[stop-imf] Critical views on international bankruptcy

[Robert Weissman]

WHEN COUNTRIES GO BANKRUPT: The Virtues And Flaws Of The
International Monetary Fund's Proposal Of An Insolvency Law
For Nation-states

By CHRISTOPH G. PAULUS ---- Wednesday,
Feb. 13, 2002
http://writ.news.findlaw.com/commentary/20020213_paulus.html

The International Monetary Fund's Anne Krueger, in a recent
speech and later remarks elaborating upon it, has laid the
foundations for a new global order. That order will be
defined not by the remnants of colonialism, but by the rule
of law. And the rule of law will govern nation-states not
only when they prosper, but also when they are unable to pay
their debts.

Currently, debt restructurings are granted on the basis of
ad hoc solutions such as the IMF's Highly Indebted Poor
Countries (HIPC)-initiative or the consultation of the Paris
or London Club, where the state creditors and the banks,
respectively, sit together to debate about possible debt
restructurings. These procedures are neither predictable,
nor transparent, nor reliable - that is, they lack the
essential virtues that characterize the rule of law.

In light of this situation, the IMF is entirely right to
urge that a new insolvency law for nation-states be devised.
The mere existence of an insolvency law would exercise a
disciplining influence on all participants - just as the
existence of bankruptcy laws for individuals does upon
individual debtors and their creditors. In the shadow of
such a law, lenders must be more cautious before they lend,
and borrowers must consider that if they resort to declaring
themselves insolvent, they may, in the future, be deemed
fiscally untrustworthy by others.

The IMF proposal for an insolvency law for nation-states is
a good starting point. For one thing, it rightly allows only
reorganization, not liquidation. (The destructive effect of
a country's liquidating its assets would be unbearable in
light of increasing global interdependence). But the IMF
proposal also has some flaws that should be corrected.

The Need for an Objective Criterion As To When Proceedings
Should Start

One of these flaws is that the filing of the petition should
not be dependent on the IMF's approval, as the IMF has
proposed. A country should not have to get the permission of
the IMF - which usually will be one of its creditors, and
thus will have a conflict of interest - to initiate the
reorganization proceeding.

To require a country to get IMF permission before going
bankrupt infringes its autonomy and sovereignty. A neutral,
objective criterion - such as the country's proven inability
to pay its debts on a timely basis based on the balance of
its assets and debits - is a far better trigger for when
insolvency proceedings should begin than the IMF's
subjective, and perhaps biased, assessment. The IMF's
assessment will inevitably be compromised by its own status
as a creditor, and by the fact that its members, who will
vote on the insolvency proceeding's initiation, include many
other lenders.

The Need for a Truly Neutral Arbiter

The IMF proposal correctly seeks the appointment of a
neutral person to supervise the proceeding. But the
structure of that person's compensation and location does
not provide for true neutrality.

The bankruptcy administrators, under the IMF proposal, will
be paid by the IMF, and will reside in Washington, D.C.,
where the IMF resides. Debtors could be forgiven for
assuming that, as a result, the administrators will likely
have a close relationship with the IMF.

The administrators should be housed and paid by another
institution. The best choice is probably the International
Court of Justice, since many of the administrators' tasks
are of a legal nature, and they may themselves be tantamount
to bankruptcy judges.

At the ICJ, a new Chamber - an International Insolvency
Court - should be founded. There, the administrators'
independence and neutrality would be unquestionable, even if
they were to cooperate (as they ought to, and will have to)
with the IMF and the World Bank in fulfilling their tasks.

Crafting The Administrator's Duties and Powers, and the Plan
Requirements

According to the IMF's proposal, the debtor country's
petition must fulfill certain minimum requirements with
respect to both form and substance. For example, the debtor
must present a plan together with its filing.

To ensure this requirement is not merely a formality, the
administrator should judge at the outset whether the plan
submitted seems feasible - and force the petition and plan
to be refiled at a later date if it does not. Final approval
will lie with the creditors' vote, but the administrator
should have the power to bounce reorganization plans that
plainly will not work.

The administrator should also be able to check the
lawfulness of the listed claims, ascertaining whether the
debtor's filing is abusive. (For instance, is the debtor's
inability to pay the result of reparation obligations after
a lost war that should not be forgiven?)

Finally, the administrator should also supervise the
discussion about, and voting over, the plan, and monitor
whether the debtor country properly fulfills the terms of
the approved plan. For most of these duties, the
administrator certainly need the support of the Bretton
Woods Institutions.

As for the substantive plan requirements, countries should
be required to budget funds in the reorganization for
domestic improvements to their school systems, food
supplies, and other necessities, and to maintain a certain
minimum standard of living for their people despite the
austerity necessary to comply with the plan.

The primary goal of a plan proceeding is to bring the debtor
back into the community of the global village rather than
expelling it; accordingly, even in reorganization, the
debtor should be required to act responsibly towards its own
people, meeting the global community's standards for human
rights and the provision of necessities.

Forcing Creditors Into the Reorganization Proceeding

An intricate and challenging question is who shall be
included into the proceeding. A single nation has the legal
authority to force all creditors of a given corporate or
individual debtor to join a single proceeding or lose their
legal claims against the debtor. However, on the global
level, there is no such authority.

Thus, if public creditors, banks, individual bondholders,
and so on, are to be forced to comply with the insolvency
rules, there must be a contractual solution, under which
creditors consent to let the majority of creditors approve a
bankruptcy plan that binds everyone.

A system of majority voting is necessary to threaten
objecting creditors with the risk of being out-voted if they
do not cooperate in negotiating a fair plan. Whether a
majority or a supermajority should be required; whether
creditors' votes should be equal, or should depend on the
amount of their claims; and whether and how the creditors
shall be grouped together are subsidiary issues that
nevertheless need to also be resolved, and resolved fairly.

We are currently witnessing the creation of a fascinating
new area of law - bankruptcy writ large, with financial
reorganizations that encompass not just a company, but a
country. The IMF has taken a brave, laudable initial step.
But it is important that it take further steps to make sure
the procedures it implements are the best possible - the
fairest to debtor countries, to their people, and also to
the creditors to whom they owe large sums.