Thank you. We meet at a time of profound challenges for the economies of our hemisphere, and for the global economy as a whole. But I think we can also say it is a time of fresh hope.

The mood at last week's World Bank/International Monetary Fund meetings here in Washington was very different than it was in October. At that time, in the wake of the Russian financial crisis, amid signs of significant strain in United States, Latin American and global financial markets and evident concerns about global growth, the G7 warned that the balance of risks in the global economy had shifted, and emphasized their commitment to promote sustainable global growth.

Six months on, as the recent G7 Communiqu‚ noted, there have been improvements in some areas, reflecting both better performance in some emerging market economies and growth-oriented policy steps that have been taken in a number of G-7 countries. But nowhere more than in Latin America, the ebbs and flows of global sentiment usually shift more quickly than the ground beneath. The sense of crisis has abated. But major challenges remain.

To be sure, stable finance is not an end in itself. Stable finance will not alone educate our children, protect our environment or build all of our nations. But these things cannot happen without it. Now more than ever, if the gains of the past decade are to be preserved and the economies of this hemisphere are to keep on the path of integration and openness, Latin America needs to build confidence in finance and financial confidence in Latin America.

I would like to spend most of my time today reflecting what will be the main ingredients of a stronger, safer financial system in Latin America and globally. First, though, let me say a few words about the more immediate outlook.

I. The Regional Outlook

Around the world and in this hemisphere, the United States remains a beacon of strength. If anyone a few years ago had predicted the combination of inflation, unemployment and growth rates we see today not to mention a rising fiscal surplus it is fair to say that the prediction would have been greeted with some skepticism.

This remarkable performance can be traced to a three-part national economic strategy based on a strong macro economic foundation, a commitment to open markets and to key public investments. But we know that in an interdependent world, our economic success will be linked ever more closely to that of the global economy and the success of our closest neighbors most of all.

When the Inter-American Development Bank met in Paris in March, some saw the region as reeling after a year of unpleasant shocks:

• Events in Brazil had challenged the region's largest economy in its commitment to low inflation and steady growth and sent unwelcome tremors through several of the region's markets.
  

• Private capital inflows into the region were drying up. In the last five months of 1998, monthly bond issuance by Latin American countries was only $1 billion, down from $4.4 billion in the first seven months of the year.
  

• Commodity markets had suffered another downward spiral. This inflicted major terms of trade shocks on Chile, Venezuela, Mexico, Ecuador and others in 1998 costing, in some cases, more than 5 percent of GDP.
  

• Worst of all, a series of major natural disasters had hit countries that had already seen more than their share: with hurricanes hitting Honduras, Nicaragua, El Salvador, Guatemala, the Dominican Republic and Haiti, floods from El Nino and a tragic earthquake in Colombia.

It was clear when we met in Paris that these shocks would take their toll on the region for some time to come and that no country will be left untouched. This surely remains true today for the victims of Mitch and other disasters most of all. As you know, an unprecedented multilateral and bilateral effort has been under way to help countries rebuild their broken economies, with a combination of immediate support and medium-term debt rescheduling. This broad initiative remains on track, and I hope we will make further progress at a special donors' meeting later this month in Stockholm.

At the same time, if there were encouraging signs for the future six weeks ago, it is fair to say that there are rather more of them today.

Perhaps the most important have been events in Brazil. The devaluation of the real was not followed by the contagion that many would have feared. That it did not do so is a tribute to Brazil's success in implementing strong fiscal policies to regain confidence and also partly a reflection of the fact that the crisis had taken so long to play out. This meant that a large volume of trade and other finance had already moved out of Brazil. When the devaluation finally did take place, this money was there on the sidelines, ready to return if and when credible policies were restored.

As the G7 noted last week, Brazil has recently made important progress implementing the revised economic program that was supported by the IMF in March in the context of coordinated voluntary assurances on the part of Brazil's major private creditors. This is having palpable effects: inflation is regularly coming in below expectations; interest rates have fallen significantly, the currency has strengthened; and market economic forecasts for 1999 have been revised sharply upwards.

Increased confidence in Brazil, a continuation of strong policies in Mexico and Argentina and others, broadly prudent policies in Venezuela, where investors had feared missteps, rising oil prices and a more general upturn in global financial and commodity markets: all of these factors have contributed to a sharp improvement in regional market sentiment relative to last fall. Indeed, Latin American borrowers raised $11 billion in international bond markets in the first quarter of 1999.

This more favorable market environment will be an important asset to the region's governments in helping reduce the immediate pressure on their economies. But it is an asset that we will quickly squander if we allow ourselves to succumb to complacency.

• In countries where sound policies are not yet in place, notably Ecuador, policy makers will need to remember that a rising regional tide, in itself, will do little to stop rising inflation, widening fiscal deficits, and crises in the financial system. Problems that were homegrown need to be fixed at home, and soon.
  

• In Brazil, especially, policy makers will need to show continued vigilance in meeting short- term, macro-economic goals and show that they can move forward on addressing medium term fiscal and structural challenges.
  

• Venezuela and others favorably affected by the recent market improvements will need to ensure that new capital inflows are sustainable for the long-term, and windfall gains in commodity markets are invested in long-term fiscal and structural reform, not spent as they have often been in the past.
  

• And as elections approach in Mexico and Argentina, policy makers will need to continue to work to build an institutional basis for strong policies that can withstand the vagaries of the electoral cycle. As President Zedillo recognizes, there is no more important legacy that he could leave to his successor whoever that may be than a growing and stable Mexico.

Let me note here that regional and sub-regional agreements between governments in the hemisphere have played and will continue to play an important role in preserving confidence that countries will keep to the path of opening markets and deeper integration. NAFTA and Mercosul are two very important examples. Another that deserves mention is the Andean Trade Preferences Act, which offers investors in the Andean countries the assurance that the United States market will remain open to them. The United States has supported this agreement in the past and I expect that we will continue to support it as a part of a strong regional policy framework for stability and growth.

II. Building Financial Confidence

The novelty of the financial crises we have seen in the 1990s is that they have been what might be called capital account crises. The dominant source of pressure has been less economic contraction caused by the reluctance to finance expenditure in excess of national incomes than it has been pressure to withdraw a large amount of capital, caused by domestic and foreign investors alike. In each case, macro-economic and micro-economic weaknesses made a crisis possible. Sharp, self- fulfilling declines in confidence made it happen with such speed and virulence.

Building a safer global and regional financial system will mean individual governments getting the basics right: pursuing strong, mutually consistent monetary, fiscal and exchange rate policies. It will require them to put in place legal and regulatory underpinnings for markets to lessen the probability that imbalances will arise and contain the effects when they do occur. Because every ill- judged credit has a lender and a borrower, it will surely also mean stronger risk management systems and more prudent credit decisions on the part of private lenders. And it will mean the international community doing its part, by providing stronger incentives for countries to act to prevent crises and by devising more effective means of resolving them when they do take place.

This is a global and wide-ranging agenda, as it needs to be. Let me just focus here on four challenges of special relevance to Latin America, whose importance has been underscored by the events of the 1990s.

A. Building Stronger, Deeper National Financial Systems

While we think of the global capital market when we think about Latin American finance, the most important capital market is the one at home. I think most would agree that the strength of the Brazilian banking system played an important role in limiting the broader consequences of the February devaluation.

To build on and learn from the experience of the past year, the region's governments need now to step up their efforts to create a domestic financial infrastructure that absorbs the right kind of capital and is more impervious to shocks. That means effective supervision and regulation and appropriate prudential management. And it means transparent accounting and corporate governance and effective domestic bankruptcy regimes.

If one were writing a history of the American capital market I think one would conclude that the single most important innovation shaping that market was the idea of generally accepted accounting principles. GAAP are not a single institution. They are not a single magic bullet. They are an ongoing process that really is what makes our capital market work and makes it as stable as it is. Very much the same kind of thing is needed in Latin America and in all of the emerging economies.

Private foreign financial sector participation can and already does support these goals in Latin America. Today fully 50 percent of the banking sector, 70 percent of private banks, in Argentina are foreign-controlled, up from 30 percent in 1994. In Mexico more than one fifth of banking sector assets are foreign-controlled. The result is a deeper, more efficient financial market, and external investors with a greater stake in staying put.

The international community can and must also play a role, by developing more effective ways to induce countries to put the right policies in place. Concrete steps toward this end include:

• Efforts to expand and reinforce norms of transparency in economic and financial data, including the development and expansion of the IMF's Special Data Dissemination Standard (SDDS). This has now been widely adopted by industrial and emerging market economies and will incorporate full details on reserves, and any claims against them, from April 2000.
  

• Development of new codes to help investors and the official community judge national policies better and set "best practice" standards for governments themselves. The IMF's new Code on Fiscal Policy has now been adopted, and we expect that a Code on Monetary and Financial Policy will be formally adopted in October. International groups have now endorsed new standards on insolvency and debtor-creditor regimes.
  

• Development of stronger standards and shared principles for the financial and corporate sector worldwide. I might say here that the Committee on Hemispheric Financial Issues created at the Summit of the Americas in Miami in 1994 has already made an important difference, in helping to disseminate application of the Basle Core Principles for banking supervisors across the region and help develop key parts of the infrastructure for stronger national financial markets.

A. Safer Management of Public Risks

Countries across the region also need to match their financial policies to the challenges posed by a more developed and more truly global financial market. In this context the most crucial lesson of recent events is surely the need for prudent and long-termist debt management. We now know that countries are courting trouble when they reach for cheap short-term capital. We saw it in Mexico, with the increasing resort to issuing dollar-denominated Tesobonos in 1994 and we saw it most recently in Russia, in the government's continued efforts to encourage foreign purchases of domestic GKOs.

In the wake of these crises, the countries of Latin America need to think long and hard about the structure of their liabilities, their exposure to rollover and other risks; and about new structures that share more risk with lenders. And they need to recall that longer-term debt is the simplest and best kind of insurance of all. As I will discuss in a moment, among other things, provision of the IMF's new Contingency Credit Line will be structured around encouraging countries to adopt safer practices in this area. Efforts are also under way to encourage safer risk management on the part of lenders.

C. Enduring exchange rate regimes

No search for better ways to prevent crises can overlook the place where so many past crises have begun in the market for foreign exchange. To sustain confidence in the future, Latin America, especially, will need exchange rate regimes that can command the trust of domestic citizens and foreign investors, accommodate regional and global integration, and stand the test of time.

The merits of more fixed versus more floating exchange rates are forever debated and surely vary greatly from situation to situation and context to context. But history and economic theory do tell us that the three objectives of free capital mobility, an independent monetary policy and the maintenance of a fixed exchange rate objective will ultimately prove to be mutually incompatible.

I suspect this means that as capital market integration increases, countries will be forced increasingly to more flexible or more purely fixed regimes. In any event, we have to recognize that in a more integrated hemisphere and a more integrated world the contagion caused by failed regimes gives all of us an increasingly large stake in the right choices being made.

Analysts in several Latin American countries have been seeking an answer in dollarization. This would be a highly consequential step for any country, one that has to be considered with a careful eye to various potential costs and benefits.

• On the one hand, experience with discretionary monetary policy in a number of countries in Latin America has been that its potential benefits have not been fully realized. In this context the presumed irrevocability of dollarization holds the promise of lower interest rates, greater stability and possibly deeper financial markets, by adding to the credibility and discipline of its own policies and advancing its integration with the world economy. It is striking that dollarized Panama is the only country in Latin America with an active 30-year fixed rate mortgage market.
  

• On the other hand, countries considering dollarization need to remember that it is not a magic bullet. No exchange rate regime can be more credible than the fundamentals that underpin it. A dollarized country must be prepared to embrace an equally irrevocable subordination of domestic monetary policy to that discipline.

As Secretary Rubin has said, a country's choice of exchange rate regime is its own to make. We do not have an a priori view on dollarization. There are a variety of means and modalities for achieving it and we would expect to discuss these with any government seriously considering taking such a momentous step. There are, however, certain limits on the steps that the United States would be prepared to take in the context of such a decision: specifically, it would not, in our judgment, be appropriate for United States authorities to extend the net of bank supervision, to provide access to the Federal Reserve discount window, or to adjust the procedures or orientation of United States monetary policy in light of another country deciding to adopt the dollar.

D. Appropriate Tools for Crisis Response

Without the right national policies, any amount of external official support or extension of private debt obligations in time of crisis will be in vain. But as we have seen in Brazil, where the reform commitment is present, conditioned provision of finance and private sector coordination may both be needed to create an environment of confidence when something akin to a bank run psychology has taken hold.

The challenge we face, globally and regionally, is to devise mechanisms for responding to these new kinds of crisis, and the bank run psychology that can drive them. In this regard the IMF's Supplemental Reserve Facility, created in 1997, was a major innovation. In line with similar moves by the World Bank, the IDB has followed this up at the regional level, in providing conditioned, fast- disbursing, premium interest rate emergency loans for Argentina, Colombia and Brazil.

Last week, the international community took another very important further step with the creation of the CCL. Like the SRF, the CCL will carry premium interest rates and shorter maturities, to maximize countries' incentive to seek alternative, private sources of finance. It is designed to reduce the risk of contagion to countries with strong polices and institutions and directly encourage countries to reduce their vulnerability to crisis before the worst happens, through the adoption of sounder policies and practices.

The question of the appropriate private sector role in resolving such crises is a delicate one. We are very much aware that debt is an obligation which must be honored whenever possible; that growth depends on the continued flow of private capital, which in turn depends on meeting obligations; and that confidence is the mirror image of moral hazard. It is the irony of financial crises that while they are usually caused by too much lending, they are ended by lending more.

At the same time, as we have seen recently in Brazil, private sector coordination in its mutual interest can play a crucial role in crisis resolution. In a healthy global financial market, instruments that were issued carrying spreads of many hundreds of basis points surely cannot be counted on with absolute certainty to be repaid on time and in full.

As I consider these questions, I am convinced that cookie-cutter formulae or preset procedures can never be pre-designed to respond to the various circumstances that will arise. A case-by-case approach, based on the interests of the country involved, its creditors, and the system as a whole, will work best, in this region and globally.

Let me say here that effective crisis response extends well beyond the immediate financial imperative to restore confidence. The best the primary reason for wanting to respond better to crises is to lessen the economic and social distress that crises bring. But then preparing for crises has to mean preparing every member of our economy to cope with their effects. Effective social safety nets are morally right because they provide a floor below which no one should be permitted to drop. And they make sense in narrow economic terms: because they can act as automatic stabilizers for the economy in a downturn; and because adjustments that are less painful for people are more likely to be made in good time.

III. Concluding Remarks

The platform of stable finance is one upon which so much can be laid so much that will further the goals for the Americas that we laid down in our Guadalajara meeting in 1994 and the Santiago and Miami Summits. Even as we work through the immediate effects of the crises we need to keep focused on those goals of inclusion, integration, increased prosperity and strengthened democracies. We have made major progress toward these goals in this decade. What is critical today is that we maintain forward momentum on the work of reform even as the storm clouds that were so evident a few months ago begin to seem more distant. Thank you