[stop-imf] IMF: Sovereign Debt Restructuring: Where Stands the Debate?

[Robert Weissman]

http://www.imf.org/external/np/speeches/2002/101702.htm

Sovereign Debt Restructuring: Where Stands the Debate?
Speech by Jack Boorman*
Special Advisor to the Managing Director, International Monetary Fund
Given at conference cosponsored by the CATO Institute and The Economist
New York,
October 17, 2002

 We are now almost one year into the renewed debate on the resolution of
sovereign debt crises that began with a speech last November by Anne
Krueger proposing the creation of a sovereign debt restructuring
mechanism (SDRM). This is not, by any means, the first time this issue
has been discussed, but it is the first time it has become a central
item on the agenda of the official sector and the first time that there
is real promise of something operational coming out of the discussion.
The issue is rather more clearly drawn in this discussion than at any
time in the past. That is partly the result of the clearer separation in
these debates between the debt problems of the poorer countries, which
are being dealt with under the Highly Indebted Poor Country (HIPC)
initiative, and the issues that surround emerging market borrowers and
the workings of the international capital markets. The SDRM debate is
focused squarely on the latter.1

 The clarity in the current discussion also reflects the experience of
dealing with capital market crises over the last ten years. There is a
diverse experience and, while the mechanisms currently under discussion
are not relevant to all those cases, some of those cases point to the
important gaps that exist in the means available to deal with sovereign
debt crises. Importantly, and dramatically in the case of Argentina,
they also show the enormous cost=97to both the debtor and its creditors=97o=
f
the dislocation and disorder that has characterized those situations in
which a country's debt has become unsustainable and a frontal attack on
the underlying policy problems has been delayed. In too many cases, the
authorities gamble for redemption through ever less credible policy
measures rather than face the uncertainty of approaching the country's
private sector creditors. This inevitably puts the official community,
and the IMF in particular, in a difficult position in deciding whether
to support those policies.

 So where does the debate on this issue stand after almost a year of
discussion? Not least, there is a far wider understanding of the issues
involved and of the complexity=97in the legal, behavioral, institutional,
political and other dimensions=97of finding an effective way to address
this problem. And differences in view in each of these dimensions help
explain the positions taken by advocates of the different proposals and
may, in the end, help define a way forward that will find broad support.

 The proposals under debate now come down essentially to four:

 (1) A statutory approach to establish a universal legal framework to
facilitate negotiations and to empower a supermajority of creditors to
approve a debt restructuring agreement with a debtor country that would
bind in minority dissenting creditors. This is the SDRM proposal of Anne
Krueger, the First Deputy Managing Director of the IMF. While based on
statute, this approach relies on decisions by creditors and is, in that
sense, a market-oriented approach.

 (2) A broadening of the kind of collective action clauses (CACs) that
are already included in some (mostly British law) sovereign bond issues
and their incorporation into a wider array of debt instruments, possibly
to include bank loans. These new and innovative contingency clauses
would, inter alia, describe as precisely as possible the procedures by
which holders of a specific debt instrument would interact with the
sovereign debtor and amongst themselves in the case of a request by the
sovereign for a restructuring of those claims. These proposals were
first made by John Taylor, Undersecretary of the U.S. Treasury.

 (3) A two-step process proposed by Ed Bartholomew and Ernie Stern of
J.P. Morgan. In step one, creditors would effectively exchange
outstanding debt for claims which include collective action clauses
which could then be used, in step two, to facilitate a restructuring
agreement between a sovereign debtor and those creditors. And,

 (4) A suggestion that current processes work sufficiently well to
obviate the need for any substantive change in current market practices,
i.e., to continue to muddle through.

 Both the debtor countries and their creditors have paid large costs, in
terms of lost economic activity and income and lost value of claims, in
recent cases of sovereign default. Some people see these costs as
necessary to discipline debtors to avoid default. Bankruptcy should be
messy, they say! In the view of many, however, the costs incurred under
the current international financial architecture are unnecessarily
large, to the detriment of both the debtor and its creditors. Some in
the private sector also point to the fact that they have been able to
conclude agreements with countries that have accumulated unsustainable
debt and have defaulted. They point to Ecuador as completed, and express
confidence that Argentina can be dealt with when the Argentine
authorities finally approach them for serious negotiations. But this is
not good enough! The losses to the Ecuadoran and Argentine economies
from the processes available in those two cases have been huge and,
arguably, unnecessary. Thus, doing nothing should not be considered an
option.

 What is needed is a system which produces a promise of orderly
resolution of unsustainable debt situations, that can be activated in a
timely manner, and that can proceed with reasonable assurance of finding
agreement without undue delay, i.e., a process that has a reasonably
predictable end game. Limiting the kind of disruption and dislocation to
the economy that has been seen in too many recent cases can help
preserve substantial value both for the creditors and for the country
and its citizens, including the poor who often suffer the most as a
result of the economic fallout from financial crises.

 There are major issues posed in the search for a workable system to
produce this desired result. How does one know when a country's debt is
unsustainable and warrants an appeal to a bankruptcy mechanism? How can
the incumbent government, and the relevant Ministers and officials, be
persuaded to accept that reality and approach creditors for relief? Who
gets to decide/vote on a final agreement? How is such an agreement to be
made binding on potential holdout creditors? Where should a mechanism
for dispute resolution reside? What is the role for the official
community, and the IMF in particular, in all of this? And, how can
leaders in other countries that may be tempted to appeal for debt relief
through such mechanisms when such relief is not warranted be prevented
from abusing the system?

 The underlying question regarding judgments about the sustainability of
a country's debt is, in the first instance, an analytic matter. But it
is also a political issue, as the capacity to service debt by a
sovereign is, in part, a matter of its willingness and ability to
implement policies to generate the resources needed to service that
debt. Debt can almost always be serviced in some abstract sense, through
additional taxation and through the diversion of yet more domestic
production to exports to generate the revenue and foreign exchange
needed to service the debt. But there is a political and social, and
perhaps moral, threshold beyond which policies to force these results
become unacceptable. Where that threshold becomes binding in a
particular country is, in the first instance, for the government to
decide. But it is also a matter for judgment by the official
international community, through the IMF, whether to accept where that
line is drawn when the country requests financial assistance to help
deal with its problem.

 In supporting an adjustment program prepared by a country, the IMF is
accepting the budgetary and balance of payments framework underlying
that program and the debt service capacity incorporated therein. The IMF
cannot avoid judgments on the sufficiency of the tax system in the
context of the country's existing situation, in the capacity to meet
certain basic needs in the economy, nor in the pace of adjustment
projected for the external sector.

 Thus, the issue of sustainability is not a matter solely of economic or
financial analysis, though the best analytics available need to be
brought to bear in such judgments. All of the proposals on the table
rely on these broader judgments that must be made. In the end, it will
be the willingness of the international community, through the IMF, to
support a country in its adjustment efforts=97both while it is negotiating
with its creditors and after a deal is struck to provide relief=97that
will signal the acceptability of the government's decision about where
to define its threshold. It will be the IMF's willingness to commit
resources to continue to assist the country in the context of its
negotiated agreement with its creditors that will signal the
acceptability of that agreement to the official community. This is
consistent with the fundamental role of the IMF envisioned under all of
the proposals.

 What then are the elements of the three basic alternatives?

 The Sovereign Debt Restructuring Mechanism

 The SDRM, through a universal treaty, would provide a legal framework
that would make binding the decisions of a supermajority of creditors in
agreeing with a sovereign debtor on a restructuring of its outstanding
debt. Such agreement could either precede or follow an event of default,
preferably the former as that could help minimize disruption and the
associated costs to the economy and loss of value to creditors.

 Under the SDRM, there would be five major features:

 1. the sovereign debtor would have legal protection from disruptive
legal action by creditors while negotiations were underway; this would
be provided through a vote by a supermajority of creditors to approve a
stay on litigation;

 2. the creditors would have some assurances that the debtor will
negotiate in good faith and will pursue policies=97most likely to be
designed in conjunction with seeking financial support from the IMF,
that help protect the value of creditor claims and help limit the
dislocation in the economy;

 3. creditors could agree to give seniority and protection from
restructuring to fresh private lending to facilitate ongoing economic
activity through the continued provision of, inter alia, trade credit
(something akin to debtor in possession financing);

 4. a supermajority of creditors could vote to accept new terms under a
restructuring agreement; minority creditors would be prevented from
blocking such agreements or enforcing the terms of the original debt
contracts, i.e., they would be bound by the decision of the majority; 2 and

 5. a dispute resolution forum would be established to verify claims,
assure the integrity of the voting process, and adjudicate disputes that
might arise.

 Note that in all of this there are no new legal powers for the IMF. The
decisions to be taken would be those of the debtor and a supermajority
of creditors or, in the case of disputes, with the assistance of an
independent dispute resolution forum. The IMF's role continues to be
essentially that of signaling its willingness to support and provide
financial assistance for the government's adjustment program. 3

 This statutory approach has found broad support among the membership of
the IMF. The advantages of the statutory approach proposed under the
SDRM include: (1) the immediacy of its applicability to all sovereign
debt upon the statue becoming effective, i.e., there would likely be no
transition period such as would likely be the case under the CAC
approach; (2) its uniform application across all debt and across all
jurisdictions, i.e., aggregation across all debt instruments or all
classes of instruments for voting purposes would be possible, again,
something not likely to be feasible under a CAC approach; and (3) the
creation of a single dispute resolution forum to assure integrity to the
process and to avoid ambiguities of language or interpretation. It has
been proposed to establish the SDRM under an international treaty, most
appropriately through an amendment to the IMF's Articles of Agreement.
This would assure legal uniformity across all jurisdictions.

 There are numerous specific issues raised by this proposal and nothing
is as yet cast in stone, although progress is being made. For example,
while it is the intent to bring as many of the claims against the
sovereign under the umbrella of any restructuring agreement, it is
recognized that it may be appropriate to define classes of creditors for
voting purposes rather than to try to aggregate votes across all claims.
At the same time, it is agreed that the number of such creditor classes
should be kept small; that they should not be pre-specified in a treaty,
but dealt with on a case by case basis; and that approval by each class
should be required to complete the restructuring, i.e., each class
should have a veto over the final agreement. This last point will
require striking a delicate balance to ensure that the classification
process itself does not create holdout problems.

 There also seems to be agreement emerging that sovereign debts governed
by domestic law and subject to the jurisdiction of domestic courts could
be excluded from the SDRM. At the same time, however, the sovereign
should take account of the overall restructuring process and secure the
support of the international community and the holders of its
international debt in any restructuring of such domestic claims. There
is also some support for excluding official bilateral claims from the
SDRM and dealing with them in the Paris Club format, but, again, in the
context of close collaboration and coordination with the parties to the
restructuring under the SDRM. This may require certain changes in the
policies and practices of the Paris Club.

 The issue here is not whether domestic debt or bilateral official
claims should be included in the restructuring; in some cases they
certainly should be! The issue is, rather, whether they are dealt with
specifically under the SDRM or, instead, under a coordinated process in
which procedures specific to, and possibly more effective in, dealing
with those claims are employed. The latter seems to be the more widely
accepted approach, although this, like many other issues, requires
further discussion.

 There has, as yet, been only limited consideration given to the
modalities for a dispute resolution forum, but there appears to be a
wide diversity of views on this within both the official sector and the
private financial community, as well as among civil society
organizations and NGOs. While the benefits of assuring uniformity in
legal interpretation under the SDRM are generally accepted, there is
concern about consistency with national laws and the potential for
political opposition. NGOs and others have also raised fundamental
questions about the role to be played by such a body. Some call for a
forum that could act as an arbitrator on the political or moral validity
of certain claims and on the sustainability of the country's debt in a
poverty eradication development context. All see a need for strict
independence of such a forum, both in appearance as well as in fact. In
this regard, some question whether any organ linked to the IMF=97which is
the current proposal=97could, in fact, strike that independence. But, this
aspect of the debate has only just begun.

 There are many more details to flesh out before a robust proposal on
SDRM can be put forward. In addition, there are important questions
regarding the impact of any agreement on a statutory approach, or on
collective action clauses for that matter, on the access of emerging
market countries to international capital markets. Differences of view
on this point have hampered greater buy-in to both the SDRM and to the
contractual or collective action clause approach, including by some of
the emerging market countries themselves. Some say that either approach
could lessen the appeal of the asset class, thus worsening terms for
borrowers. Perhaps, but the opposite argument could be made and is
supported by the limited evidence which exists.4 After all, domestic
bankruptcy law is thought to make the market in domestic debt more, not
less, efficient. Why not the same in international markets? This said,
there could be a first mover problem and it may take some time for both
issuers and markets to get used to a world governed by either regime.

 Finally, does such an approach have a fighting chance politically? Some
early reactions, particularly in the U.S.=97which would have a blocking
minority on any amendment to the IMF's Articles=97would say not. However,
the debate has not yet been fully joined, a fully fleshed out proposal
on SDRM remains to be produced, and the possible shortcomings of the
other proposals have yet to be fully understood. The support for further
work on the proposal by the official community is clear. At its latest
meeting, the International Monetary and Financial Committee (IMFC)
"call(ed) on the IMF to consider the issues further and to develop, for
consideration at its next meeting, a concrete proposal for a statutory
sovereign debt restructuring mechanism to be considered by the
membership."

 At the same time, the response of many in the private sector remains
cool at best. As the letter from the International Institute for Finance
to Chancellor Gordon Brown as Chairman of the IMFC says: "......
continued official support for the "two track" approach involving both
CACs and a sovereign debt restructuring mechanism (SDRM) runs the
serious risk of undermining efforts to advance contractual changes"; and
"We would encourage the official community to concentrate its energies
on advancing with the private sector and issuers efforts already under
way to put in place CACs, not to thwart or jeopardize those efforts."

 Collective Action Clauses

 The official community, including the G-7, and the IMFC have called for
further efforts=97even as the SDRM discussion continues=97to better
formulate and to encourage the use of collective action clauses,
including the more innovative contingency clauses proposed by John
Taylor. The more traditional clauses, which provide for majority
enforcement and majority restructuring provisions, have been included in
bonds issued in some jurisdictions (the U.K.) for some time. The
official community has, since the endorsement of the G-10/Rey report in
1995, encouraged their wider use, but to little effect.

 The contingency clauses proposed more recently are more ambitious than
traditional majority action clauses and would include:

 =B7 representation clauses that would authorize a trustee of a bond
holder syndicate to act as a channel of communication between its bond
holders and the debtor at an early stage of a restructuring;

 =B7 initiation clauses that could provide temporary protection against
litigation by a minority of bond holders; and

 =B7 aggregation clauses which would effectively aggregate creditor claims
across different bond issues for voting purposes.

 Two issues regarding collective action clauses are being discussed
simultaneously: one concerns the formulation and potential effectiveness
of these more innovative clauses; and the other how to encourage greater
use of both the traditional and the more innovative clauses. While
continued effort is called for by all concerned, and the private sector
holds out the promise for quick advancement on this initiative, it would
appear that little real progress is yet coming out of either of these activ=
ities.

 The recent initiatives to foster the use of collective action clauses
can be seen as an effort to mimic what could be done under an SDRM. The
CAC approach is often described as "voluntary and market based", but
that does not distinguish it from the SDRM which also relies on
decision-making by the private creditors themselves. (The role of the
IMF would be similar under either approach.) The essential difference
between the approaches is that the CAC approach relies on the inclusion
of various clauses in individual bond instruments (or bond and loan
agreements) and would, as a result, leave jurisdiction to courts in the
country/state under whose laws the debt instruments were issued (mostly
New York and London). It is also the case, of course, that the current
outstanding debt of sovereigns would remain untouched until maturing
obligations are replaced with new issues containing CACs.

 There is little question that the inclusion of such clauses=97if they can
be formulated to be acceptable to markets and issuers across
jurisdictions and if they could be included uniformly in all new debt
instruments=97would be a significant improvement over the current state of
affairs. It would broaden the array of claims that would prescribe how a
restructuring would be handled if that became necessary and it would
bring some greater predictability to the process. That is all to the
good; but is it enough?

 Suppose that, as of tomorrow, widely accepted and far reaching clauses
were incorporated into all new claims on sovereign debtors. This is a
heroic assumption, given the apparent difficulty in finding agreement on
draft language for such clauses and given the views expressed by many
private creditors and emerging market borrowers on the desirability of
their inclusion in new issues. 5 How would the prospects for an orderly
restructuring in a case that warranted such treatment change? In the
first instance, very little. It would take years for the current
outstanding stock of debt to mature and/or be replaced with new debt
containing these clauses. But if we assume this issue can be
resolved=97say through a mega-swap of current debt instruments for new
debt containing such clauses=97or if we fast forward to a time when the
maturity schedule/new issue process resolves the problem, what can be expec=
ted?

 How much comfort could be taken from this situation? Could uniformity
of language be assured across all jurisdictions and across all
instruments? Even if uniform or identical language was used=97a global
standard that is spoken of=97could uniformity of interpretation across
jurisdictions or acceptance of judgments and interpretation in lead
jurisdictions be assured? 6 How could aggregation be achieved, i.e., if
each individual credit instrument is voted separately, how are different
outcomes across instruments reconciled? What would constitute a majority
across instruments and who would rule on the existence of such a
majority? Market participants remain highly skeptical of the need for or
desirability of cross-issue majority action. Most supporters of SDRM
fail to see how the assurances needed to produce a reasonably
predictable and orderly process to restructuring can be secured without
it! There are no clear answers to these questions. Thus, while the CAC
approach attempts to mimic the statutory approach of the SDRM, it seems
a distant second in providing assurances on the universality of coverage
and interpretation that is at the heart of the SDRM approach.

 There are important legal issues at play, as well, in considering the
initial formulation of some of the newly suggested clauses. To design a
procedural clause, for example, there would need to be a reconciliation
of different legal traditions. Under U.K. law, a trustee has the right
to litigate and the individual bond holders' rights (both to litigate
and under majority voting) are curtailed. In the U.S., however, even
when a trust indenture is used (which is rare), each bond holder retains
the right to bring enforcement action. Similarly, under U.S. law, most
bonds employ a fiscal agency agreement; but the agent has no rights to
act on its own and leaves all discretion to individual bond holders. As
the proposed new clause would go even further in conveying authority to
a trustee than does current U.K. law, and beyond anything used in
international sovereign issues under U.S. law, it is not surprising that
market participants are unenthusiastic.

 Similar problems are seen in the formulation of an initiation clause.
The drafting of such clauses remains vague, in particular as regards the
conditions under which a sovereign could initiate the restructuring
procedure and an associated stay.7 It is difficult to see how this can
be decided under either the SDRM or the CAC approach without envisioning
a significant role for the IMF.

 Thus, it seems there is a long way to go in formulating effective
clauses even to accomplish the more limited aims of their proponents.
Similarly, efforts to date to design effective mechanisms to encourage
or cajole borrowers to seek inclusion of such clauses in their debt have
met with little, if any, success. "Leading by example" by the major
industrial countries through the inclusion of the traditional collective
action clauses in their debt is seen by few as producing any major
effect on emerging market issuers. (Thus far, the U.K. and Canada among
the G-7 have included such clauses, and the EU member states have agreed
to do so in new bonds issued under foreign jurisdiction.) The
possibility of fostering the inclusion of such clauses through a
regulatory requirement, or a requirement for admitting an instrument to
a market or for listing on an exchange, has received a mixed reception,
including a negative reaction from the SEC in the U.S., the largest
issuing market. Efforts to encourage inclusion through IMF policy have
also seen limited results. While all agree that the practice should be
recommended in the context of IMF surveillance of member countries, it
is unclear whether this by itself would have a major impact. Other
proposals, such as making inclusion of such clauses a precondition for
use of the IMF's financial resources (including for example, under the
Contingent Credit Line facility or CCL) or encouraging their use by
levying lower charges on borrowing by those members that do include such
clauses, run into significant operational and/or legal issues.

 It is perhaps not surprising that this effort has produced few concrete
proposals. Resistance to collective action clauses has been a persistent
theme since the call in the Rey Report in 1995 to include them=97even the
more modest traditional clauses=97in all bond issues. The recent efforts
of the G-10 to work with private market participants "..... to develop
provisions that would facilitate the orderly restructuring of sovereign
bonds governed by the laws of major jurisdictions" appear to have met
with mixed results. While the G-10 Ministers welcomed the report of the
Working Group on this issue, 8 it remains unclear whether the proposals
for collective action provisions coming out of that effort will be
acceptable to the broader private sector. The Working Group itself has
not endorsed the more ambitious provisions originally suggested by Under
Secretary Taylor; the private sector associations have not accepted a
number of features of the G-10 clauses.

 The Two-Step Approach

 An intriguing twist on the collective action clauses approach is
contained in the two step proposal by Ed Bartholomew and Ernie Stern of
J.P. Morgan. Under this proposal, when a country with an unsustainable
debt approached its creditors, there would first be an effort to
exchange all existing debt for debt instruments (Interim Debt Claims or
IDCs) containing collective action clauses. Various incentives,
including some up front cash, would be offered by the debtor to induce
creditors to accept the exchange. The new instruments would be made
additionally attractive by structuring them to be highly liquid to
permit the exit of those creditors so disposed. A stick, in the form of
exit consents (as employed by Ecuador in 1999), could also be used to
convince recalcitrant creditors that their rights would be significantly
reduced if they held on to the original instruments.

 The clauses included in the new instruments would describe the rules
for creditor representation and for majority action. Once the original
debt had been converted, the provisions of the IDCs would be employed to
facilitate a restructuring agreement between the debtor and its creditors.

 This approach cleverly deals with some of the problems of the
collective action clause approach; in particular, the debt stock
problem. Moreover, it has the inherent beauty of requiring no new
legislation; accomplishes aggregation; and presumably deals with the
potential problem of multiple jurisdictions and the risk of conflicting
interpretations by issuing the IDCs under a single jurisdiction.

 But basic questions remain. Will bond holders (or other claim holders)
be willing to accept the IDCs? Where will a country in crisis (or near
crisis) get the resources for the up front cash inducement? Which
collective action clauses would be used and would they be up to the
tasks in the second stage restructuring? Will minority/holdout
creditors, in fact, be made legally powerless, especially if they
managed to accumulate concentrated positions in a particular instrument,
making exit consents ineffective? Would the exit consents themselves be
subject to challenge? And could all of this be done in a sufficiently
expeditious fashion to limit the dislocation and disruption to the
economy that is an important objective of this exercise?

 These questions are not all without answers. But the workability of the
proposal can be tested only in a real case. As either SDRM or the
inclusion of innovative CACs will likely take some time, it may be that
a case will present itself in which the two-step approach could be consider=
ed.

 Concluding Observations

 The protracted, and at times frustrating, discussion of involving the
private sector in the resolution of financial crises periodically
confronting countries has been energized and put on a more constructive
operational footing with the proposals to create a sovereign debt
restructuring mechanism or to expand the use of collective action
clauses. At the same time, it is important to remember the limited,
although critical, role intended for any of these approaches. They
represent just one element in a broad array of instruments being
developed to help prevent crisis as well as to better manage those that
will, inevitably, still occur.

 It remains the case that, among crisis countries, there will continue
to be those which will require temporary support to see them through a
genuine liquidity crisis, especially where the crisis has its origins
more in overall market conditions than in domestic policy. In such
cases, official financial support, at times possibly quite large in
comparison with historical limits on access to IMF resources, may be
appropriate. It will also be necessary to continue to seek ways to
secure some involvement of private creditors in those cases where a
spontaneous return to market access cannot confidently be expected in
the time-frame assumed under an appropriate policy adjustment program.
Such cases may require finding more or less formal devices to seek the
maintenance of exposure, especially by short term creditors, or to halt
capital flight.

 The debate over the relative merits of SDRM as compared to a widespread
use of collective action clauses has been helpful in better defining the
issues that must be confronted in successfully designing either a
statutory or a contract-based system. However, unlike the contractual
approach, the SDRM provides a universal, uniform regime that can
aggregate claims across jurisdictions and that has a standing mechanism
that can be activated both to assure the integrity of the process and
the resolution of disputes. Those who support ambitious collective
action clauses or approaches along the lines of those proposed by
Bartholomew and Stern may be persuaded through further discussion and
debate that SDRM, while starting with a similar premise, provides a more
robust solution. It would seem difficult to be strongly in favor of
ambitious CACs, with the implicit acknowledgement that collective action
is an issue, and, at the same time, strongly oppose the current proposal
for an SDRM.

 At the same time, to favor only traditional collective action clauses,
such as majority action and majority enforcement clauses, which seems to
be the temptation in some segments of the private sector, may be a
recipe for only repeating the disappointing experience since the call
for collective action clauses in the Rey Report of 1995.

 But much more work is needed to flesh out the design and see the
creation of an SDRM. There is, of course, the need to secure political
buy in for such a mechanism, although events of the past weeks seem to
suggest some developing momentum on that front. There are also a host of
technical and institutional issues still to be examined. A more explicit
and credible process for putting in place a stay in the early stage of
any appeal to activate the SDRM, and the associated role of the IMF,
needs to be designed. So too with an effective, and timely, device to
consider seniority for new credit. More work is also needed to decide
the criteria for determining creditor classes that will produce balance
and assure coordination amongst those classes themselves, as well as
with creditor classes that may restructure outside the direct ambit of
the SDRM. More thought also needs to be given to the dispute resolution
forum and to the need to assure its independence.

 There are broader issues as well, that go beyond the SDRM. There is,
for example, the matter of dealing with a systemic disruption to the
private corporate sector in a crisis economy. In recent cases, domestic
bankruptcy processes have been overwhelmed when corporate sectors have
collapsed in the face of sharply depreciating exchange rates, increased
interest rates, and a self-aggrevating decline in domestic activity.
While lessons need to be learned from recent cases of such collapse and
better ways designed to deal with such situations, the SDRM itself, by
facilitating early action, could help prevent the severe dislocation
that ultimately undermines the corporate sector.

 This is a large agenda, but the constructive debate to date on the
various approaches put forward to deal with sovereign insolvency holds
promise for finding a means to address this critical aspect of the
international financial architecture. During the next six months a more
detailed proposal on SDRM will be put forward for consideration by the
IMFC at its meetings next Spring. Further work will also be carried
forward on collective action clauses. This is an opportunity to debate
all the relevant issues at length and to consider the relative merits of
each of the basic proposals. Hopefully, this time will be used
constructively and strong position=97taking will be postponed until all
the arguments have been aired.

 * The views expressed are those of the author and do not necessarily
reflect the views of the International Monetary Fund or of its senior
management. This paper was prepared for a conference cosponsored by the
CATO Institute and The Economist on International Financial Crises: What
Role for Government, New York City, October 17, 2002.

 1 There is, of course, an ongoing discussion about the sufficiency of
the relief provided under the HIPC initiative, but that is a separate
issue for another discussion. There are, of course, a small number of
countries eligible for assistance under the HIPC initiative that also
have large debt outstanding to private creditors; the SDRM could be
relevant to their situation as well.

 2 The statutory basis of the SDRM approach would provide the legal
framework under which a debtor and its creditors could act as if common
collective action clauses were included in all relevant debt instruments.

 3 This discussion of sovereign debt restructuring needs to be seen in
the broader context of other reform initiatives that are underway in the
IMF. These include all the various efforts to do better at crisis
prevention. But they also include the recent discussions in the IMF
regarding its policies on access by members to its financial resources
at times of crisis=97especially crises originating in the capital account;
its policies on lending to a member when it is in arrears to private
creditors; and even to broader issues, such as quotas, that touch on
basic questions regarding the size and role of the IMF. Information on
these recent discussions can be found on the IMF's webstie at:
www.imf.org, then click on News Releases, then click on Press
Information Notices.

 4 Eichengreen and Mody, "Bail-ins, Bailouts and Borrowing Costs," IMF
Staff Papers Volume 47, pp. 155-188 (2001). See also Eichengreen and
Mody, "Would Collective Action Clauses Raise Borrowing Costs: An Update
and Additional Results", Policy Research Working paper No. 2363, World
Bank, May 2000.

 5 The possibility of getting acceptance for the more ambitious clauses
seems to be receding as the effort goes on to draft model clauses. In
this process over the last several months, some in the private sector
have shown their resistance to such clauses and seem wiling to
contemplate only the plain vanilla clauses already familiar under U.K.
law-but even then only with very high thresholds for majority decision.

 6 Note the Argentine has 88 bonds outstanding, issued in a number of
jurisdictions. Note also that none of its bank debt includes such clauses.

 7 This, however, remains an issue under the SDRM proposal as well.

 8 Communiqu=E9 of the Ministers and Governors of the Group of Ten,
September 27, 2002.



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