[stop-imf] Dawson on IMF Bankruptcy views
Robert Weissman
rob@essential.org
Fri, 15 Feb 2002 13:39:51 -0800
http://www.imf.org/external/np/vc/2002/020702.htm
A Contribution to an Online Discussion on Sovereign Debt Restructuring
Moderated by the European
Network for Debt and Development
A Letter By Thomas C. Dawson
Director, External Relations
Department
International Monetary Fund
February 7, 2002
Thanks to Eurodad for setting up
this forum and to the various contributors for putting forward
their views. As you know, we are
at an early stage in the discussion of new approaches to
sovereign debt restructuring,
with the Fund's executive board holding its first substantive
discussion of the topic next
week. Ms. Krueger's speeches have outlined our current thinking
(and these are available on the
Fund website at www.imf.org/cgi-shl/create_x.pl?mds), but we
do not yet have a detailed
proposal to put to our members. Indeed, at the moment we have
almost as many questions as
answers, and so we look forward to hearing ideas from all
interested parties in coming
months on how we should proceed. Your thoughts are very helpful.
It would take up a lot of
bandwidth to respond to all the points that have been raised on the
forum, so let me pick up on just
five:
1. The ideas discussed by Ms.
Krueger focus on the problems of countries that have borrowed
from the private sector, as well
as from other governments and international institutions. In other
words, it addresses the
difficulties faced by emerging market countries rather than the poorest
with no access to capital
markets. The international community is tackling the debt problems of
the poorest countries through
the HIPC initiative. There is of course a debate over whether that
initiative should be more
generous or differently structured, but that is a separate question from
the issue raised by Ms. Krueger.
2. Several contributors ask what
if any role the Fund itself should play in a new sovereign debt
restructuring mechanism. This is
a complicated question, and would depend on the precise
proposal that is finally put on
the table.
One element of the new approach
would be to decide whether a country's debts are truly
unsustainable and what policies
are required to stop the problem reoccurring. This is difficult
enough when companies get into
trouble, and even more so when countries do. Ultimately, it is
a matter of judgment on which
the international community needs to take a collective view,
rather than leaving it to
technocrats or unaccountable judges. The IMF's executive board is an
appropriate body: it is
representative of the international community ? both debtor and creditor
nations ? and has appropriate
expertise through its ongoing surveillance and lending activities.
And, of course, the debtor
country itself is represented on the board. It is worth noting that the
Fund's Board has performed this
role for many years. The approach suggested by Ms. Krueger
would not change the Fund's role
in this area.
However, in most cases the Fund
will be a creditor of the country seeking help and therefore
faces an apparent conflict of
interest. This is true, for example, of sorting out disputes among
different creditors or arranging
votes on whether to accept particular debt restructuring terms. It
would probably not be
appropriate for the board to take decisions on these matters. Some
legally ring-fenced body could
be created to do the job, either inside or outside the Fund.
At the end of the day, the
crucial point to remember is that the Fund would not decide the terms
of any debt restructuring. In
other words, neither the amount of relief the country receives nor
the size of the hit the private
creditors take. That is for the debtor country to sort out with its
creditors. The aim of the new
approach is simply to make the process of getting to an agreement
easier, which should benefit
both the debtor country and most of its creditors. The heart of the
approach is a framework for
making a restructuring that is accepted by a qualified majority of
creditors binding on all
creditors, not to give greater legal authority to the Fund. This would
be
similar to the "cram-down"
mechanisms incorporated in most bankruptcy regimes.
3. A related question is whether
debts owed to the Fund should be restructured along with those
owed to the private sector. The
key point to remember here is that the Fund is not a commercial
organization seeking profitable
lending opportunities. We lend at precisely the point at which
the private sector is reluctant
to do so ? and at interest rates well below those that would be
charged by private creditors.
Countries that come to us for help are by definition in painful
economic positions, but by
lending we help them avoid having to resort to policies that would
do further unnecessary harm to
themselves, their private creditors, and other countries. This is a
public good that benefits all
concerned and it would not therefore be appropriate to lump
outstanding loans to the Fund
with commercial claims in a workout. To do so would limit our
ability to be able to help other
countries in trouble in future.
4. Some critics argue that the
mechanism would reduce the amount of private capital flowing to
emerging market countries. But
remember that by making the process of restructuring
unsustainable debts more
orderly, the mechanism would help private creditors distinguish
between good and bad risks.
Countries with good policies should find it easier and cheaper to
attract capital. Countries with
weak policies might find it more difficult to obtain capital, because
creditors know that the Fund
will not be waiting on the sidelines to bail them out. But that
would be no bad thing. It would
make debt problems less likely to build up and would
encourage countries to
strengthen their policies. It should be recalled that nonsovereign
credit
markets operate within a
framework for court supervised workouts, and so there is little reason
to believe that an efficient
mechanism for resolving sovereign debt difficulties would have a
major impact on private capital
flows.
5. What about the argument that
the system is working perfectly well as it is? If the new
approach comes to fruition, then
it will alas be too late to help Argentina in its current
difficulties. But Argentina is a
good example of a country where underlying problems could
well have been addressed earlier
and in a less painful way if it had been in place. Like a
toothache sufferer delaying a
visit to the dentist until the last possible moment, governments
frequently try to put off the
inevitable. The result is that the citizens of the defaulting country
experience greater hardship than
they need to, and the international community has a tougher
job helping pick up the pieces.
In the end, unsustainable debts have to be restructured. The only
question is how painfully.
IMF EXTERNAL
RELATIONS DEPARTMENT
Public Affairs:
202-623-7300 - Fax: 202-623-6278
Media Relations:
202-623-7100 - Fax: 202-623-6772