[stop-imf] WPost: IMF Cuts Disputed Clause From Debt Plan

[Robert Weissman]

IMF Cuts Disputed Clause From Debt Plan
By Paul Blustein
Washington Post Staff Writer
Wednesday, January 8, 2003; Page E01


The International Monetary Fund, bowing to strenuous objections from
banks and
investors over its proposed "bankruptcy" system for indebted countries,
unveiled a proposal yesterday that omits one of the plan's most controversi=
al
features.

The IMF dropped the mechanism that would block creditors from suing to reco=
ver
their money for a certain period after a country has suspended payment
on its
debts.

That move marks a partial retreat from earlier proposals that were aimed at
giving countries legal protections from creditors similar to those availabl=
e
to companies and individuals in the United States and many other nations.
Although some experts said the IMF appears to be watering down its plan in
significant ways, fund officials said they had concluded that these
"standstill" provisions aren't necessary because of other protections
the plan
provides to countries.

"It looks like a big change," an IMF official said. "But it's really
just a
refinement."

The IMF surprised the financial world when its first deputy managing direct=
or,
Anne O. Krueger, first announced in November 2001 that the fund's managemen=
t
would back an international bankruptcy regime. One of the main
motivations was
to establish an alternative to the much-criticized rescues the IMF had
launched during crises in Russia, Brazil and Argentina, which involved mass=
ive
loans from the fund aimed at helping those nations avoid default.

The "sovereign debt restructuring mechanism," as Krueger called it, is
intended mainly for middle-income, emerging-market nations and is separate
from another debt-relief program for extremely poor countries. Under the
original plan, if a country were deemed by the IMF to be burdened with debt=
s
that are unpayable for all practical purposes, it could seek IMF
approval to
suspend payments to foreigners temporarily -- with legal shelter
provided by a
"comprehensive stay" -- and negotiate more realistic terms for repaying its
obligations.

To make the whole scheme work, the laws of many nations, including the Unit=
ed
States, would have to be changed so that individual bondholders would no
longer have the automatic right to obtain court judgments against foreign
governments for full repayment of their claims. The stay, and permanent
restructuring of repayment terms, would become legally binding once credito=
rs
had approved them by supermajority vote -- say, two-thirds to three-quarter=
s
of the total.

With few exceptions, international bankers and investors ardently oppose th=
e
IMF plan as a violation of their property rights that could cause a
drying up
of private capital flows. For that reason, many emerging-market government
officials have opposed it, too. Armed with formidable political clout,
financial firms have lined up behind a proposal put forward by the U.S.
Treasury under which creditors and countries would voluntarily change bond
contracts to allow supermajority approval of debt restructurings.

The latest alterations in the IMF plan don't appear likely to appease the
bankers. "Quite frankly, serious flaws remain and continue to exist with th=
is
basic notion," said Charles H. Dallara, managing director of the
Institute of
International Finance Inc., an organization of major firms that invest and
lend in emerging markets.

As a result, some specialists derided the IMF's move as a futile gesture.
"They keep watering the plan down in the hope of reducing the creditors'
opposition, and the creditors just get angrier," said Peter B. Kenen, a
Princeton University economist.

But dropping the stay doesn't make the plan substantially weaker, IMF
officials said. Aggressive creditors are unlikely to pursue litigation for
full repayment of their claims because it will be costly and time-consuming=
,
and the reward for doing so could be zero if they end up being legally boun=
d
by a debt restructuring approved by a supermajority of other creditors. The
plan unveiled yesterday also proposed other complex provisions to discourag=
e
such litigation.

"I don't think it's so serious [to drop the stay] so long as de facto, the
borrower feels he has some protection one way or another," said Morris
Goldstein, a scholar at the Institute for International Economics.



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