International Financial Crises:

Efforts to Anticipate, Avoid, and Resolve Sovereign Crises

GGD/NSIAD-97-168: Published: Jul 7, 1997. Publicly Released: Jul 7, 1997.

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Pursuant to a congressional request, GAO reviewed initiatives and proposals to anticipate, avoid, and resolve future sovereign financial crises that might pose a threat to the international financial system, focusing on: (1) capital market and other mechanisms that are used to anticipate, avoid, and resolve sovereign financial crises as well as any limitations of these mechanisms; (2) initiatives that international financial institutions and others are developing to improve anticipation and avoidance mechanisms; and (3) initiatives and proposals to improve methods of resolving sovereign financial crises.

GAO noted that: (1) the possibility that a future sovereign financial crisis may threaten the stability of the international financial system cannot be ruled out, and current mechanisms to anticipate, avoid, and resolve crisis have limitations; (2) one limitation of mechanisms used to anticipate sovereign financial crises is that countries do not always supply the necessary information for market participants to accurately assess investment risks; (3) G-7 country initiatives may help anticipate and avoid some crises, but a number of obstacles may hinder the potential effectiveness of these initiatives; (4) for example, the International Monetary Fund (IMF) has developed a voluntary standard to improve countries' public disclosures of economic and financial data; (5) although IMF intends to enforce adherence to the standard, an IMF official told GAO that IMF lacks the authority and the resources to ensure the accuracy of these data and plans only limited monitoring to check for adherence to the data standards; (6) the G-7 has proposed an initiative to expand the General Arrangements to Borrow to quickly make more resources available to help resolve sovereign financial crises that threaten the international financial system; (7) GAO's analysis indicated that this initiative could reduce the U.S. share of the burden of resolving future crises, but its use would involve several trade-offs for the United States; (8) under this proposed initiative, the U.S. share would be slightly under the 20 percent of the new arrangements' funds, down from 25 percent under the General Agreements to Borrow; (9) however, although the U.S. share of the lines of credit would fall, the actual amount of funds the United States would contribute to the new lines of credit would increase; (10) use of the New Arrangements to Borrow would reduce the U.S. share of sovereign financial crisis resolution funding compared to the 51-percent share that the United States contributed to the 1995 multilateral financial assistance to Mexico; (11) however, the reduced U.S. participation in the new arrangements could dilute U.S. influence by decreasing its voting power, which might make it harder for the United States to influence activation of the lines of credit by IMF; and (12) use of the lines of credit could help to stem a crisis' spread to other countries and forestall systemic risk, but such use could also increase investors' or countries' moral hazard.

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