The overview-report looks at the problems identified by the G8 Action Plans, Task delegated to various institutions and results given from the implementation report. It is subdivided into ten sections:

• General Provisions
• Market Infrastructure
• Securitization Markets
• Public Debt Management
• Broadening and Diversifying the Investor Base
• Developing of derivative and swap markets
• Promoting Regional Initiatives
• Broadening the Database
• Developing bond markets in less-developed countries (especially Sub-Saharan Africa)
• Techical Assistance

The G8 Action Plan was mentioned in the recent report of the G8 Finance Ministers Meeting in Osaka, Japan, but also in various other conferences:

• High Level Workshop 2007 Developing Bond Markets in Emerging Market Economies, Frankfurt, May 10, 2007
• G8 Conference on Bond Markets in Emerging Economies and Developing Countries, Frankfurt, 31 January 2008
• Second OECD Forum on African Public Debt Management, 12-13 December 2007, Amsterdam
• World Bank Debt Management Stakeholder’s Conference, Oslo Norway, March 5-6 2008

A list of further documents can be found in the report, further entries will be added in the future.

He outlines the following benefits from having Local Bond Markets:

Foreign versus local currency

• Reduced volatility and easier debt management
• Long-term fiscal budget stability
• Increased investors confidence
• Reduced conflict of interest between devaluation of currency to spur export growth and appreciation of currency to ease debt payment
• Local participation in the debt market

Risk management and investment

• Free capital by providing low-risk local currency government bonds which allow investors with an appetite for medium-risk exposure to invest in high-risk investments, such as SMEs and Startups.
• Lower capital adequacy requirements from banks because of availability of local-currency government bonds
• Allows the operation of enterprises with lower risk appetites –(particular pension funds)

Monetary policy

Shared costs of inflation targeting between public and private sector

Information

• Local bond markets provide key investment information, including interest rate expectations, inflation rate expectations, yield curves.
• Better fiscal and monetary planning because of knowledge about market expectations

Market forces

• Government over-borrowing is restrained by inflation and economic decline and would therefore in theory be restrained, foreign lenders share in the cost of excessive lending.

Debt/investment cycle

• Interest on government debt increases the revenues of the local investors, which in turn can increase the tax revenues of government.

He also describes why Local Bond Markets have not developed in developing countries:

There are many possible explanations why African countries initially chose foreign loans over local bonds – a lack of local capital, an abundance of apparently cheap foreign capital, the lower administration costs of foreign loans over issuing bonds – but once this decision was made, it became a self-reinforcing cycle. As the foreign loans drain local capital and foreign exchange reserves, more foreign capital and currency is required. As the economies stagnate for a variety of reasons, local capital becomes more scarce and more expensive, whilst foreign capital is readily available at cheaper rates. Any weakening of the currency reduces the relative size of local capital and increases the need for foreign exchange. A government eventually has no interest in issuing local bonds at very expensive rates, which will not provide vital foreign exchange. From the foreign lenders’ point of view, they would have no interest in buying local bonds carrying additional currency risk, when they are able to issue debt in the currency of their choosing. As the economic situation declines in the country, the lenders will insist on having their loans denominated in foreign currency so as to limit their risk. Eventually the multilateral institutions are brought in and, in an attempt to help, offer the countries even more foreign debt at even lower rates. A bond issued in local currency at market prices stands little chance of competing against these cheap and relatively freely available loans.

The topic is also discussed at Ecorica.

In this post, the main recommendations are going to be listed and assesses whether they have been implemented.

IMF

• The IMF should serve as quasi lender of last resort (LOLR) to emerging economies.

  The IMF is acting less and less as LOLR to emerging economies. Most loans to emerging economies hit by the Asian or the Russian crisis have been paid back (see paper by William Cline). To become LOLR, the IMF would need more funds and more access to supervision, as Olivier Jeanne and Charles Wyplosz argue in this IMF paper.

• Eligible member countries must permit freedom of entry and operation for foreign financial institutions.

  Financial integration of emerging economies has increased to some extent – mostly in Europe, leastly in Latin-America and Asia in the middle (see BIS-Paper by Alicia García-Herrero and Philip Wooldridge. The main integration was regional rather than global.

• Every country that borrows from the IMF must publish, regularly and in a timely manner, the maturity structure of its outstanding sovereign and guaranteed debt and off-balance sheet liabilities.

  Measuring public debt is not an easy taks because of the different types and issuers of public debt. The BIS, the World Bank, the IMF and the OECD maintain the Joint External Debt Hub which collects and publishes information about sovereign debt. A list of central government debt for 89 countries between 1991-2005 is available at the Inter-American Development Bank.

• Commercial banks must be adequately capitalized either by a significant equity position, in accord with international standards, or by subordinated debt held by non-governmental and unaffiliated entities.

  Standards for minimum capital for banks and other financial institutions are given by Basel II, but the final decision on how to implement Basel II was not reached until July 2007.

• The IMF in cooperation with the BIS should promulgate new standards to ensure adequate management of liquidity by commercial banks and other financial institutions so as to reduce the frequency of crises due to the sudden withdrawal of short-term credit.

  The adequate bodies would not be the IMF and the BIS, but the BCBS and other international bodies such as IOSCO or IAIS.

• The IMF should establish a proper fiscal requirement to assure that IMF resources would not be used to sustain irresponsible budget policies.

  The IMF has introduced and updated several codes for fiscal transparency.

• The IMF should use its policy consultations to recommend either firmly fixed rates (currency board, dollarization) or fluctuating rates.

  Just like in 2001, the world is still far away from completely floating exchange rates for all currencies (see IMF overview of Exchange Rate Arrangements in 2006).

• The IMF should cease lending to countries for long-term development assistance (as in sub-Saharan Africa) and for long-term structural transformation (as in the post-Communist transition economies). The Enhanced Structural Adjustment Facility and its successor, the Poverty Reduction and Growth Facility, should be eliminated.

  The Poverty Reducation and Growth Facility is still active. Togo has been the most recent recipient in April 2008.

• The IMF should write-off in entirety its claims against all heavily indebted poor countries (HIPCs) that implement an effective economic development strategy in conjunction with the World Bank and the regional development institutions.

  Through co-operation of creditors in the Paris Club and together with IMF and World Bank, several debt relief initiatives for heavily indebted poor countries have been implemented. The IMF estimates that about 40% of debt has been cancelled.

• Further quota increases for the IMF are not necessary.

  Adjusting quota shares is necessary to reflect the economic development of various IMF Members. Often this was done by increasing quota for some countries. If the USA wants to keep its defacto veto of having more than 15% of votes, then it also needs to increase its quota.

  The Development Banks

• The development banks must be transformed from capital-intensive lenders to sources of technical assistance, providers of regional and global public goods, and facilitators of an increased flow of private sector resources to the emerging countries.

  The World Bank has programs for technical assistance and co-operation with the private sector through the International Finance Corporation.

• The focus of their individual financial efforts should be on the 80 to 90 poorest countries of the world that lack capital market access.

  This would not only be counterproductive, because the World Bank provides technical assistance along with financial help, but it would also set the wrong incentives because countries with difficult capital market access would then stop their efforts to achieve that goal.

• All resource transfers to countries that enjoy capital market access (as denoted by an investment grade international bond rating) or with a per capita income in excess of $4000, would be phased out over the next 5 years.

  Poverty and a good bond rating are not mutually exclusive. Often countries might still be in financial need even though their treasury bonds might have excellent ratings. This proposal contradicts with the previous one, because some countries have access to bond markets but their per capita income is well below US-$ 4000.

• In poor countries without capital market access, poverty alleviation grants to subsidize user fees should be paid directly to the supplier upon independently verified delivery of service. Costs would be divided between recipient countries and the development agency. The subsidy would vary between 10% and 90%, depending upon capital market access and per capita income.

  The World Bank is more and more engaging with the private sector and funds directly the supplier. Often however governments supply certain goods and then financial support from the World Bank becomes an indirect transfer of funds to goverments.

• The government of each developing economy would present its own reform program for institutional change which would be supported by the World Bank and audited independently.

  Institutional change needs to go along with changes in social and political norms. The problem is not drafting a reform agenda, but implementing them and creating the mechanisms for a continuous evolution.

• To underscore the shift in emphasis from lending to development, the name of the World Bank would be changed to World Development Agency. Similar changes should be made at the regional development banks.

  A name change has not occured and would most likely be strongly contested by United Nations institutions reponsible for development.

• All country and regional programs in Latin America and Asia should be the primary responsibility of the area’s regional bank.The World Bank should become the principal source of aid for the African continent until the African Development Bank is ready to take full responsibility. The World Bank would also be the development agency responsible for the few remaining poor countries in Europe and the Middle East.

  There is still considerable overlap between the various regional development banks.

• The World Bank and the regional development banks should write off in entirety their claims against all heavily indebted poor countries (HIPCs) that implement an effective economic development strategy under the Banks’ combined supervision.

  See above to a comment on the similar IMF reform proposal.

• The United States should be prepared to increase significantly its budgetary support for the poorest countries if they pursue effective programs of economic development.

  Even though the USA is the largest donor of development aid, compared to its economic power it only donates a marginal amount to development (about 0.17% of GNI)

The Bank for International Settlements

• The Commission recommends that the BIS remain a financial standard setter.

  The main standard-setting bodies are the BCBS, the IOSCO, the IASB, the IAIS and the FATF. All cooperate with the BIS, but are not the same.

• Implementation of standards, and decisions to adopt them, should be left to domestic regulators or legislatures.

  Especially in Europe, the Commission was a driver of implementation of already negotiated standards, thus it is not always clear whether national discretion to implement at will is the best way to establish international standards.

• The Basel Committee on Bank Supervision should align its risk measures more closely with credit and market risk.

  Basel II is the attempt to do exactly that.

The World Trade Organization

• Rulings or decisions by the WTO, or any other multilateral entity, that extend the scope of explicit commitments under treaties or international agreements must remain subject to explicit legislative enactment by the U.S. Congress and, elsewhere, by the national legislative authority.

  WTO Agreements have to be ratified and implemented in national legislation, but non-compliance can be countered by sanctions and other enforcement mechanism. Whether the Dispute Settlement Mechanisms at the WTO undermine national sovereignty or create a fair playing field for all countries under international trade law is a different matter.