and bank B falls.  There is no direct exposure between England and France but there is an indirect exposure.

How to look at these things and how to integrate this into global risk analysis?  These are the issues that we need to incorporate as a matter of routine.  We’re looking at them now, but once the crisis will be over, if we don’t institutionalize this we will have forgotten what we were looking at and will be back to our old habits.

MR. ADAMS:  Thank you, sir.  Wonderful.  I think our time is just about up so we’re going to wrap that up for the day.  Mr. Minister, again, thank you so much for taking time out of your busy parliamentary session.  We greatly appreciate your insights.  And as I said before, I feel much more comfortable knowing that you’re in the driver’s seat at the IMFC.

MR. BOUTROS-GHALI:  Thank you.  Thank you very much.  And I appreciate your very kind words this evening.  Thank you all and thank you for coming.

MR. ADAMS:  Good-bye.  Thank you.


Transcript by Federal News Service, Washington, D.C.

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