[stop-imf] NYT: Plan to Let Nations Declare Bankruptcy Gains

[Robert Weissman]

December 25, 2001
Plan to Let Nations Declare Bankruptcy Gains
By JOSEPH KAHN
WASHINGTON, Dec. 24 — Argentina's chaotic political and financial collapse
has given a strong push to a plan by the International Monetary Fund to allow
nations to declare bankruptcy and seek legal protection from their creditors,
much as people and companies can do, fund officials and private experts said.

The governing board of the fund has given a preliminary nod to the plan,
which was floated late last month by Anne Krueger, the No. 2 official. The
fund is expected to prepare a formal proposal in time for a financial summit
meeting in the spring, officials said today.

The plan would fill what Ms. Krueger call a "gaping hole" in the
international financial system. It would establish a formal bankruptcy
process for nations that face severe financial difficulties, allowing
them to
stop paying debts while they negotiate with bankers and bondholders.

"At the moment too many countries with insurmountable debt problems leave
them too long, imposing unnecessarily heavy economic costs on themselves and
on the international community that has to pick up the pieces," Ms. Krueger
said.

The proposal has won early support from the Bush administration, as well as
financial leaders of Britain and Canada. But it would probably require the
approval of Congress and legislatures of all the fund's 183 member nations
because they would have to grant legal amnesty to nations that meet the
fund's conditions for bankruptcy.

The plan faces stiff opposition on Wall Street, where bankers and brokerage
houses warn that investors will move their money out of developing countries
rather than risk having funds impounded in an international bankruptcy
proceeding.

"This is a nuclear-bomb solution that could really backfire," said
Charles H.
Dallara, managing director of the Institute of International Finance, who
represents many banks with loans in emerging markets.

Some developing nations have also expressed unease that they might be forced
into bankruptcy instead of being granted aid to help them ride out financial
storms.

Though the plan was broached before Argentina announced on Sunday that it
would stop making payments on its $132 billion debt, the troubles there
highlighted the urgency of finding a more orderly process for resolving
financial disputes.

Some experts believe that Argentina is a case study in how not to handle a
debt crisis. It sought to slash government spending, freeze bank
accounts and
dip into state pension funds to raise money for debt payments during a deep
recession — before riots brought down the government of President Fernando
de
la Rúa last week. Under the fund's proposal, Buenos Aires could have declared
a time out, halting debt payments or other outflows while it sought to
rebuild financial credibility.

The I.M.F. has historically gone to great lengths to help nations stay
solvent, often by providing large loans that they can use to stay
current on
debts or to shore up currencies. Such loans — including recent
multibillion-dollar packages for Mexico, Thailand, Indonesia, South Korea
Russia, Brazil, Turkey and Argentina — have drawn criticism because
they are
seen as expensive ways of rescuing countries that make bad policy decisions,
as well as protecting investors who buy risky stocks and bonds.

Major American, Japanese and European banks once accounted for most of the
money invested in developing countries, and they often informally agreed to
terms to settle disputes when countries ran into trouble. Today, there is
more variety among bond investors, and many have been reluctant to accept
anything less than full repayment.

The I.M.F. proposal is modeled on Britain's bankruptcy laws. A nation could
apply to the fund for the right to declare bankruptcy. If granted, that
nation would negotiate a settlement with its creditors, and a majority of
them could decide terms for the whole. The fund would also allow nations to
impose temporary foreign-exchange controls to prevent a rapid outflow of
private funds.

Bush administration officials have signaled their support for a shift away
from bailouts and toward a bankruptcy process. Treasury Secretary Paul H.
O'Neill has not publicly commented on the proposal, but during a meeting of
the fund's executive board, the United States approved developing the plan.

The proposal was also welcomed by some international economics experts,
including Jeffrey D. Sachs of Harvard, who proposed a similar idea more than
a decade ago.

But critics like Mr. Dallara said the plan was deeply flawed because the fund
wants to cast itself as bankruptcy judge even though it is often the largest
creditor and seeks to protect its own loan portfolio. The interests of
private investors do not rank as high, he said.

"How can the I.M.F. be a neutral judge when it is often the largest
creditor?" he asked. "That would be thrown out in any court."



Copyright 2001 The New York Times Company | Privacy Information