International Finance

HL Deb 02 November 1998 vol 594 cc27-40

4.11 p.m.

Lord McIntosh of Haringey

My Lords, with the leave of the House, I should now like to repeat a Statement on the world economy which has been made in another place by the Chancellor of the Exchequer. The Statement is as follows:

"With permission, Madam Speaker, I am reporting to the House at the earliest opportunity available on the terms of a new international agreement reached by Finance Ministers and central bank governors of the G7 countries to reform and strengthen the international financial system.

"A full copy of this and a Statement by the Heads of Government setting out an agenda for further action is now available in the Vote Office.

"Tomorrow I will present to the House the pre-budget report, with its detail on the domestic economy.

"But the financial crisis that swept Asia last year and reverberated around the world has revealed long-standing weaknesses in the international financial system which G7 Ministers agree must now be addressed as a matter of urgency.

"Our predecessors had to meet the challenge of ensuring economic stability in an era of national economies. Now our generation must meet the challenges of ensuring stability in the era of the global economy, where each individual economy can directly affect the prospects of every other.

"And the new way forward for this new era is sensible global financial regulation, credible crisis prevention, and orderly mechanisms for crisis resolution, with a sure foundation in minimum standards and best practice which all countries adopt to participate in the international financial system.

"And this is directly relevant to the UK economy. It is everybody's business, not only because we are dependent on trade in goods and services with other countries—for example, the Asian crisis has in one single year cut UK exports to Indonesia, Malaysia and South Korea by around 50 per cent. and to Thailand and the Philippines by around 60 per cent.—but also because—as we have seen—a weak financial system or inappropriate economic policies in one country not only put at risk another country's financial system, but will also threaten people's savings or investments and eventually their companies or jobs.

"That is why it is in every country's interests to support a new mechanism for crisis prevention and resolution, a new transparency and a new process for global financial regulation.

"Our Statement reaffirms that the balance of risks in the world economy has shifted from concerns about inflation to concerns about growth. In the last month interest rate policy has already been adjusted. In Japan, the United States, Canada, the United Kingdom, Spain, Portugal, Ireland, Denmark, Italy, and again in the United States. The G7 statement reaffirms our commitment to create or sustain the conditions for strong domestic-demand led growth and financial stability in each of our economies. The authorities will continue to be vigilant in the light of the shift in the balance of risks on a global basis.

"In our Statement each continent has agreed to make its contribution to creating the conditions for stability and growth—Japan with immediate banking reform, Europe with structural reforms to tackle unemployment, America to promote growth with low inflation and, in the case of Latin America, we welcome the policy commitments the Brazilian Government has made and we will work with the international community to support them. And all of us must act to avoid retreat into protectionism.

"But as well as measures to deal with short-term instabilities we also need action to reform the financial architecture.

"For 50 years our policies for regulation, supervision, transparency and stability have been devised and developed for a world of relatively sheltered national economies with limited capital markets. Now that markets transcend national boundaries we must create for global markets systems for supervision, transparency, regulation and stability that are as sophisticated as the markets they have to work with.

"And G7 governments have therefore concluded that the international architecture devised in the 1940s for the economies of the 1940s is no longer adequate to the challenges of the 1990s and that we need new rules for the global financial system of the 21st century.

"So in the G7 statement each G7 country has now agreed to adopt and apply codes of conduct founded on minimum standards and best practice: new disciplines and undertakings that each country is prepared to accept as a condition of its participation in the international system.

"In monetary and financial policy we are agreed on the need for greater transparency and openness, that each country should specify its objectives for monetary policy, and identify responsibility for achieving these objectives and for reporting and explaining monetary and financial policy decision. And we are agreed that these standards should be set down in an internationally agreed code of conduct that all countries are prepared to accept.

"The G7 Ministers have also committed themselves to comply with the code of conduct of good practice on fiscal transparency, that has been drawn up by the IMF.

"Similar standards of transparency are required in the private sector. By spring next year the QECD will complete work on a code of principles on sound corporate governance and structure. And by early 1999 we will also have in place a plan for internationally agreed accounting standards.

"These codes of conduct in monetary policy, fiscal policy and corporate governance will mean radical changes in the way governments and financial markets function. They will help produce an environment in which financial markets can operate better. They should reduce the risk of future failures, and mean that when failures do occur the financial system is robust enough to withstand them. By improving public understanding of why and how decisions are made, and making sure the right long-term policies are in place, the codes will help build public understanding and support for the policies that deliver economic growth and prosperity.

"Proper implementation of the codes of conduct should be a condition of IMF and World Bank support. Immediate action to promote transparency in policy making, financial sector reform and corporate governance should be key components in any reform programme which the IMF and World Bank agree in coming months.

"And the IMF and the World Bank must themselves be more open and accountable, with a presumption in favour of releasing information and external audit of their performance.

"And there should be new undertakings on social policy too. An injustice anywhere is a threat to justice everywhere and the G7 statement underlines the importance of policies that protect the most vulnerable, the real victims of financial crises, whose pain is very real indeed. That is why the G7 has agreed there should be general principles for good practice in social policy in all countries that will now be set down by the World Bank and serve as a guide to best practice.

"But we are also agreed that there must be, as a matter of immediacy, a new World Bank emergency facility, to provide additional funding on special terms to the most vulnerable groups in society.

"Secondly, global financial regulation: the G7 Ministers are now agreed to support the establishment of a process for strengthened financial sector surveillance using national and international regulatory and supervisory expertise, to be used in the IMF's regular surveillance of its member countries.

"To this end, we will bring together the key international institutions and key national authorities involved in financial sector stability, better to co-operate and to co-ordinate their activities in the management and development of policies to foster stability and reduce systemic risk in the international financial system and to exchange information more systematically on risks in the international financial system.

"Dr. Tietmeyer, the President of the Bundesbank, has agreed to consult the relevant international bodies on these reforms and I would like to see an international memorandum of understanding, establishing a proper division of responsibility between regulators and international authorities at the international level.

"In the G7 statement we commit ourselves to strengthen the regulatory focus on risk management systems and prudent al standards in financial sector institutions, in particular to examine the implications arising from the operations of leveraged international financial organisations, including hedge funds.

"In this area, a fundamental problem has been a lack of transparency And poor standards of disclosure on the part of some financial market participants. This important issue will be looked at by the Basle Committee in considering an international standard of best practice for transparency and disclosure. An agreed international standard of best practice would act as a benchmark, both for financial institutions and their regulators.

"The United Kingdom is clear that those financial institutions which deal with hedge funds must take into account all proper prudential standards and requirements of disclosure. Proper due diligence procedures are essential.

"Britain also believes that, as part of the general review of capital adequacy rules, the Basle Committee needs to examine the appropriate treatment of banks' exposures to hedge funds so there is proper recognition of the risks involved. And, as the Chairman of the Financial Services Authority, Howard Davies, has emphasised, managements of financial institutions have a responsibility to ensure that circumstances can never arise in which personal relationships with potential counterparts get in the way of appropriate due diligence. He said that there must be complete transparency in respect of senior managements' personal investments in counterpart firms to avoid any suspicion of conflicts of interest. I fully endorse these remarks.

"The statement from G7 Heads of Government said that they would examine not only the implications of the operation of highly leveraged operations of offshore institutions but also how they can encourage offshore centres to comply with internationally agreed standards. This is a particular issue for the UK because long-term capital management was registered in the Cayman Islands.

"This Government are committed to improving standards of regulation and regulatory co-operation in our overseas territories as well as to implementing the European, G7 and OECD initiatives to tackle unfair tax competition.

"We must not let high risk hedge fund speculation by a few translate into wider risks for the many and destabilise the financial system on which we all depend for prosperity.

"So by international examination of these issues of concern—transparency in hedge funds, proper due diligence procedures, tackling potential conflicts of interest and dissemination of standards to offshore centres—governments can play their part in minimising the implications of future sudden and systemic disturbances.

"Finally, G7 Ministers are agreed on the need for a new procedure for crisis prevention, and tackling contagion. The central element would be an enhanced IMF supplementary reserve facility which would provide a contingent short-term line of credit for countries pursuing strong IMF approved policies. This facility could be drawn upon in times of need and would entail appropriate interest rates along with shorter maturities. The facility could be complemented, in individual cases, by bilateral contingent financing and the facility would be accompanied by appropriate private sector involvement.

"The G7 have also agreed that there also needs to be a better long-term mechanism for international authorities to work with the private sector and national authorities in handling debt problems, including debt rescheduling, at times of potential crisis. We are now asking, first, the private sector to adopt 'collective action clauses' to facilitate more orderly workout arrangements, and we will consider the use of such clauses in our own sovereign and quasi-sovereign bond issues. We are also asking the World Bank, in co-operation with the IMF to work with their members to put in place effective insolvency and debtor-creditor regimes, and, secondly, the IMF to consider lending into arrears, under carefully designed conditions and on a case by case basis.

"We want the private sector to build upon its experience with some emerging market countries in developing new market based contingent financing mechanisms. G7 governments will now support the more active use of loan guarantees to encourage greater private sector involvement in emerging market financing. Following the welcome United States Congress decision, we call for the IMF quota increase and the new arrangements to borrow to be implemented as soon as possible. Together they will provide additional IMF resources of 90 billion dollars to ensure the stability of the international financial system.

"Globalisation has happened. We must now make it work in hard times as well as good. As we have shown, we do not need new institutions, but we do need new rules and new disciplines. And I want to thank other G7 Ministers and central bank governors, and heads of government who have backed this work all along, for working through this new agreement.

"Taken together, the reforms we have agreed—global financial regulation, codes of conduct, and mechanisms for crisis prevention and crisis resolution—represent the first step and now set the agenda for the most radical restructuring of the international financial architecture since its creation in the 1940s, making us better equipped to tackle the challenges of the 1990s and the century ahead. I commend this Statement to the House".

My Lords, that concludes the Statement.

4.26 p.m.

Lord Higgins

My Lords, the House will be grateful to the noble Lord the Minister for repeating that wide-ranging and extensive Statement. He will agree that to a large extent it represents an agenda for reform rather than reform itself. We shall need to keep closely in touch over the development of the various proposals. One must also consider the extent to which the United Kingdom is setting an example in some of the areas referred to by the Minister.

The key point, described as such in the G7 memorandum, is that the agreement reflects the shared determination of the UK and G7 to modernise financial systems and to put in place new rules and procedures. It states: The key point is that the G7 agree that the balance of risk in the world economy has shifted from high inflation to concerns about low growth, and commit themselves to create or sustain conditions for strong domestic demand-led growth". One cannot help feeling that to some extent the shadow of Lord Keynes, which has been absent from this Chamber for a long time, is to be seen hovering above the Gallery.

More particularly, one is bound to ask whether the terms of reference which the Government have imposed on the Bank of England, a point frequently made by the noble Lord, Lord Barnett, are appropriate against the statement that I have just made because the balance appears to have been shifted from inflation to growth. Although it is true, as the Minister said, that there have been recent reductions in interest rates, as regards the Bank of England, and more particularly the European Central Bank, one must ask whether the bias in their terms of reference is consistent with what has been set out by the Government.

No doubt we shall hear more tomorrow in the Chancellor's Statement, which has been so extensively leaked in the press today, about the rate of growth in the United Kingdom. No doubt we shall also hear that the reduction in the rate is due to the international situation and so forth. Can the Minister confirm that the latest Economist poll on the economic forecast suggests that the rate of growth in the United Kingdom in 1999 is likely to be less than half not only that of France and Germany but also Australia, which was more severely hit by the Asian crisis?

There is a certain amount of jargon in the Statement. I am glad that the Minister agrees with that and no doubt he can clarify a number of issues. I ask him about only one. It is said that there should be more ordinary work-out of debts and effective insolvency and debtor/creditor regimes. It goes on to say that lending into arrears by the IMF will be required. Can the Minister tell us what is meant by lending into arrears by the IMF, since it is a relatively new piece of jargon? It would be illuminating to know what it means.

It is debatable whether the Government have set an example of transparency, not least in regard to the controversy which has raged over the way in which the working family tax credit should be treated in our own accounts.

The issue of fighting protectionism and open free trade is mentioned at great length in the Chancellor's Statement but not to the same extent, if at all, in the IMF and G7 statements.

Finally, I shall concentrate on the real guts of the issue. We are told that there is to be an enhanced IMF supplementary reserve facility, accompanied by appropriate changes in agreements to borrow, et cetera. As far as the American contribution is concerned, is that simply paying up arrears or is it a new additional amount? Does the United Kingdom contribution appear in the comprehensive spending review? Is it a new initiative, or is it something we have already agreed to? Has there been any consideration of extending the system of SDRs, special drawing rights, which played an important part in earlier reforms as far as the bank and the fund were concerned?

We are told that the World Bank will have an emergency facility to deal with the problem of contagion, particularly to help countries which stick to IMF rules. I am not clear whether that is an attempt to stop contagion as far as the patient is concerned or as far as those who might be affected or infected are concerned. Will this new emergency facility help those who are already in trouble or those who are likely to be affected by other actions?

The Statement says that there is to be a report on the work completed, the work in progress and the work to be done. Can the Minister tell us what work has already been completed?

4.33 p.m.

Lord Taverne

My Lords, the G7 statement is a worthy statement, although I am not absolutely sure how much it will be worth. It depends on whether the splendid principles of good practice will be applied. However, there are good features about recent developments, some of which are mentioned in the Statement, for example the 90 billion dollar increase in the IMF funds which is very welcome and may help to stop Brazil falling into a state of collapse. The recent prompt action by the Fed was extremely helpful. When we look back on these matters we may find that we owe a considerable amount to Mr. Greenspan. Next to avoiding severe recession in the United States, it is obviously of great importance that the growth of the European Union should be maintained. Does the Minister agree that the best contribution the Government can make lies in the domestic economy, avoiding a serious collapse in our growth? Therefore, the Statement tomorrow will obviously be more important than today's Statement. Does the Minister agree that the top priority must be to enable the Bank to lower interest rates, thereby, together with the lowering of the value of the pound, encouraging investment? Does the Minister not realise that apart from what the Chancellor does tomorrow, the most important contribution by the Government to the long-term stability of investment would be to make the earliest possible commitment to joining the euro? Is it not becoming clearer by the day that that is the essential decision for the Government to face?

4.35 p.m.

Lord McIntosh of Haringey

My Lords, I am grateful to both noble Lords for their response to the Statement. Oddly enough, I am more grateful on this occasion to the noble Lord, Lord Higgins than I am to the noble Lord, Lord Taverne. I suspect that the noble Lord, Lord Higgins, is right in saying that at this stage this is as much an agenda for reform as reform itself. It is clear that the agreement made by the G7 countries last Friday is a statement of intent and a description of what is going to be done rather than a report on work that has been completed. The whole process arises from meetings presaged by a speech of the Prime Minister at the end of September to the New York Stock Exchange subsequently fleshed out by speeches by the Chancellor to the annual meetings of the IMF and the World Bank and at G7 at the beginning of October. A series of agreements has been reached for short-term rescue and for medium and longer-term institutional changes. In that sense I am not afraid of the description of an agenda.

I am grateful to the noble Lord, Lord Higgins, for his recognition of the UK leadership. This is, after all, 1998 and our presidency of G7. We can justifiably say that the Prime Minister and the Chancellor made very good use of our presidency in order to move forward issues of global financial management. Whether or not he meant to pay tribute to the United Kingdom leadership of G7, I should like to do so, as one who is very much on the periphery of these matters.

I was interested, amused and encouraged to hear the noble Lord say that the shadow of Lord Keynes is hovering over this Chamber for the first time in a number of years. There have been occasions in the last few months when it was appropriate to refer to counter cyclical demand management policies, and I have done so. There may be other such occasions in the future. The noble Lord asked whether these issues give rise to questions about the terms of reference given to the Bank of England in its consideration of short-term interest rate policies. The terms of reference given to the Bank are fundamentally price stability and a given inflation rate; and that inflation rate has always been a minimum as well as a maximum inflation rate. To that extent our setting of inflation rate targets applies as much when the issue is growth as when the issue is inflation itself. I remind the noble Lord that the Bank of England Act states that subject to the inflation target, the Bank should encourage the Government's policies of high levels of employment and growth. That is exactly what we are now seeking to do.

The noble Lord asked about current growth forecasts by economists. I may find an opportunity to answer that point on a more relevant occasion tomorrow when we will consider the UK economy in more detail.

The noble Lord asked about the gaps, the setting-up of the additional 90 billion dollars of IMF reserves. The United States payment is the result of a decision made by the United States Congress and is not a payment of arrears. The UK contribution, which is approximately five per cent. of the total either in the quota payments or in new arrangements for borrowing is not, as the noble Lord knows, public expenditure as such. It is a different way of using our reserves and therefore does not appear, as he suggested, in the comprehensive spending review. Insofar as those reserves are used by the IMF, they are compensated; interest is paid on them at the SDR rate. I do not know whether that entirely answers the question about SDRs.

The noble Lord made a very good point about the issue of contagion, which is referred to in the Statement. We are concerned both with those countries which are in trouble and those countries which are likely to be in trouble. To that extent, the width of the agenda put forward by the G7 Ministers and governors is evidence of the concern which we have on both those issues. The noble Lord asked about reporting on that programme of work. It will continue to be reported to Parliament as appropriate.

I am grateful to the noble Lord, Lord Taverne, for his recognition of the importance of the 90 billion dollars. He says that the health of the UK domestic economy is the best contribution we can make to international stability. I agree entirely. I hope that when the Chancellor makes his new budget report tomorrow, he will give the same general support to that as I think he has done today.

As regards joining the euro, perhaps the noble Lord should read Ministers' statements made to the CBI conference today.

4.42 p.m.

Lord Peston

My Lords, this Statement is of global significance. I can think of no Statement made in all my years in your Lordships' House which equals it in importance as regards the future of the world economy and world financial systems. It gives one hope that perhaps the normal self-destructive tendencies of the advanced industrialised world will not be allowed to go beyond anything which would imperil our future. Indeed, as regards the references to Lord Keynes, it is worth bearing in mind that Maynard Keynes was much more concerned about world international financial co-operation and the survival of the world than he was about quite minor matters such as contra-cyclical fiscal policy. Therefore, the shadow of Keynes certainly holds over this Statement but in a much deeper way than is sometimes recognised.

How do we get from statements of intent to the practicalities? There is reference to codes of practice, codes of conduct and transparency. But who will be responsible and who will be in a position to ask years from now: where are those codes of conduct? Subsequently, whose responsibility will it be to say whether people are operating according to those codes of conduct? Can my noble friend throw any light on that matter and, in particular, on the question of enforcement?

The Statement says that we do not need new institutions but new rules. Coming from the G7, the only comment that one can make is, "They would say that, wouldn't they?" However, will my noble friend bear in mind that a number of people who have thought deeply about these matters are convinced that we need some new institutions and not just some new rules from old institutions, those institutions, in one or two cases, having failed us. I hope that, without necessarily responding to that, my noble friend will bear in mind that it is a very important question.

Lord McIntosh of Haringey

My Lords, before I respond to my noble friend's interesting and worthwhile points, perhaps I may take up a point made by the noble Lord, Lord Higgins, to which I failed to respond earlier. He asked me what lending into arrears meant. It is the practice of providing credit to countries which have enacted a temporary standstill in debt repayment in consultation with their creditors. I hope that that helps.

My noble friend Lord Peston pays, I think, proper tribute to the importance of the Statement. He reminds us of the extent to which we are all members of the international economy. He asks about the extent to which we can make progress without new institutions. I suspect that the phrase "international financial architecture", the cant phrase now in use—I resisted its use on an earlier occasion but I have failed to do so now—is a way to describe something which falls short of a new institution but is a revitalisation and extension of the responsibilities of existing institutions. I suspect that we should do better to concentrate on what international financial architecture is for, rather than the form it takes.

As to how changes will be implemented, many of them are implemented already in the sense that the new reserves for the new agreement on borrowing and the quota increases will be available within the next few months as they are needed. The logjam has been broken, in particular by the United States' agreement to the new agreement on borrowing. It is the availability of finance which brings with it the other changes which are necessary because it provides the cement which holds together the rules which must be imposed. Those rules will be imposed by continued negotiation between the members of G7, both the finance Ministers and governors, in the same way that the agreement itself was achieved, over the next few months. There will be a formal reporting at the next G7 summit in Cologne but in the meantime it has been shown that work can proceed and rules can be introduced without the necessity for complicated and expensive international meetings.

Lord Barnett

My Lords, I should tell my noble friend that I welcome the commitment of the UK and others to go for high rates of growth and employment. I do not care terribly whether that is considered Keynesian or Milton Friedmanism or whatever. I just welcome it. My noble friend has not yet responded to points made by the noble Lord, Lord Higgins, about reconciling the Bank of England Act with that requirement. Despite the fact that my noble friend Lord Peston and I tried to amend that Act to ensure that the Government's growth and employment policies should be at least on a par with policies in relation to inflation, that was not done. The Act as it stands seeks to advise, indeed insist, that the Bank of England and the Monetary Policy Committee must put inflation above the Government's own economic policy on growth and employment, to which they are now even more firmly committed.

Perhaps the Government have in mind, under the terms of this agreement, to amend the Act along the lines which my noble friend and I recommended previously. That would at least meet the commitment which my noble friend the Minister has made so clearly to the House today.

Lord McIntosh of Haringey

My Lords, no, an amendment to the Act is neither desirable nor necessary. I made clear in answer to the noble Lord, Lord Higgins, that the inflation target which has been set is both a maximum and minimum target. In other words, it can be used for the purposes of stimulating growth if that, as appears to be the case in the global economy, is the higher priority rather than keeping down inflation. It is because we have, in addition to the inflation target, the phrase "government policies on growth and employment" that the terms of reference for the Bank of England Monetary Policy Committee are still entirely appropriate.

Lord Shore of Stepney

My Lords, I too welcome the Statement, not least because at last we have recognised that there is a global problem which needs global solutions; and secondly, because at long last there is some recognition that we face a problem of deflation and not inflation with which the present Government have been obsessed during the past 12 months. That relates immediately to the terms of reference to the Bank of England which should and could be changed by operating Section 19 of the Bank of England Act. That allows for new actions, changed terms of reference, in the light of major changes of circumstance.

My short question is this. Is the 90 billion dollar facility a new one or simply the facility for which, for two years—long before the present crisis hit us—the IMF has been asking and which was held up because the United States had not paid its contribution?

Lord McIntosh of Haringey

My Lords, the answer to my noble friend's short question is that it is a new facility made possible because, before the United States Congress rose for the election period, it made the extra money available. As to whether or not the IMF asked for it before that, I do not know and will gladly write to my noble friend.

In any normal use of the term, this is a new facility available for the purposes of the IMF. I can only refer my noble friend to previous answers I have given. There is no need for any change in the instructions to the Bank of England. What has proved to be the case is that the formulation in the Bank of England Act is appropriate whether or not the balance of risks has changed. My noble friend complains that we have been obsessed by inflation. We come back to Keynes: "If situations change, we change with them. What do you do, sir?"

Lord Clinton-Davis

My Lords, I wish to refer to one aspect of the worthwhile Statement in relation to corporate governance. I do not subscribe to the view that all multinational operations are malign. It is extremely difficult, from past experience, to imagine that provisions for corporate governance will be overwhelmingly supported. Does my noble friend agree that in terms of environment and activities within developing countries, too many multinational operations have not observed the already existing provisions for corporate governance? Why, therefore, does my noble friend imagine that this provision, when refined, will have a more stimulating and progressive effect than has been the experience in the past?

Also, does my noble friend agree that, in relation to multinational companies, there is a pronounced emphasis upon the measure of voluntarism that has to be applied in this case for the new regime to be successful?

Lord McIntosh of Haringey

My Lords, my noble friend, who knows far more about these matters than I ever shall, is right in saying that multinationals are not necessarily malign. But of course they are multinationals; that is the essence of them. That is why it is essential for us to have consistent policies throughout the developed world—not just the G7 countries but on a wider scale—for corporate governance.

The Statement made by the Chancellor makes clear that the imposition of proper rules for corporate governance is an international responsibility. All multinational corporations must be based somewhere. Unless we have comparable rules, wherever they may be based, then we shall not have the control over their activities which is necessary to achieve the objectives of global governance of the economy. My noble friend therefore is right in moving from government policies to corporate governance issues. I am grateful to him for making that point.

Lord Bruce of Donington

My Lords, I congratulate my noble friend on injecting a note of caution into these proceedings. He correctly pointed out that the agreement among the G7 countries was more in terms of aspiration than the practical steps that have to be taken if those aspirations are to be realised. Clearly, before we approve the rules we need to know what they are. Before we approve the policies we want to know—as he pointed out—how and with what precision they are to be carried out and by whom. It is sensible that matters should have been presented to us in that way. Speaking personally, I would prefer to wait until after tomorrow's domestic budget announcement before passing a definitive judgment on some of the matters quite properly touched upon at the G7 conference.

One principle upon which I should like to go on record is that it is not the formation of institutions that is important. On another occasion I might be tempted to outline a few institutions I could usefully abolish with great benefit to the European and world economy. But that does not arise in this instance and I therefore repeat my congratulations. I do not believe institutions matter. We have to get the policy right and then determine which institutions should carry them out.

Lord McIntosh of Haringey

My Lords, I hesitate to disagree to some extent with my noble friend when he is being so supportive. However, I did not describe this programme in terms of being "aspirations". I agreed with the noble Lord, Lord Higgins, that it was as much an agenda as a description of completed action. But it is a firmly based agenda which addresses both the immediate problems and the longer-term issues.

The agenda consists of a firm commitment by the G7 countries to implement specific reforms with the resources to implement those reforms. It enables them to deal with any potential crisis from new countries facing financial difficulties and, without saying that this will happen to Brazil noble Lords referred to Brazil as a possible example of it. It commits the G7 countries to reform to increase the transparency and openness of the international financial system; to identify and disseminate codes of good practice in policy making; to strengthen incentives for countries to meet those standards of behaviour; and to improve surveillance of the international financial system. That amounts to a great deal more than just aspirations.

Lord Burns

My Lords, I agree with noble Lords in relation to the importance of the G7 Statement in that it seeks both to deal with the challenges and the present situation and also to put in place arrangements for dealing with crisis management in the future. When faced with failures of banks in a domestic context, it has been widely agreed that we should seek to minimise the contribution of the taxpayer and to maximise the contribution of the private sector in the work-out. Can the Minister confirm the interpretation in today's Wall Street Journal that the new IMF facility is also expected to put a great deal of emphasis upon the role that the private sector will perform in problems and not simply leave them to the IMF, the World Bank and the taxpayers of the individual countries?

Lord McIntosh of Haringey

My Lords, I can certainly confirm that. In fact, there are three strands to anything that we do for individual countries. One will be the IMF strand, which is an international contribution. The second, referred to in the Statement, is the possibility of bilateral contractual assistance. The third, as the noble Lord, Lord Bums, rightly says, will be the contribution which can be made by the private sector.

Lord Sudeley

My Lords, to what extent does the Minister recognise the problem of fractional reserve banking in this situation whereby banks lend out more than they have in the proportion of 10:1 of the reality? That situation would not exist if, as happened under the old thinking, banks were forbidden to lend money without taking a share of the risk.

Lord McIntosh of Haringey

My Lords, the noble Lord is surprisingly modest. Many hedge funds, such as long-term capital management, lend out far more than a multiple of 10 of their reserves. It is a very real problem, which is referred to in detail in the Statement. We have to balance the risks, as do the investors concerned, of lending, investing or gambling, if you like, beyond the available reserves, against the undoubted benefits to the global economy of wider credit which have arisen over recent decades. It is a difficult balance to sustain.

Lord Grenfell

My Lords, first, does my noble friend agree that although one welcomes the idea of precautionary credit lines, that idea is still far from being properly thought through? What happens if a country is accorded a credit line on the strength of good policy and those policies deteriorate after the credit line has been started? That would put the IMF in an extraordinarily difficult situation. I would not like to be in its place and to have to decide whether or not to withdraw the line of credit.

Secondly, I am not sure whether I heard an answer to the question from the noble Lord, Lord Higgins, about the role of the World Bank and the new facility. I thought that we were trying to get away from the idea of having the World Bank issue liquidity and were trying to get it to maintain its position as a development financing agency. There seems to have been a change of heart.

Lord McIntosh of Haringey

My Lords, perhaps I may answer my noble friend's second question first. If I gave any suggestion in an answer that we were proposing a change in the role of the World Bank, I did so mistakenly. I do not think that I did so. There have been questions on that point, but I was not conscious of indicating that we expected the World Bank to develop its role in that direction. I think that I gave the same answer when we debated the European Central Bank.

With regard to lines of credit, I do not underestimate the difficulty of dealing with a country which changes its policies once a line of credit is available. The very fact that lines of credit will be followed up by further financing and that that further financing is contingent on continuing with policies which will have to be satisfactory to the IMF is some satisfaction against the kind of dangers that my noble friend fears.