[stop-imf] IMF on international bankruptcy

Tue, 02 Apr 2002 16:25:08 -0800

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In addition to the pieces below, more information on IMF thoughts on
international bankruptcy proceedings from an Anne Krueger press
conference, transcript of which is posted at
http://www.imf.org/external/np/tr/2002/tr020401.htm.

IMF outlines new plan for bankrupt countries to restructure debt:

A judicial panel would need binding international powers to override
litigation in national courts, reports Alan Beattie
Financial Times; Apr 2, 2002
By ALAN BEATTIE

Anne Krueger, the International Monetary Fund's second-in-command,
called yesterday for a new international judicial panel to allow
bankrupt governments to restructure their debt without being sued by
private creditors.

Ms Krueger said that such a procedure would need a change in the IMF
constitution to create binding international rules which could override
litigation in national courts.

The speech was her first major intervention on the proposed bankruptcy
procedure - often called the "sovereign Chapter 11" after similar rules
in US domestic bankruptcy law - since she declared IMF support for the
radical plan in November.

Since then, governments of several rich countries including the UK
and France have declared their support in principle for such a
procedure, while some private investors have argued against the idea.
The case of Argentina, which has entered a chaotic and unplanned debt
default, has also given the idea more prominence.

Ms Krueger's speech to the Institute for International Economics
in Washington last night took a middle path between radical and moderate
approaches.

She went beyond the limited view adopted by the US Treasury, which has
suggested that a mere change in bond contracts could allow a majority of
shareholders to impose a restructuring deal if a sovereign government
went bankrupt. But she said that any restructuring would be supervised
by an expert panel rather than the IMF - allaying private sector fears
that the fund would play judge and jury in the process.

"If we are to create a better framework for the restructuring of
unsustainable sovereign debt, the central feature would have to be a
mechanism enabling a super-majority of creditors - across the broad
range of credit instruments - to make the terms of a restructuring
binding on the rest," Ms Krueger said last night.

"But a purely contractual approach cannot resolve all the weaknesses of
the current system," Ms Krueger added.

Bond clauses which allowed a majority of investors to impose a
restructuring deal on the minority did not allow a country with multiple
bond issues to bind all its creditors into an agreement, she said.

A change in the IMF's constitution - which would require 85 per cent of
country shareholder votes - would allow "the creation of a single
international judicial entity that could arbitrate disputes and oversee
voting," Ms Krueger said. IMF officials suggested this could be modelled
on World Bank panels which arbitrate on disputes under trade agreements.

It would also "prevent creditors from shopping around for jurisdictions
in which they could enforce their legal claims through the courts," by
creating a treaty obligation which overrode national law, she said.

The push for a regulated sovereign bankruptcy procedure has gained new
impetus in recent years following the case of Peru, which was sued by a
New York-based hedge fund following a debt restructuring.

Since Ms Krueger's initial speech in November, the IMF has consulted
widely with lawyers and investors in the private sector. See Theory &
Practice column, Inside Track www.imf.org www.ft.com/globaleconomy

=====

Co-operate or bust: İIndividual lenders working together may help
governments to overcome debt crises
Financial Times; Apr 2, 2002
By ALAN BEATTIE

Today a conference at the Institute for International Economics
in Washington will discuss one of the more radical ideas to hit the
international capital markets in many years: that governments can
declare themselves bankrupt.

The idea was proposed by Anne Krueger, number two at the International
Monetary Fund, in November. The collapse of the Argentine currency and
the government's default on external debt have given the idea strong
contemporary relevance.

The economic theory that, its supporters say, makes such an approach
necessary relies on the idea that people forced to play a strategic game
with each other can produce a worse outcome than if the same people all
co-operate.

Here, the players are creditors who have lent to a government that has
got into trouble. If a government becomes illiquid but not insolvent the
investors face a difficult choice.

If they agree to wait until money becomes available, they will all get
their investment back in full. But if sufficient individuals decide to
pull out, so the government runs out of money, the rest will get far
less in the fire sale of assets.

Creditors can then push a country unnecessarily into default by starting
a "grab race", selling up and rushing out before others do. The early
exiters may end up with less than if they had all waited to be paid
back; but they will end up with more than if they had been the few to
stay on the burning deck whence all but they had fled.

As Maurice Obstfeld, the monetary economist, points out*, this explains
why certain debt or currency crises were not predicted well by the
markets. What sparked the crisis was not a change in the underlying
economic fundamentals but a perception among creditors that a
significant number of them were about to sell.

Only a situation with multiple creditors can create this outcome. In
this sense, the problems with countries such as Argentina may be more
intractable than previous Latin American debt crises in the 1980s. Then,
the bulk of the debt was in the form of loans held by a few banks,
making co-ordination easier. The loans were also syndicated.

Now, partly as a result of banks' reluctance to lend heavily, far more
emerging market external debt is in the form of tradable bonds. These
are scattered among thousands of investors, making co-ordination almost
impossible.

Solutions to overcoming the co-ordination problem have traditionally
involved a large official lender - usually the IMF - standing behind a
country and reassuring investors that they will not lose out by keeping
their money there.

But not only does this create the well known "moral hazard" problem -
encouraging reckless lending and borrowing on the grounds that the IMF
will bail creditors out - it also creates the difficulty of the IMF
having to judge what is a temporary liquidity problem owing to bad luck
and what is a serious insolvency problem owing to bad policy.

Supporters of a bankruptcy procedure argue that it can overcome this. If
creditors start to pull out, a country can put itself into bankruptcy,
forcing creditors to come to an agreement that shares the burden equally
rather than rewarding those who jump ship first. This should help to
differentiate real insolvency crises, which require debt restructuring,
from liquidity panics, which should not. Other mechanisms that can
compel creditors to work together, such as the collective action clauses
in bonds issued under English law, which allow a majority of creditors
to force a deal on the minority, can also help**.

Whether this would have helped prevent the crisis in Argentina is
questionable. Rather than a sudden flip into default because of investor
panic, the collapse in December had been long foreseen by financial
markets. A bankruptcy procedure could, however, have brought the crisis
forward by making it easier for default to be reached earlier. It might
also have made the process of working out a default easier by binding
individual creditors into a collective deal.

The sovereign bankruptcy procedure faces many legal and logistical
hurdles and its detractors say it creates incentive problems of its own,
notably discouraging investors from buying emerging market assets
because they fear being locked into a bankruptcy deal over which they
have little control.

But it could overcome the problem that crops up in debt crises: that
what comes out when individuals work separately may be improved if they
can be made to work together.

*Maurice Obstfeld, "Models of currency crises with self-fulfilling
features", NBER Working Paper 5285 www.nber.org **Marcus Miller and
Sayantan Ghosal, "Bail-outs, bail-ins and bankruptcy"; paper to be
presented to Institute for International Economics conference

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<div class=Section1>In addition to the pieces below, more information on
IMF thoughts on international bankruptcy proceedings from an Anne Krueger
press conference, transcript of which is posted at <A HREF="http://www.imf.org/external/np/tr/2002/tr020401.htm">http://www.imf.org/external/np/tr/2002/tr020401.htm</A>.

<p class="MsoNormal"><a NAME="docAnchor020402001203"></a><span style='font-size:
12.0pt;font-family:"Century Gothic";color:black;font-weight:bold;mso-bidi-font-weight:
normal'><font face="Century Gothic"><font color="#000000"><b><font size=+0>IMF
outlines new plan for bankrupt countries to restructure debt</span><span 
style='mso-bookmark:docAnchor020402001203'><span style='font-family:"Century Gothic";color:black'></font></b>:&nbsp;</font></font><o:p></o:p></span></span>

<p class="MsoNormal"><span style='mso-bookmark:docAnchor020402001203'><span style='font-size:10.0pt;
font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>A
judicial panel would need binding international powers to override litigation
in national courts, reports Alan Beattie&nbsp;</font></font></font></span></span><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'>
<br><font face="Century Gothic"><font color="#000000"><font size=-1>Financial
Times;&nbsp;</span><st1:date Month="4" Day="2" Year="2002"><span style='font-size:10.0pt;
 font-family:"Century Gothic";color:black'>Apr
2, 2002</font></font></font></span></st1:date><span style='font-size:10.0pt;
font-family:"Century Gothic";color:black'>
<br><font face="Century Gothic"><font color="#000000"><font size=-1>By
ALAN BEATTIE</font></font></font>
<br><![if !supportLineBreakNewLine]>
<br><![endif]><o:p></o:p></span>
<br><!-- the article byline -->

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Anne
Krueger, the International Monetary Fund's second-in-command, called yesterday
for a new international judicial panel to allow bankrupt governments to
restructure their debt without being sued by private creditors.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Ms
Krueger said that such a procedure would need a change in the IMF constitution
to create binding international rules which could override litigation in
national courts.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>The
speech was her first major intervention on the proposed bankruptcy procedure
- often called the "sovereign Chapter 11" after similar rules in US domestic
bankruptcy law - since she declared IMF support for the radical plan in
November.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Since
then, governments of several rich countries including the&nbsp;</span><st1:country-region><st1:place><span style='font-size:10.0pt;
  font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>UK</span></st1:place></st1:country-region><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>
and&nbsp;</span><st1:country-region><st1:place><span style='font-size:10.0pt;
  font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>France</span></st1:place></st1:country-region><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>
have declared their support in principle for such a procedure, while some
private investors have argued against the idea. The case of&nbsp;</span><st1:country-region><st1:place><span style='font-size:10.0pt;
  font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>Argentina</span></st1:place></st1:country-region><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>,
which has entered a chaotic and unplanned debt default, has also given
the idea more prominence.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Ms
Krueger's speech to the Institute for International Economics in&nbsp;</span><st1:State><st1:place><span style='font-size:10.0pt;
  font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>Washington</span></st1:place></st1:State><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>
last night took a middle path between radical and moderate approaches.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>She
went beyond the limited view adopted by the US Treasury, which has suggested
that a mere change in bond contracts could allow a majority of shareholders
to impose a restructuring deal if a sovereign government went bankrupt.
But she said that any restructuring would be supervised by an expert panel
rather than the IMF - allaying private sector fears that the fund would
play judge and jury in the process.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>"If
we are to create a better framework for the restructuring of unsustainable
sovereign debt, the central feature would have to be a mechanism enabling
a super-majority of creditors - across the broad range of credit instruments
- to make the terms of a restructuring binding on the rest," Ms Krueger
said last night.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>"But
a purely contractual approach cannot resolve all the weaknesses of the
current system," Ms Krueger added.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Bond
clauses which allowed a majority of investors to impose a restructuring
deal on the minority did not allow a country with multiple bond issues
to bind all its creditors into an agreement, she said.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>A
change in the IMF's constitution - which would require 85 per cent of country
shareholder votes - would allow "the creation of a single international
judicial entity that could arbitrate disputes and oversee voting," Ms Krueger
said. IMF officials suggested this could be modelled on World Bank panels
which arbitrate on disputes under trade agreements.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>It
would also "prevent creditors from shopping around for jurisdictions in
which they could enforce their legal claims through the courts," by creating
a treaty obligation which overrode national law, she said.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>The
push for a regulated sovereign bankruptcy procedure has gained new impetus
in recent years following the case of&nbsp;</span><st1:country-region><st1:place><span style='font-size:10.0pt;
  font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>Peru</span></st1:place></st1:country-region><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'>,
which was sued by a New York-based hedge fund following a debt restructuring.</font></font></font><o:p></o:p></span>
<p><span style='font-size:10.0pt;
font-family:"Century Gothic";mso-bidi-font-family:Arial;color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Since
Ms Krueger's initial speech in November, the IMF has consulted widely with
lawyers and investors in the private sector. See Theory &amp; Practice
column, Inside Track www.imf.org www.ft.com/globaleconomy</font></font></font><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:12.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=+0>=====</font></font></font></span><o:p></o:p>

<p class="MsoNormal"><a NAME="docAnchor020402001125"></a><span style='font-size:12.0pt;font-family:"Century Gothic";
color:black;font-weight:bold'><b><font face="Century Gothic"><font color="#000000"><font size=+0>Co-operate
or bust:&nbsp;<span 
style='mso-spacerun:yes'> </span>Individual lenders
working together may help governments to overcome debt crises</font></font></font></b></span><span 
style='mso-bookmark:docAnchor020402001125'><span style='font-family:"Century Gothic";color:black'></span></span><span style='font-family:"Century Gothic";
color:black'>
<br></span><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Financial
Times;&nbsp;</span><st1:date Month="4" Day="2" Year="2002"><span style='font-size:10.0pt;font-family:
 "Century Gothic";color:black'>Apr
2, 2002</font></font></font></span></st1:date><span style='font-size:10.0pt;
font-family:"Century Gothic";color:black'>
<br><font face="Century Gothic"><font color="#000000"><font size=-1>By
ALAN BEATTIE</font></font></font>
<br><![if !supportLineBreakNewLine]>
<br><![endif]><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Today
a conference at the Institute for International Economics in&nbsp;</span><st1:State><st1:place><span style='font-size:10.0pt;
  font-family:"Century Gothic";color:black'>Washington</span></st1:place></st1:State><span style='font-size:10.0pt;
font-family:"Century Gothic";color:black'>
will discuss one of the more radical ideas to hit the international capital
markets in many years: that governments can declare themselves bankrupt.</font></font></font><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

The
idea was proposed by Anne Krueger, number two at the International Monetary
Fund, in November. The collapse of the Argentine currency and the government's
default on external debt have given the idea strong contemporary relevance.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>The
economic theory that, its supporters say, makes such an approach necessary
relies on the idea that people forced to play a strategic game with each
other can produce a worse outcome than if the same people all co-operate.</font></font></font><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

Here,
the players are creditors who have lent to a government that has got into
trouble. If a government becomes illiquid but not insolvent the investors
face a difficult choice.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

If
they agree to wait until money becomes available, they will all get their
investment back in full. But if sufficient individuals decide to pull out,
so the government runs out of money, the rest will get far less in the
fire sale of assets.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

Creditors
can then push a country unnecessarily into default by starting a "grab
race", selling up and rushing out before others do. The early exiters may
end up with less than if they had all waited to be paid back; but they
will end up with more than if they had been the few to stay on the burning
deck whence all but they had fled.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

As
Maurice Obstfeld, the monetary economist, points out*, this explains why
certain debt or currency crises were not predicted well by the markets.
What sparked the crisis was not a change in the underlying economic fundamentals
but a perception among creditors that a significant number of them were
about to sell.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

Only
a situation with multiple creditors can create this outcome. In this sense,
the problems with countries such as&nbsp;<st1:country-region><st1:place>Argentina</st1:place></st1:country-region>
may be more intractable than previous Latin American debt crises in the
1980s. Then, the bulk of the debt was in the form of loans held by a few
banks, making co-ordination easier. The loans were also syndicated.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

Now,
partly as a result of banks' reluctance to lend heavily, far more emerging
market external debt is in the form of tradable bonds. These are scattered
among thousands of investors, making co-ordination almost impossible.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>Solutions
to overcoming the co-ordination problem have traditionally involved a large
official lender - usually the IMF - standing behind a country and reassuring
investors that they will not lose out by keeping their money there.</font></font></font><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>But
not only does this create the well known "moral hazard" problem - encouraging
reckless lending and borrowing on the grounds that the IMF will bail creditors
out - it also creates the difficulty of the IMF having to judge what is
a temporary liquidity problem owing to bad luck and what is a serious insolvency
problem owing to bad policy.</font></font></font><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

Supporters
of a bankruptcy procedure argue that it can overcome this. If creditors
start to pull out, a country can put itself into bankruptcy, forcing creditors
to come to an agreement that shares the burden equally rather than rewarding
those who jump ship first. This should help to differentiate real insolvency
crises, which require debt restructuring, from liquidity panics, which
should not. Other mechanisms that can compel creditors to work together,
such as the collective action clauses in bonds issued under English law,
which allow a majority of creditors to force a deal on the minority, can
also help**.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

Whether
this would have helped prevent the crisis in&nbsp;<st1:country-region><st1:place>Argentina</st1:place></st1:country-region>
is questionable. Rather than a sudden flip into default because of investor
panic, the collapse in December had been long foreseen by financial markets.
A bankruptcy procedure could, however, have brought the crisis forward
by making it easier for default to be reached earlier. It might also have
made the process of working out a default easier by binding individual
creditors into a collective deal.<o:p></o:p>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>The
sovereign bankruptcy procedure faces many legal and logistical hurdles
and its detractors say it creates incentive problems of its own, notably
discouraging investors from buying emerging market assets because they
fear being locked into a bankruptcy deal over which they have little control.</font></font></font><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>But
it could overcome the problem that crops up in debt crises: that what comes
out when individuals work separately may be improved if they can be made
to work together.</font></font></font><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><font face="Century Gothic"><font color="#000000"><font size=-1>*Maurice
Obstfeld, "Models of currency crises with self-fulfilling features", NBER
Working Paper 5285 www.nber.org **Marcus Miller and Sayantan Ghosal, "Bail-outs,
bail-ins and bankruptcy"; paper to be presented to Institute for International
Economics conference</font></font></font><o:p></o:p></span>

<p class="MsoNormal"><span 
style='font-size:10.0pt;font-family:"Century Gothic";color:black'><o:p></o:p></span>

<p class="MsoNormal"><span style='font-size:10.0pt;
font-family:Arial'><o:p></o:p></span></div>

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