FROM THE OFFICE OF PUBLIC AFFAIRS

1) We, the Finance Ministers and Central Bank Governors of the G-7 countries, met today to review recent developments in the world economy and financial markets. President Willem Duisenberg of the new European Central Bank participated for the first time in part of the discussions. We were also joined for parts of the meeting by the Managing Director of the International Monetary Fund, Michel Camdessus, and by World Bank President James Wolfensohn.

Developments in the World Economy

2) We discussed developments and prospects in our own economies and in the rest of the world. Financial market conditions have deteriorated in many parts of the world, leading to a further weakening of growth prospects especially in most emerging market countries, and also more generally. In this context, we reaffirmed our view that the balance of risks on a global basis has shifted. We agreed that in today's integrated world economy and financial markets, developments in our economies, while being affected importantly by economic and financial developments elsewhere, have a significant impact on the rest of the world. More broadly, we reaffirmed the key importance going forward of each country in the global economy doing its part to promote recovery and financial stability. We must continue our efforts to strengthen the open world trading system, with free trade flows and open capital markets.

G-7 Economies

3) Inflation in G-7 countries as a whole is low and in some countries has declined further in recent months. Although growth so far has been sustained in our countries taken as a whole, the weakening in Asia and some other markets poses increasing downside risks to economic activity. We reemphasized our commitment to create or sustain conditions for strong domestic-demand led growth and financial stability in each of our economies. In this context, we noted the importance of intensified cooperation among us at this juncture. We also agreed that the challenges that face each of our economies differ.

• In the United States, Canada and the United Kingdom, where strong growth has been firmly established for some time, the task of policy is to take appropriate action to maintain conditions for sustainable growth.

• The Continental European G-7 countries are expected to achieve stronger growth this year as their recoveries strengthen. It is important to preserve conditions conducive to robust domestic demand, to implement urgent structural reforms and reduce unemployment.

• Japan's economic challenges have intensified significantly in recent months, with three consecutive quarters of negative growth and continued weakness in the financial sector. Strong sustainable recovery in the economy is of critical importance to Japan, the Asia region and the rest of the world. The Japanese authorities outlined their intention to strengthen the confidence in the financial system by promptly establishing a framework to maintain the stability of the financial system and to provide sufficient and sustained stimulus to boost domestic demand-led growth. While noting the steps taken by the authorities to date, we stress the importance that we attach to the swift and effective action to strengthen the financial systefm, including the prompt enactment of measures to support viable banks with public assistance in sufficient amounts to be provided swiftly with appropriate conditions.

European Economic and Monetary Union

4) We discussed the ongoing smooth transition to Economic and Monetary Union in Europe on January 1, 1999 and looked forward to a successful EMU which contributes to growth, and to stability in the international monetary system.

Exchange rates

5) We discussed developments in our exchange and financial markets reaffirming the views we expressed in our April statement. We will continue to monitor developments in exchange markets and to cooperate as appropriate.

Russia

6) We met with representatives of the Russian Federation to discuss recent developments in Russia's economy and the difficult challenge the government faces in achieving financial re-stabilization. We agreed on the importance of monetary restraint and fiscal adjustment, noting the serious risk of inflation and further exchange rate weakening if revenue collections are inadequate and government expenditures are financed through central bank money creation. We emphasized the importance for Russia of undertaking comprehensive financial sector restructuring which would close or merge insolvent banks, write down problem assets, and greatly enhance supervision. We also agreed that Russia must accelerate its program of structural reform to promote efficiency and growth in the real economy. We encouraged Russia to develop sound approaches and to pursue a constructive dialogue with the IMF on the urgent task of stabilization. We also stressed the great importance for Russia to pursue a cooperative dialogue with private creditors

Emerging Market Economies

7) Policies countries pursue are a crucial determinant of their economic performance. We welcomed the impressive efforts by a number of emerging market economies to strengthen their domestic policies in light of the financial market pressures that have spread over the past year. We reaffirmed the support expressed in our September 14 statement for exploring ways to reinforce the existing economic programs of economies facing financial crises with accelerated efforts to promote comprehensive programs for corporate and financial sector restructuring and measures to alleviate the effects of the crises on the poorest segments of society, including if necessary through the provision of augmented financial assistance centered in the multilateral development banks.

8) We reaffirmed our concern about the extent of the general withdrawal of funds from emerging markets that had occurred without respect to the diversity of prospects facing those economies or to the significant progress that has been made in many economies in carrying out strong macroeconomic policies and structural reforms that enhance long-term growth prospects.

9) More broadly, we reiterated our support for the central role of the IMF in enhancing crisis prevention, including encouraging reforms through its surveillance process, as well as providing catalytic financial assistance as needed in support of appropriate policies and to combat contagion. We emphasized that the private sector also has a key role to play in crisis resolution.

10) In this context, we urged the early implementation of the IMF quota increase and the New Arrangements to Borrow. We drew attention to the possibility, if circumstances so warrant, of activating the General Arrangements to Borrow, in consultation with other participants in the arrangements. We agreed to explore a strengthened capacity, based in the IMF and with the general increase of IMF quotas and establishment of the New Arrangements to Borrow, to provide more effectively contingent finance to help countries pursuing sound policies to maintain stability in the face of difficult global financial conditions.

11) We stressed the critical role of the World Bank in crisis prevention through support for strong institutions, good governance and structural reforms, particularly in the financial, corporate and social sectors. We also underlined our support for an active role for the World Bank and other MDBs responding to the crisis. We would support the following steps:

• To develop a new emergency capacity with a particular focus on support for the vulnerable groups in society and for financial sector restructuring;

• To use loan guarantees and other innovative means to leverage private sector lending for investment projects in emerging markets, and

• To expand their own lending as much as possible for sound operations within their guidelines to countries now affected by the crisis.

Debt

12) We also discussed the problems of the poorest countries. We endorse the need to sustain the momentum of the HIPC initiative. We shall also encourage the IMF and the World Bank to move forward quickly on further proposals which recognize the special needs of poor post-conflict countries, especially those with arrears to the IFIs.

Strengthening the International Financial System

13) Looking ahead, we agreed on the importance of adapting the IMF to ongoing changes in the world economy. This includes a focus on increasing its transparency, the design of appropriate reform programs, and effective use of IMF resources. We expect further progress in these areas in the near future.

14) We agreed on the need to build upon the work done to date and extend the reach of international discussions to ensure that the system is equipped to meet the challenges posed by the increasingly integrated global economy and financial markets. We committed to work together within the G-7, and with other industrial and key emerging market economies and with the international financial institutions, to develop approaches to strengthen the system in the following key areas:

• promotion of soundly based capital flows, with better transparency and disclosure for all types of financial institutions and improved regulatory focus in industrialized countries on risk management systems and prudential standards;

• strengthening existing institutions and bodies to ensure that they work more closely and cohesively together so as to seek to maintain on an on-going and regular basis the integrity and stability of the international financial system;

• strengthened national financial systems, with measures to increase incentives for countries to act in this area, including stronger surveillance of financial sector supervisory and regulatory regimes including the possibility of peer review and much closer cooperation and coherence between the various international institutions and groups involved in the financial sector. In this respect, we welcome the upcoming meeting of the banking surveillance authorities of the G-10 Basel group and of emerging economies in Sydney this month;

• consideration of the elements required for sustainable exchange rate regimes in emerging market economies in the context of the global economy, backed by consistent macroeconomic policies;

• development of effective mechanisms to involve the private sector in crisis management, with an appropriate financing role; and

• other adaptations of the international architecture, including the possibility of strengthening the Interim and Development Committees.

15) The G-7 welcomed the reports of the working groups of the G-7 and key emerging market economies, and we agreed to work together to implement recommendations in the key areas of transparency, strengthening financial systems and managing crisis with an appropriate private-sector role, as a matter of urgency. We look forward to a productive discussion of these and other issues in the Interim and Development Committees and other meetings, including the meeting with finance ministers and central bank governors from key emerging markets. We also called on our deputies to consult in a systematic way to complete a more detailed work plan, based on the agenda above, and report to us at a meeting of G-7 Finance Ministers and Central Bank Governors as soon as the work is completed. We have asked Mr. Tietmeyer, a member of our group who is also the Chairman of the G-10 Central Bank Governors, to consult with other appropriate bodies and to consider with them the arrangements for cooperation and coordination between the various international financial regulatory and supervisory bodies and the international financial institutions interested in such matters, and to put to us expeditiously recommendations for any new structures and arrangements that may be required.