My statement on IBRD's Liquidity Management and Borrowing Program

We join in the chorus of praise of the World Bank Group's "Financial Complex." It is precisely because they could just become too good for our own sake, and thereby fall into the human traps of complacency and excess of confidence, that we need to put forward some comments, in order to pinch.

Phrases such as "absolute risk-free arbitrage income opportunities" should be banned in our "Knowledge Bank." We believe that much of the world's financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on short series of statistical evidence and doubtful volatility assumptions.

Just as an example, we should not forget how all the risk assessment models had to be recalibrated to take into account for Argentina.

If the "Financial Complex" identifies an arbitrage opportunity where it feels reasonably confident that it can close out positions in a brief period and register a profit, so be it. However, some important opportunity costs of keeping arbitrage positions on book might be present, and we feel they are not sufficiently considered in the current presentation.

Specifically, the Review of IBRD Liquidity Policy of March 2000 refers in paragraph 15 and 16 to the value of "borrowing flexibility", but primarily to discuss this issue in terms of the need to borrow while the conditions are good and the markets are not closed. In our opinion, we should also look at the other side of the coin, as the opportunity cost of borrowing today should also reflect the possibility that we could perhaps obtain even better conditions tomorrow. The finance department itself points to this when it refers to "record sub-Libor rates during the Asia Crisis as a consequence of the flight to safe haven."

We all share the concern of lower lending activity in the Bank but, form another perspective, this could in fact allow us to assist more forcefully when needs really are present. Clearly, we are not a "lender of last resort." but I believe we need to reflect on what we could have done now had we not participated in the build-up of the debt of Argentina while their markets were open and had thereby been leveraged to help out when the crisis occurred. US$10 billion, in long-term loans from the World Bank, would have provided more than enough incentives to achieve a satisfactorily restructuring of the current debt of Argentina (and the only conditionality would of course have been asking Argentina not to incur in more public debt, but allowing the private sector to breathe).

In good times the differences in basis points of the funding costs between the World Bank and Argentina might have been, say, 100, while in bad times they might easily have reached 2000. You tell me... when is the right moment for the World Bank to help out?