Q&A: O'Neill on Bailouts: "We Need an Alternative"

Since taking office early last year, U.S. Treasury Secretary Paul H. O'Neill has struggled to reshape some longstanding policies governing international finance. On Sept. 12, two weeks before the annual IMF and World Bank meetings were to take place in Washington, BusinessWeek Senior Writer Rich Miller met with O'Neill in his office next to the White House for an update on how the effort is going.

Q: When it comes to bailouts, many investors think that you say one thing--that you're against them--then do another, as you did with Brazil. Just what is your policy?

A: People have not understood us. We need an alternative to--let me say it in quotes--"financial" bailouts. But we have to deal with the world the way it is, not the way we'd like it to be and the way we're trying to remake it. What the IMF did with Brazil was very smart. The program they put together provides $3 billion more between now and December. Everything else is conditional on what the [soon-to-be-elected] new government does next year.

Q: What, then, is the alternative to bailouts?

A: There are three pieces. One is the IMF's proposal for a legal process [on sovereign-debt restructuring]. But that's going to take some time to put in place. So we also want to put contractual clauses into sovereign-debt instruments [to make it easier for investors to agree on a debt restructuring]. And we want to establish hard and fast limits on how much money the IMF will provide to any country. That's a good idea, but only in combination with the other two.

Q: What sort of limit are you thinking about?

A: It ought to be set at a level so that if a country reaches it [and needs more], you don't have a meltdown. But you do have, in effect, a Chapter 11 reorganization, where people have to face the fact that the situation is unsustainable.

Q: So you don't think the IMF should be a lender of last resort?

A: The idea of lender of last resort accepts the notion that it's the world's responsibility to bail out bad policies. I don't agree with that.

Q: What are you doing to change things?

A: We're looking for some [emerging-market] countries whose debt is investment-grade to put these collective-action clauses [allowing a majority of investors to decide on a restructuring without requiring the consent of all] into their financing instruments. That would be a way of demonstrating that the clauses are benign and don't add to borrowing costs. Chile is an obvious case. And we've talked to Mexico about it. There's a willingness to think about how this might be done. We're also working with the IMF on its proposal for sovereign-debt restructuring.

Q: When you took office, you said you wanted to get out of the business of fighting crises and into the business of anticipating and preventing them. Has any progress been made?

A: We have developed a fairly elaborate country-by-country analysis that we look at every month or so. It uses different measures to look at conditions in a country so that we can inform ourselves about places that could be a problem.

Q: What are you doing with that information?

A: When we have meetings [with a country's finance officials], this information is very much in the conversation.

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