FROM THE OFFICE OF PUBLIC AFFAIRS

Today I would like to discuss the financial crisis in Asia; why the United States must protect its vital economic and national security interests by working to help restore financial stability and economic growth to that troubled region; and why acting promptly and effectively to do so protects the economic interests of every American.

To begin, I think it is important to place the recent events in Asia in the context of the emergence of the global financial system. Over the last several years, we have entered a new era for global financial markets and the global economy -- an era of interdependence, complexity and opportunity. Expanding economic ties through greatly increased trade and vastly increased capital flows has brought tremendous benefits to the American people through greater exports, more high-paying jobs, and higher standards of living and through lower inflation than would have been expected with the strong growth we've had. And countries in the developing world and emerging markets have also benefited enormously from this environment, which has allowed them to attract previously unimaginable flows of private capital for investment. That investment has helped foster growth and lift millions out of poverty.

Yet just as this era brings great opportunities for the United States and the rest of the world, so does it present new risks. In recent months, these risks have been brought home as financial instability in Asia has shaken the region and affected markets around the world. Just a few years ago, it would have been unimaginable for the fluctuations of the Thai baht, or the fortunes of the Korean stock market to impact U.S. markets to be printed on the front page of newspapers every day.

In the face of this challenge, our first job is clear: to help stabilize the immediate crisis. Yet, to make the most of the opportunities and limit the risks of the new global financial system and to have a viable situation for the years ahead, we must also modernize the architecture of the international financial markets that we helped create and that has served us so well for the last fifty years. This will be a long and complex process -- which we actually began several years ago -- involving both great intellectual effort and extensive international coordination, yet it is imperative for the strength of our economy and the prosperity of our citizens as we enter a new century.

The United States has enormously important economic and national security interests at stake in promoting restoration of financial stability in Asia. When we act to resolve the Asian crisis, we act to protect and benefit the American people.

The countries in Asia are our customers, our competitors and our security partners. Financial instability, economic distress, and depreciating currencies all have direct effects on the pace of our exports, the competitiveness of our companies, the growth of our economy and, ultimately, the well-being of American workers. Thirty percent of U.S. exports go to Asia, supporting millions of U.S. jobs, and we export more to Asia than Europe. In states like California, Oregon and Washington, exports to Asia account for more than half of each state's total exports.

Thus far, the effects on our economy, though real, are relatively moderate and the most likely scenario for the next year is continued solid growth and low inflation. However, the risks in this crisis are not just confined to the Asian countries now most directly involved. Roughly forty percent of our exports have been going to emerging markets around the globe. If the crisis were to spread more broadly to other emerging markets, then the impact on American workers and businesses could be much greater. Simply put, we cannot afford to stand back and gamble that the crisis will resolve itself.

The United States also has critical national security interests in seeing a restoration of financial stability in the region. We have 100,000 troops based in Asia, 37,000 on the Korean peninsula alone, where we have spent 45 years keeping the peace, and where North and South Korea have only just begun negotiating a possible end to their conflict. History has shown that economic distress and financial instability can threaten political stability and security. A stable and prosperous Asia is more likely to be a peaceful Asia.

Action on a global scale is not easy, but the United States cannot turn its back on this crisis in the hope that we will remain insulated from its effects and markets alone will cure the problem. It's neither desirable nor possible to save countries from the consequences of structural deficiencies and bad policies, but we can work to support an international effort to help countries that help themselves, and that is very much in the interest of the American people. By reestablishing financial stability and economic well-being, these countries will once again be strong markets for American goods, will have stronger currencies that will help the competitiveness of our goods in world markets, and will enjoy the economic conditions conducive to political and social stability. There are no guarantees for success, and even with success, these countries' financial and economic difficulty will persist for some while the reforms take hold and lead to renewed confidence and a return to solid growth. But we must do everything sensible to help address this crisis, because the alternative of doing nothing will lead to far deeper and far longer financial instability and economic duress.

Before I discuss the steps the United States has taken to confront this crisis, let me offer a few thoughts on what has happened in Asia.

While each of these countries enjoyed decades of strong growth and rising standards of living for their people, they also had deep seated common and individual problems. At the core, for all of them, close links between governments, banks and corporations led to fundamentally unsound investments by corporations funded by unsound lending by banks. Their financial systems lacked transparency, which masked the extent of the problem. They had inadequate financial regulation and supervision. In short, the essential underpinnings to a modern financial system were weak or did not exist. Additionally, several economies had large current account deficits, fixed exchange rates and inadequate monetary policies -- an unsustainable combination.

Foreign investors injected an extraordinary amount of capital into these flawed systems without due weighting of the risks involved. From 1990 to 1997, foreign capital inflows quadrupled in the region. Anyone who has spent substantial time enmeshed in markets, as I have, appreciates that financial markets tend to go to extremes, including the market for bank credit extension -- and when they reverse, they sometimes do so with great force.

In Asia, massive amounts of capital flowed into banks, which then extended unsound loans, including a fundamental mismatch between short term bank funding in foreign currency and lending on long term projects of questionable merit.

No single factor that I have described would likely have produced a financial crisis. While economies usually adjust in a relatively orderly fashion to market swings, in this case the combination of factors proved combustible. When these crises began, foreign investors started to withdraw capital, local companies sought to hedge hard currency exposures, exporters stopped bringing their export earnings home, and citizens moved their savings abroad. I think it has now become accepted that most of the pressure on these currencies came from local sources and not foreign investors. This process brought stock prices and land values down sharply across the region, imposed severe strains on Asian banks and companies, and led to acute depreciations of exchange rates and greatly reduced or negative economic growth.

The international community has been involved in a major effort to focus countries on these underlying problems, and to assist them in addressing them. These issues have been a central focus of the IMF in all its many interactions with these countries as well as our interactions with these countries both bilaterally and multi-laterally. And as I will explain later, the United States has been working actively to strengthen the architecture of the international financial system to help better prevent and better manage financial crisis that could threaten our interests. However, before a crisis occurs, we have the capacity to advocate but not to force sovereign countries to take actions they do not believe to be in their interest.

From the very beginning of this crisis, we at Treasury, in close cooperation with Chairman Greenspan and the staff of the Federal Reserve Board, have been deeply involved in crafting an international response involving the countries in the region, the G-7, the World Bank, and the Asian Development Bank -- all working with the International Monetary Fund. The President's national security team including Secretary Albright, Secretary Cohen and National Security Advisor Berger, have been integrally and critically involved in this effort.

The program we have supported has focused on four key elements: supporting reform programs in individual nations; providing temporary financial assistance when needed; encouraging strong action by Japan and the other major economic powers to promote global growth; and fostering policies in other developing and emerging economies to reduce the risk of contagion. Let me describe each of these elements.

First, and most importantly, our approach requires that these countries take the concrete steps necessary to reform their economies. These programs, which are designed with the IMF, address the specific causes of each nations' crisis and can be adapted as the situation changes. The fundamental objectives of these reforms are to restore financial stability and confidence, promote stronger and more stable exchange rates, attract new flows of capital, and restore economic growth. These reform programs have at their core strengthening financial systems, improving transparency and supervision, eliminating the interrelationships between banks, the government, and commercial entities, opening capital markets, and appropriate monetary and fiscal policies. If countries don't take these steps, no financial assistance is made available.

These are not austerity programs. These are primarily programs of structural and financial reform. However, in financial crises like these, where confidence is critical, some fiscal and monetary tightening is necessary to stabilize the currency and restore confidence. It is the crisis and the ensuing loss of confidence -- not the reform programs -- that leads to economic hardships for the population. The reform programs are the best and probably the only viable way for these countries to limit the degree and duration of economic distress and reestablish confidence, stability and growth.

The second element of our approach is to support these programs of reform with temporary financial assistance if necessary. When a nation's financial stability is at risk, this money provides the breathing room for a nation to establish the conditions to restore economic confidence, attract private capital and resume growth. These programs of financial assistance allow the external debt to be refinanced over a longer period of time. Without this, these countries face the risk of default, either by the sovereign or systemically in the financial sector, which could readily result in deep and prolonged distress in these countries, possible contagion effects for emerging and developing countries around the world, and potentially serious impacts on the industrialized countries, including our own.

The central provider of this financial assistance is the International Monetary Fund, with additional support from the World Bank and the Asian Development Bank. In addition, the United States has joined other industrial countries in indicating its willingness to provide supplementary financial resources in some situations if a country fully adheres to the reform program and further resources become necessary. Up to this point, we have not actually disbursed any of this money, and those disbursements -- to the extent they occur -- will be in the form of short term loans whose payment is guaranteed by the borrowing government.

While the temporary financial assistance is an important part of an effective response to these problems, let me stress, no amount of official money alone can solve these problems and official money is not the key. Only when sound policies are pursued, will confidence -- and capital -- return.

Private financial institutions have an important role to play in solving these problems. In the case of Korea, for example, we stated that the United States would provide funds only in the context of international banks addressing Korea's immediate financing needs. This linkage has helped produce a short-run rollover by bank creditors in Europe, Japan and the United States which has helped calm Korean markets more recently. What is important now is that the private financial institutions move forward on a voluntary basis to negotiate with Korea a longer-term financing plan to help reestablish financial stability. And an approach like this can be an important part of any viable response to similar crises in the future.

The third element of our approach is to encourage the major industrial countries to act to strengthen their own economies and take the steps necessary to promote the strong economic and financial environment globally which can contribute to resolving the crisis in Asia. The policies pursued by the United States over the past five years, which have produced lower budget deficits, lower interest rates, low inflation, and strong growth have made a major contribution to supporting growth around the globe. But we cannot play this role alone.

In Europe, whose economies, when combined, are larger than the United States, and where growth is starting to rebound, it is very important to undertake structural reforms and other policies necessary to strengthen this recovery so that Europe, too, can be an engine of global growth.

Japan, the second largest economy in the world, has an especially crucial role to play. It is absolutely critical that Japan take the steps necessary to deal with the issues in its financial system, to generate solid growth in domestic demand and to open its markets. A weak Japan is a source of weakness for the region. A strong Japan would be a source of strength for the region. Strong actions by Japan are vitally in the interest of Japan, the Asian region and the global economy.

China also plays a critical role in Asia's economic stability. I want to welcome the statements by Chinese officials made in recent weeks reconfirming their commitment to exchange rate stability and to dealing effectively with the economic challenges that they face.

Fourth, and finally, we have worked closely with the IMF to encourage other emerging markets to make policy adjustments to reduce their vulnerability to contagion from the countries now in crisis. From the APEC finance ministers meeting in April to the meeting of global finance ministers and central bank governors in Hong Kong in September to the meeting of Latin American finance ministers in Santiago last December, we've worked closely to promote structural, financial, and macroeconomic policies that are critical to stability. We have also worked closely with Russia, Eastern Europe and other transitional economies to help reduce their risk of contagion.

At the beginning of the crisis in Asia, there was widespread concern that it might spread throughout emerging markets around the globe. But thus far, the strong efforts to re-establish financial stability in Asia, and reform measures in many developing countries elsewhere have succeeded in limiting the contagion effect after the initial impact.

The IMF is the right institution to be at the center of these support programs. This institution, which was established at the initiative of the United States fifty years ago, has long benefited Americans. The core mission of the IMF has always remained the same -- to promote financial stability, trade and economic growth.

The United States has worked forcefully to help the IMF meet the new challenges of the modern financial system, and there is simply no other institution capable of performing its mission. With tremendous expertise and technical resources, the IMF has the ability to shape effective reform programs. As a multinational organization, it is able to require an economically distressed country to accept conditions that no contributing nation could require on its own. Finally -- and critically important -- the IMF internationalizes the burden during a global financial crisis by using its pool of capital instead of the United States having to bear that burden alone.

The American people should also know this: over the past fifty years our contribution to the IMF has not cost the taxpayer one dime. When the IMF draws on our commitments, we receive a liquid, interest bearing offsetting claim on the IMF. There are no budget outlays. Our contribution does not increase the deficit, or divert resources from other spending priorities.

Support for our periodic pledge to the IMF, and support for a new emergency fund, the New Arrangements to Borrow, which supplements the IMF's resources to deal with crises such as this one, is critical. This funding is absolutely necessary to enable the IMF to respond effectively if this crisis were to spread and intensify -- which we all want to avoid event -- and to deal with future crises that could similarly affect the interests of the American people. Moreover, failure to provide funding could reduce our leverage in the IMF, and could shake confidence in American leadership in the global economy at a time when confidence is so important in re-establishing stability in Asia.

There is no question that the approaches to crisis prevention, and to dealing with crisis when they occur, must advance to meet the new challenges of the international financial system, and we have been and are working energetically toward that objective. But we cannot afford to wait for these extremely complicated issues to be resolved to deal with IMF funding. The United States needs an IMF that is financially equipped to help protect U.S. interests right now. If we close the door on the IMF, we hurt ourselves.

The financial instability in Asia involves enormously complicated problems and presents challenges the global financial system has never faced. While there are specific dimensions in each of these programs that could be debated, I am confident that overall these are strong well-crafted programs and the best and probably the only viable way to help these countries re-establish stability and confidence. Moreover, these problems are going to take time to resolve, and we must proceed energetically but with patience, and with determination.

A number of concerns have been raised with respect to these programs. Let me try to respond to them.

First, some have said that it's not in our interest to help countries that are seen as our competitors, especially when falling currencies make their products cheaper. The exact opposite is the case. Without support, it is highly likely that these countries will have much deeper recessions and much weaker currencies, hurting U.S. exports and our competitiveness with far greater damage to American businesses and workers. With support, these countries have the best chance to restore growth, restore the capacity to buy more of our goods, and restore currency values.

A second criticism has been that these programs do not require nations to take specific steps to promote the environment, protect core labor standards and ensure human rights. Let me be clear: these issues are critically important to the United States, and we are pursuing them actively through other initiatives and in other fora. And there is no question that financial stability, growth and prosperity provide an environment most conducive to advancing these objectives, while instability and economic duress are inimicable to these objectives. Moreover, designing and obtaining sustained adherence to programs to restore financial stability is extremely difficult. To add these three objectives -- however important -- would vastly complicate this effort and greatly reduce its chance of success. Also, if these objectives were added others would clearly seek to add still more objectives, and the whole undertaking would become impossible.

Third, some have said that providing financial assistance to these countries shields investors and countries from the consequences of bad decisions and sows the seeds of futures crises. This problem -- often called the problem of moral hazard -- has two dimensions: the impact on the behavior of countries, and the impact of the behavior of investors and lenders. For the countries, it should be obvious that they are not now shielded from the effects of their bad decisions. They may receive temporary financial assistance, but they also inevitably go through a very difficult economic period before recovery takes hold. No country would opt to go through what Mexico went through, or what various Asian countries are going through now.

As to investors and lenders, the problem is more complicated. Let me just say that I would not give one nickel to help any creditor or investor. And, in fact vast numbers of investors and creditors have taken large losses in Asia. Foreign banks and other creditors to corporate and other borrowers throughout the region now have many troubled or bad loans, real estate investors have almost universally sustained large asset depreciations, and investors have suffered the consequences of stock markets that are down more than fifty percent from their highs. Just today three major U.S. banks -- J.P. Morgan, Chase, and Citibank -- have reported that developments in Asia have had a substantial negative impact on their profits. The crisis in Asia has clearly taken its toll on American investors and creditors.

To those who argue that we must ensure that all creditors take a loss, my answer is this: The reality of the situation is much more complex. A byproduct of programs designed to restore stability and growth may be that some creditors will be protected from the full consequences of their actions. But any action to force investors and creditors involuntarily to take losses, however appropriate that might seem, would risk serious adverse consequences. It could cause banks to pull their money out of the country involved. It could reduce that nation's ability to access new sources of private capital, and, perhaps most tellingly, it could cause banks to pull back from other emerging markets.

Having said this, it is critically important that we work toward changing the global financial architecture so that creditors and investors bear the consequences of their decisions as fully as possible, while minimizing adverse consequences. But devising such architectural changes is difficult and complex. We cannot wait until that work is complete to take the steps necessary to deal with the crisis at hand that so powerfully affects our interests.

Fourth, some say that doing nothing would be best, because markets would ultimately solve the problem on their own. Let me say as someone who spent 26 years on Wall Street and who has an enormous belief in markets, there are problems that markets alone simply cannot solve. In this country, we recognized that long ago, with measures such as the Federal Reserve System, the Securities and Exchange Commission and deposit insurance. Laws and institutions support healthy free market activity by dealing with issues beyond the ability of unfettered markets to handle. There is simply too much risk that markets alone will not resolve these problems of financial instability, and therefore given our stakes in Asia we must try to help get these countries back on track.

The global economy needs architecture as modern as the markets. That is why, even as we have tried to confront the immediate crisis in the Asian region, we have also begun an intensive effort to improve the global financial system to both better prevent crises from occurring and better deal with them if they do occur. President Clinton began this effort four years ago at a G-7 meeting in Naples. At the summit that followed in Halifax in 1995, we launched a broad international effort to strengthen safeguards in the global financial system. Two important parts of this initiative are an international program to strengthen disclosure and the development of core principles for supervision in emerging market financial systems.

To build on these efforts, we have begun an intensive internal effort with the Federal Reserve Board and others, to identify and analyze possible mechanisms for dealing with new challenges to the international financial system. As I have said, this is a very complex undertaking which will take time and, while there have been some suggestions which may look attractive on their face, there are no easy answers. We also will be working with our G-7 partners and others on this issue, and at President Clinton's initiative, we will convene a meeting later this spring with finance ministers from around the world to share our views on this subject and to begin to develop a consensus on further steps.

This initiative will focus on four objectives: improving transparency and disclosure; strengthening the role of the international financial institutions in helping to continue to deal with the challenges of today's global markets; developing the role of the private sector in bearing an appropriate share of the burden in times of crisis; and strengthening the regulation of financial institutions in emerging economies.

This is a period of considerable uncertainty and challenge for the global financial system, and for the countries most directly involved in the crisis. As I said earlier, even under the best of circumstances, these crises take a time to abate. The process is bound to be a difficult one for the people of these countries. But the approach I have described today is the best and most likely the only viable way to succeed. While nobody can say for certain what will happen, the countries in Asia have great underlying strengths, such as high savings rates, firm commitments to education, and strong work ethics and, with a sustained commitment to the necessary reforms, they are well-positioned to re-establish strong economic growth and sound currencies going forward.

The United States has enormous economic and national security interests in a strong and vibrant Asia. Financial instability in Asia is a threat not only to the region, but to economies all over the world, and even ourselves. We cannot ignore these risks. We must act to best protect and promote our interests.

As I said at the beginning, we are at the frontier of a new era. When America has entered new eras in the past it has done so with vigor and determination. Our leadership is critical to guiding the global economy into the 21st century, and to protecting the interests of the American people. This is no time to turn our back. We must confront the crisis today, and build for tomorrow. The actions we take now are critical to our economic well-being today, and for the future. Thank you very much.