[stop-imf] WSJ: New Debt Proposal Allows Overhaul for Poor Nations

[Robert Weissman]

September 17, 2002

New Debt Proposal Allows
Overhaul for Poor Nations

By MICHAEL M. PHILLIPS
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- With financial instability rippling through Latin America,
momentum appears to be building for an international plan to make it
easier for developing nations to declare bankruptcy and renegotiate
their foreign debts.

The Bush administration, which recently has found itself forced to
support bigmoney rescue loans for some crisis-wracked developing
countries, has given the International Monetary Fund a spring deadline
to draw up terms of a global treaty allowing nations to restructure
debts more smoothly. Top economic officials from the IMF's 184 member
nations are likely to give the plan a boost when they meet here at the
end of the month.

"Today, with no clear process for sovereign-debt restructuring in place,
when a nation is on the brink of financial collapse we have two stark
and uninviting options -- unwarranted lending or sending the troubled
nation off a cliff into a catastrophic default," Treasury Secretary Paul
O'Neill said in a recent speech.

Growing support for the plan is a sign of official concern about recent
financial crises in the developing world. Argentina has defaulted on
much of its $141 billion in government debt. Uruguay has been caught up
in a run on its banks. And the IMF has promised $30 billion to help
restore flagging investor confidence inBrazil. While there is enormous
pressure to aid countries whose problems might infect their neighbors,
economic officials worry that such large rescue packages sometimes
simply put off an inevitable default.

Instead, the world's wealthy nations have agreed to look at two
proposals that would create a process by which countries that are truly
insolvent -- not just short of cash -- could reduce their debts and
stretch out payments.

The Bush administration has thrown its weight behind the idea of urging
borrowing governments to include clauses in future bond contracts that
would allow a majority of creditors to agree to a restructuring and
force less-willing bondholders to go along with them. That would keep
vulture funds and other holdout creditors from turning to the courts to
block a restructuring. Investors and bankers, acting through trade
associations, are crafting model language for such clauses, but no
developing country has used one yet.

A second proposal, created by IMF First Deputy Managing Director Anne
Krueger, would essentially make those majority-action contingency
clauses retroactive, applying to the hundreds of billions of dollars in
emerging-market debt that are in circulation. Under the IMF proposal, a
country would declare itself bankrupt, halt all repayments to foreign
private creditors, and negotiate a restructuring with the majority of
its creditors. Minority creditors would have no choice but to go along
with the majority.

IMF member nations would rewrite its articles of agreement to give the
plan force of law world-wide. The U.S. Congress would have to approve
such a change.

The IMF plan has alarmed investors, who oppose altering the terms of
existing debt contracts. "We continue to believe this is not a
productive way forward, and that at a time of extreme risk-aversion in
emerging markets, when capital flows are falling, that approaches such
as this add further to uncertainty and investor anxiety," said Charles
Dallara, head of the Institute of International Finance.

European governments argue that the IMF proposal is central to
insulating the world financial system from the shock of defaults. "I
would like this to move very fast," said Caio Koch-Weser, Germany's
deputy finance minister.

But the key to making the plan a reality is the position of the U.S.
government, the most powerful voice on the IMF board. Mr. O'Neill has
said both the IMF and Treasury proposals are "necessary and important."
John Taylor, Treasury undersecretary for international affairs,
acknowledged that he has been more forceful in pushing the U.S. plan.
"The time for action is here," he said. But he stressed that Treasury
supports movement on both plans.

For months, however, U.S. allies have complained of mixed messages and
behind-the-scenes obstructionism from Treasury on the
international-bankruptcy issue. The U.S. has blocked attempts by other
members of the Group of Seven major industrialized nations to issue
stronger words of support, complained one senior G-7 official. "The
support by the U.S. has been lukewarm at best," the official said.

Now that perception is changing. At a recent private lunch, Mr. O'Neill
asked IMF Managing Director Horst Koehlerto draw up language -- by the
IMF's April meetings -- to amend the articles of agreement to permit the
plan to go into effect. Although Treasury didn't commit to supporting
such an amendment, IMF officials came away from lunch convinced that the
U.S. is warming to their idea.

Write to Michael M. Phillips at michael.phillips@wsj.com1