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Introduction and Thanks
Argentina & Emerging Market Policies -- The Struggle for a New Paradigm
This administration came to office having advocated a new approach to international financial crises. We sought to reduce the likelihood of crises arising in the first place. We sought to increase investment flows from the developed to the developing world at more affordable interest rates. And we sought to promote a more prudent approach to the use of IMF [International Monetary Fund] resources. I would like to focus my comments on this last effort.
Beginning with Mexico in the mid-90s, and especially with the Asian financial crisis later in the 90s, the size of major IMF programs grew enormously in a number of crisis countries. And worries arose that large financing packages might be leading some creditors to act on the assumption that their investments might be protected whenever an emerging market country got into financial trouble.
To want to change a policy is one thing, but in this instance changing it was something else again. Three problems stood in the way. First, large borrowers from the IMF increasingly began to fall behind in carrying through on IMF programs. Second, the threat of contagion to other emerging market countries had to be faced. And third, sovereign debt workouts -- the practical alternative to the policy of extending large scale access to IMF resources when borrowers failed to take the necessary steps to return to payments balance -- might prove hard to achieve.
The first step was the decision to be sure that the IMF itself was taken seriously. The fact is that markets had increasingly begun to look through the IMF to the U.S. Treasury as the decisive decision maker, despite the fact that the U.S. had only one seat on the IMF Executive Board. We believe that the Fund's success is essential to stability in the international economy, and we wanted to make sure that we did not undermine its credibility. That's harder than it sounds when the media repeatedly seeks a U.S. view on each new financial event and when a judicious silence is interpreted as a lack of engagement. So although we talked at one level or another with Fund officials nearly every day, we wanted the Fund to be out front and successful.
We took the second step when Turkey, having received a large augmentation of its IMF program in December 2000, faced another crisis last spring. The problem was that Turkey needed to take decisive action on a number of fronts, which was politically difficult for the governing coalition. The solution we found, jointly with the Fund and its other shareholders, was to require Turkey to adopt a number of difficult measures, including nine key prior actions to be precise, before the IMF would agree to a new program, rather than, as too often in the past, merely requiring the borrower to promise to take action in the future under the principle of conditionality. This principle of prior action was not entirely new -- nothing is in international affairs -- but the emphasis was new.
Argentina provided a new challenge to the emerging policy. We decided, again jointly with the Fund and its other shareholders, to go the last mile with Argentina last August. We went along with a new program, but with the twist that some of the Fund money could be used to support a voluntary, market-based debt operation.
But here again a ruling coalition found it difficult to take the necessary measures and within a few months Argentina was in deep trouble. The decision was taken within the Fund process that Argentina's economic situation had become unsustainable. This recognition that the international community should not entertain ever larger scale financing for a country that cannot resolve problems rooted in its policies and structures came to be accepted by markets as well as by governments.
Still, as the President has said, "the United States is prepared to help Argentina weather this storm. Once Argentina has committed to a sound and sustainable economic plan, [we] will support assistance for Argentina through international financial institutions."
The Argentine case shows that with sufficient preparation the international community does not have to be faced with contagion whenever a large borrower runs into trouble. Steps were taken by the Fund, through its existing program with Brazil, to give confidence that Argentina's closest neighbor would not fall victim to contagion. And the markets came to see that a workout was inevitable. The result is that today there is little evidence of contagion in the Argentine crisis, particularly not worldwide contagion.
We are thus well along the way to a new paradigm. The international community recognizes that the Fund cannot succeed if borrowers are unable or unwilling to take the domestic steps necessary to live within their means. The world is thus beginning to move back toward the original concept of the Fund as a lender to help countries withstand temporary payments imbalances. Contagion seems far less a necessary consequence than in the recent past. And in the case of Turkey, while it cannot be said to have overcome all of its economic challenges, recent economic indicators suggest that the markets at least have regained considerable confidence and Turkey appears to be making progress on some of the difficult measures that it needed to implement to restore its economy to health.
Of course, the new paradigm is not yet fully in place. Until the world economy recovers, emerging market economies face a difficult head wind. Fortunately, the world economy, like the U.S. economy, appears to be doing better than a few months ago.
And a second challenge lies in creating the structure for successful sovereign workouts. The world has no system such as found where national bankruptcy systems provide a stable environment for a debtor and its creditors to negotiate free from the fear that opportunistic minority creditors may, especially through litigation, make agreement difficult. Under our corporate reorganization law, Chapter 11, the bargaining occurs in the shadow of the court, thereby assuring that the interests of creditors as a group are safeguarded and that a sensible restructuring can be arrived at.
No such international bankruptcy system exists. Anne Krueger, the second-ranking official at the IMF, has made some tentative suggestions. The U.S. Treasury has similarly expressed interest. Various possibilities, some IMF-centered and others based more on contract, are under wide discussion in and out of official circles. We believe that if those discussions can reach a sensible, market-friendly conclusion, both creditors and debtors will be better off. And another step away from the bailout paradigm will have been taken.
Financial War on Terrorism
The world economy is bottoming -- but terrorism is a "wild card."
We are now seeing many signs that the world economy is bottoming and perhaps reviving. Here in the U.S., consumer confidence has improved. Leading indicators are up -- for the third week in a row. And, most importantly, there are signs that the economy can sustain the high rates of productivity growth that it achieved during the last half of the 1990s.
But, as [Federal Reserve] Chairman Greenspan has observed, we saw some of these encouraging signs in August and early September. The attacks on the World Trade Center certainly dealt our economy a short-term blow and ended an earlier recovery.
Terrorism remains an economic wild card. No one can predict whether or when another attack may take place, or how bad the next attack might be. The recent incident of the shoe bomber demonstrates that the threat is not yet behind us. Our job, as stewards of our citizens and our economy, is to try to make sure that another attack does not occur or at least does not succeed.
Treasury's role in the overall war effort.
As you know, U.S. foreign policy is coordinated by the National Security Council [NSC]. At the beginning of his Presidency, President Bush made Treasury a full member in the NSC -- on all issues, not just so-called economic issues.
Today problems do not come labeled "security only" or "economic only."
In addition, President Bush tapped Treasury as the lead agency on the financial front of the war on terrorism. We draw upon our experience in money laundering and other financial crimes, our relations with finance ministries around the world, and our contacts with the financial services industry. We use the expertise of financial investigators in our Treasury bureaus, particularly the IRS [Internal Revenue Service] and the Customs Service. We use the credit card and identity theft expertise of the Secret Service. We rely on the Office of Foreign Assets Control (or "OFAC") to help unveil terrorist financing networks and implement asset blocking orders against them.
But we can't go it alone. We work closely with other agencies -- especially the Department of Justice and the FBI[Federal Bureau of Investigation], the State Department, and the intelligence agencies. There has been an unprecedented level of cooperation as these agencies have worked together and mostly set aside their historical rivalries.
In this vein, I was pleased to announce yesterday that the President will ask Congress to increase the budget for the Financial Crimes Enforcement Network or "FinCEN" -- one of Treasury's bureaus that provides law enforcement agencies across government with a common platform from which to conduct financial crimes investigations.
Importance of international cooperation.
International cooperation is crucial to winning the financial war. After all, we can't bomb foreign bank accounts. We need the help of the foreign government to freeze them.
So far, we have received much international cooperation. We froze some $34 million of terrorist assets in the U.S. since September 11 -- foreign governments froze at least another $46 million -- $10 million of which I announced on Tuesday. 147 countries and jurisdictions have blocking orders in place. Luxembourg and Canada have blocked all of the names we have blocked, and the UK has blocked all but a handful. Switzerland, the country that used to advertise its protection of "bank secrecy," has blocked 30 terrorist-related accounts. Even the United Arab Emirates has issued blocking orders on the assets of several terrorists on the U.S. list and published an additional list of 30 companies with suspected terrorist links.
The UN and our able Ambassador John Negroponte have played an important role as well. UN Resolution 1373 calls on member countries to criminalize terrorist financing and to develop the legal infrastructure to designate and sanction terrorists and those who support them. Believe it or not, many countries -- including Canada -- did not have laws on their books making it a crime to wittingly provide money to terrorist organizations. Increasingly, they now do. Also, the UN has maintained and expanded a list of designated terrorist individuals and organizations. The G-7 [Group of 7], G-20 [Group of 20], and the 31-member Financial Action Task Force have also made important contributions.
We are particularly pleased with the EU's recent decision not only to cooperate, but to play a leadership role. At the end of December, the EU designated several terrorist entities and organizations, including some Irish and Spanish extremist organizations that the U.S. had not previously designated. We were pleased to follow the EU's lead and designate those entities, too.
Needless to say, some of the international cooperation -- particularly from countries in the Gulf region -- is behind the scenes. But regional governments are quietly providing leads, taking the initiative to shut down front charities, and cooperating with the coalition's overall investigations.
New tools in the war on financing.
Also important, we have some new tools to fight on the financial front. For example, the USA Patriot Act requires banks to know the true owner of correspondent bank accounts and to terminate suspect correspondent accounts. We will be extending suspicious activity reporting requirements to brokers and security dealers. As of January 1, we have required money service businesses -- including hawalas -- to register with FinCEN, report suspicious activity, and collect and retain customer identification information -- over 8,500 have already done so. And we recently concluded agreements with Interpol and Europol that deepen our ability to exchange information with foreign law enforcement agencies.
Other International Issues -- Creating a Clean Environment
Another important component of the financial front of the war on terrorism is our effort to create a cleaner international financial system more generally. We continue to support the highly successful "name and shame" approach of the Financial Action Task Force. And this approach is being extended to terrorism. Increasingly, foreign jurisdictions previously known for their "no questions asked" approach to financial services are finding it worthwhile to start asking a few questions. In addition, we have concluded landmark Tax Information Exchange Agreements based on an OECD [Organization for Economic Cooperation and Development] model, with the Cayman Islands and Antigua & Barbuda. We are about to announce a third, major agreement. Around the world, financial centers are cleaning up their act. This has a further, if less direct, deterrent effect on terrorist finances.
Are We Making a Difference? Short Answer Is Yes.
Without question, there is a lot of activity on the financial front. But are we making a difference? Earlier, I cited some quantitative measures of our success -- $80 million in frozen assets; 147 countries with blocking orders, etc. But do all of the statistics mean that we are helping to prevent terrorist attacks? That is the ultimate question, the ultimate measure of success. We may ultimately never know the answer -- it is hard to prove a negative, hard to measure prevention and deterrence. But, I think, the short answer is yes.
Our intelligence channels indicate Al Qaeda was "feeling the pinch" in Afghanistan. We believe that terrorists groups are finding it harder to move money around the globe. Wealthy donors who are accustomed to paying protection money are becoming more cautious about whom they support. Shutting down the global al-Barakaat hawala was a particular blow because Osama bin Laden and Somali extremist groups derived large sums of money from its operations. As a result of these pressures, we have crippled bin Laden's global reach. His loose collection of allied extremist groups was premised on his providing them with financial means. Bin Laden's operations must now find additional sources to support themselves.
Another place where we see some signs of success is in the special area of Islamic charities. While they are important sources of support for hospitals, orphanages and the like, the managers of some charities sometimes also run a clandestine business supporting terrorist groups. Their directors and donors are waking up and cleaning up some of the charities' operations. And governments in which these charities are found are rethinking their "blind eye" approach.
As I mentioned earlier, regional cooperation is picking up.
So the short answer is "yes, we are making a difference" but we need to do more. Let me mention four tasks.
First, we must encourage independent identification of terrorist groups by other countries. The EU designation at the end of December is a step in the right direction, but we need more countries to initiate more designations.
Second, we have to ensure that more countries issue blocking orders for more of the entities identified, by the United States, other countries, and the international community, as being part of terrorist financial networks. We must also do a better job of following up with the countries to make sure that their orders, once issued, are fully implemented and obeyed.
Third, we must do a better job of exploiting the "industrial quantity" of documents captured in Afghanistan and increasingly elsewhere. Hard drives and e-mails must be exploited as well. This is a massive challenge. To meet it, we must bring documents together from all over the world, translate them, cross-reference them, and thereby build a complete picture. No one document can tell us that much. Fourth, we must redouble efforts by U.S. and allied intelligence services against such financial intermediaries as hawalas and other informal systems.
Some may be tempted to say that the financial war on terrorism is an impossible task. After all, money is fungible and illegal money tends to flow to the most hospitable country. But that the task is difficult does not mean that it is impossible. This is an unconventional war where there are no boundaries, where civilians are the targets, where people (or so-called "martyrs") are the weapons, and where electronic money transfers and messaging are the fuel and the logistics train. Identifying the flow of money helps us find the footprint of sleeper cells, disable them, and perhaps prevent the next attack. Thank you.
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