[stop-imf] Cato: IMF as bankruptcy court for countries?

[Robert Weissman]

The Washington Times
IMF as bankruptcy court for countries?
Ian Vasquez
Published 10/23/2002



 The International Monetary Fund has backed more than $300 billion in
bailouts since the Mexican peso crisis of 1995, making it obvious the
world needs a new way of handling debt crises. The IMF has been at the
center of a crisis-generating system in which investors and
emerging-country governments engage in less cautious behavior on the
expectation that they will be "rescued" if anything goes wrong.

 IMF head, Horst Kohler, identifies such moral hazard as one reason to
reduce reliance on bailouts. The inability of massive IMF aid to prevent
the collapse of the Argentine and other economies provides further
impetus for reform. But if investors won't automatically be rescued in
times of financial turmoil, how will they resolve disputes with
sovereign countries in an orderly manner?

 The IMF's answer is to create bankruptcy procedures on the
international level similar to those that exist on the domestic level.
The Fund is proposing to turn itself into a sort of bankruptcy court for
countries, a fundamental change in its mission.

 Yet the bankruptcy approach proposed by the fund is fraught with
problems. The changes called for require the IMF's charter to be
amended, a procedure that would take years to complete if accepted by
its members. The Fund would play a central role in determining what
countries would qualify for default and why, including countries holding
IMF debt.

 IMF financing would still be used during debt negotiations. In
practice, that would encourage creditors to prolong the workout process
in an effort to extract more IMF financing; debtors could also use the
IMF money to game the system and delay needed reforms. The result of
putting the Fund at the center of debt renegotiations would likely be
unpredictability, financial volatility and higher borrowing costs to
emerging markets across the board regardless of whether some countries
merit such an outcome or not.

 Better approaches involve direct negotiations between creditors and
debtors without the IMF's cumbersome, third party interventions. For
example, Undersecretary of the Treasury for International Affairs John
Taylor has proposed that creditors begin relying on clauses that would
allow a majority of creditors to negotiate in the name of all creditors
in the event of a default, thus eliminating the need for unanimous
consent among thousands of creditors.

 Carnegie Mellon University economists Adam Lerrick and Allan Meltzer
point out that all of the protections offered by a formal bankruptcy
court can be incorporated into new debt issues. Messrs. Lerrick and
Meltzer also show how market mechanisms already exist to renegotiate
outstanding debt in a short time without the aid of the IMF.
Well-established capital market tools can be used to voluntarily convert
old debt into new debt with majority action clauses and to change the
terms of the old debt. Those tools, and Argentina's experience with a
well-organized creditors' committee formed before the country defaulted,
undermine the argument that coordination among creditors would be too
difficult to achieve absent an IMF-backed bankruptcy procedure.

 One of the reasons to allow creditors and borrowers to engage in direct
debt renegotiations is to increase accountability on both sides. Lenders
would take a hit for poor investment decisions and debtors would be
forced to shape up to get access to new money. That level of
accountability should also include the IMF.

 But while the Fund urges the private sector to take losses as part of
its sovereign bankruptcy scheme, it exempts itself from such an outcome.
In the Fund's view, countries should always pay the agency back in full,
no matter how poor were its previous loans.

 The troubling idea of a bankruptcy court judging cases where it has its
own money at stake =97 and holding itself to a different standard=97is bein=
g
tested in Argentina today. Bankrupt Buenos Aires owes $10.7 billion to
the IMF, coming due this year and next. The country claims it will not
pay back the IMF unless it receives a new IMF package, which the Fund
rightly claims Argentina does not merit. But the Fund's tendency to use
new loans to pay back old loans is well known. If the IMF lends to
Argentina out of self-interest, it will distort any debt workout and
undermine its own integrity. If the Fund does not lend, it will
encourage more accountability on all sides =97 and prove its own
irrelevance at resolving debt problems.

 Ian Vasquez is director of the Project on Global Economic Liberty at
the Cato Institute and editor of the book, "Global Fortune."