FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon. Thank you for welcoming me again to the Bond Market Association.

I have a lot of respect for the people in this room. When we were attacked on September 11, nearly our entire economy shut down. Most Americans stayed home watching the news and trying to absorb the shock of it all. You didn't have that breathing room. You had to regroup quickly and figure out how to reopen the bond market and maintain liquidity in our financial system.

I think before that, some people had the illusion that capital markets run themselves. But I think America saw that the markets don't run themselves. People run the markets, as they run every organization. And it's an honor for me to be back here with those people today. I appreciate your work.

THE ECONOMY

Members of the Bond Market Association certainly understand that the financial markets do not operate in a vacuum. They are an integral part of US economy, the most flexible and resilient economy in the world.

In fact, I am convinced that our capital markets were an important reason the recession the NBER says began last March was one of the mildest on record.

Let me elaborate. As the economy began to slow, long-term government bond yields fell, reaching near-record lows in the weeks following September 11^th. Mortgage rates followed, and this triggered a surge in refinancing which put ten of billions of dollars back in household pockets. These refinancings cushioned consumption spending and helped offset the investment spending contraction which began in 2000, and which helped push the economy into recession in the first place.

Of course, other factors also played an important role in dampening the downturn, including the timely enactment of the President's tax package last June, which put $36 billion into consumer hands right at the nadir of the slowdown, and the reduction in short term interest rates engineered by the Federal Reserve throughout the year. The flexibility of our labor markets also contributed to a smaller decline in employment than occurs in most recessions.

However, let me emphasize that President Bush and I will not be satisfied until unemployment falls again, and America is fully employing its labor force.

Based on my personal reading of the numbers and conversations with business people around the country, I believe we are going to see continued improvement in the economy throughout 2002. Productivity growth will stay strong, if not always at the 2001 fourth quarter rate. During the first half of the year, inventory rebuilding should give the economy a significant boost. As we move into the second half of the year, business investment spending, aided by sensible changes to the tax code in the March Job Creation Act, should revive to a pace more consistent with our growth potential, if a somewhat slower pace than we saw in the late 1990s. We expect the economy to grow somewhat faster than potential -- as does the CBO -- over the next several years, which should reduce unemployment.

In Washington, and I suspect on Wall Street, we pay very close attention to the daily, weekly, and monthly data we get on the economy. I am optimistic about our economy's potential for robust, sustainable average growth, but I recognize, as I am sure you do, that the rate of growth is bound to vary at times.

FINANCIAL CRISIS PREVENTION AND RESOLUTION

Flexible, innovative financial markets are clearly a bulwark of the US economy and our businesses, and the markets helped us weather our slowdown.

The US government also has a great advantage in the capital markets. The markets for US sovereign debt are so deep, the US government can finance its debt at the lowest cost in the world. Investors everywhere view the United States as the safest place on earth for their money. The low cost of capital in the United States, for businesses and the government, has been a key ingredient in our economic growth.

The rate of return on US Treasury debt is the yardstick by which the investment climates in other nations are measured. When we talk about other nations' sovereign debt trading at so many basis points above US treasuries, those basis points are a measure of the perceived risk of investing in that economy.

I believe all nations around the world should strive to achieve investment-grade sovereign debt. That goal would focus them on reducing risk for investors, which translates into advancing the rule of law, enforcing contracts, eliminating corruption, and investing in human capital. In other words, making the same kinds of improvements that will help their citizens, and empower domestic private enterprise.

In an ideal world, every nation would have investment grade sovereign debt. The market would judge each nation's investment climate as healthy. Capital would flow into these countries and they would flourish -- not because they were receiving capital, but because they knew what to do with it, how to put it to work.

Last year, official development assistance to all countries from all sources totaled $53.7 billion. At the same time, there was almost $47 billion of foreign direct investment into China alone. This gives you some idea of how private capital can dwarf official assistance when it is welcomed. Of course, everyone thinks they welcome capital -- but it's all talk unless they provide a fair, risk-adjusted return.

Even in this ideal world, an investment grade world, problems would no doubt arise. We would still need remedies for nations that have trouble servicing their sovereign debt.

This past weekend, the G-7 finance ministers met in Washington, and we found unprecedented unity on the need to develop a predictable process for restructuring debt.

We released a plan to create a continuum of steps that would occur when a nation can no longer service its debt.

This continuum would begin by establishing a limit on official sector lending, in effect, shutting the loan window once a nation has reached the upper limit on IMF lending. In the past, I've opposed this idea of a firm limit, because we had nowhere for countries to turn once the window was closed to them. Crisis would simply lead to chaos. But now we are moving forward to establish an orderly process nations can pursue.

As a first step in this process, we agreed to work together with emerging market countries and their creditors to incorporate new clauses into debt contracts - clauses that would specify the action to be taken in the event a restructuring were necessary. The second part of that process is to pursue the IMF's notion of a statutory mechanism for sovereign debt restructuring.

I believe we, the seven largest economies, took an enormous step forward this weekend by agreeing on one action plan. That act alone creates a sense of momentum on an issue that has frustrated many of us for years, and yet has languished without a consensus to drive change. We need to build on this momentum. The IMF will continue to develop a plan for the official sector approach, which will take some time because of the IMF rules. I will be encouraging them every step of the way.

But we will also begin to implement the market-oriented, decentralized aspect of the plan right away, to capitalize on the consensus among the G-7 nations. Creditors and borrowers can begin immediately to incorporate contingent clauses into their sovereign debt contracts, such as a majority action clause, an engagement clause, and an initiation clause.

Regardless of the exact balance of private sector and official sector measures in the sovereign debt restructuring framework, I want to make sure we include creditors and debtors themselves in the dialogue. We need all involved parties to buy into the new system, if it is to succeed.

That's where we need your help. The Bond Market Association could do a lot to speed adoption of the kinds of crisis-preventive clauses we are talking about. I'm sure you all appreciate the advantages of our market-oriented, decentralized approach as well. We want to work with you on this. How can we raise the investment ratings for emerging market debt? How can we best persuade the markets to incorporate these clauses into debt agreements? We want your input.

I think these moves are important because emerging markets need private capital to support domestic private enterprise and raise living standards for their people.

The uncertainty of the sovereign debt restructuring process today has made crises more likely than they should be. With less capital pursuing emerging market opportunities, the available capital is more expensive, and the efforts that it funds become fewer, and less likely to succeed.

We are trying to find mechanisms to restore private capital flows on the most competitive terms to emerging market countries, in order to unleash their private sector development potential, and permit them to take advantage of globalization.

I think we are making great progress toward that goal, and with your help, we can do even better. The success of our efforts to improve living standards around the world depend upon it.

Again, thanks for inviting me to New York today. And keep up the good work.