[stop-imf] IMF's 'Bankruptcy' System for Nations Fails to Draw Support

[Robert Weissman]

Washington Post
April 2, 2003
>  'Bankruptcy' System for Nations Fails to Draw Support
>
>  By Paul Blustein
>  The top International Monetary Fund official who advanced a radical
> proposal to create an international "bankruptcy" system for countries has
> privately acknowledged that the plan has failed to win enough support to
> move forward, according to people familiar with the matter.
>
>  Although she didn't pronounce the plan completely dead, Anne O. Krueger,
> the IMF's first deputy managing director, conceded that because of
> insufficient political backing there is at present no chance for the
> legal changes necessary to establish a "sovereign debt restructuring
> mechanism," or SDRM. The mechanism is intended to give nations stricken
> by financial crises a form of protection from their creditors.
>
>  Krueger's comments, which were made in a closed session at the Harvard
> Business School last week, will be released shortly by the IMF.
>
>  In another sign that the plan is about to be shelved, John B. Taylor,
> the U.S. undersecretary of the Treasury for international affairs, said
> yesterday in an interview that fierce opposition means the IMF proposal
> "is not practical right now." Bush administration officials have been
> major skeptics, together with private international financiers and the
> governments of many emerging market nations.
>
>  The comments appear to herald the end of an extraordinary effort by the
> IMF's management and staff to reshape the rules of the international
> economy with the aim of providing a new approach for dealing with
> financial crises. The idea behind Krueger's proposal, which shocked the
> financial world when she unveiled it in November 2001, was to establish a
> procedure making it easier for countries facing catastrophic defaults to
> halt financial panics and negotiate an orderly restructuring of their debts.
>
>  Until then, the IMF had looked askance at such proposals, but its
> leadership felt impelled to come up with alternatives to the massive loan
> packages the fund had marshaled for a series of countries, including
> Thailand, Indonesia, Russia and Argentina. Those loans drew criticism
> because they often failed to stem financial turmoil, while bailing out
> many of the international banks and foreign investors who had placed
> risky bets in emerging markets.
>
>  Under Krueger's plan, laws would be changed internationally so that
> governments of countries hit by crises would gain protection from
> creditors similar to those available to companies under domestic
> bankruptcy laws such as Chapter 11 in the United States. Most important,
> the new laws would override the rights bondholders have to insist upon
> unanimous approval for a debt restructuring.
>
>  But Wall Street reacted with outrage to the idea, warning that capital
> flows to emerging markets would dry up if creditor rights were infringed.
> The fear of losing access to cheap foreign funds sparked resistance from
> emerging market governments too.
>
>  So although the issue will be a major topic at the spring meetings of
> the IMF and World Bank on April 12-13, IMF officials have abandoned hope,
> at least for now, that the fund's 183 member nations will approve the
> needed amendments to the fund's articles. "There's very strong support in
> Europe, but we do not have the support of the U.S. at the moment, or the
> key emerging markets," an IMF official said.
>
>  That leaves the way clear for a "voluntary" approach that Taylor
> proposed, in which emerging market countries borrowing money would be
> encouraged to issue bonds with "collective action clauses." The clauses
> would allow a supermajority of bondholders to approve a debt
> restructuring, instead of 100 percent. But critics question whether the
> clauses would be much help anytime soon in quelling crises, because so
> many bonds remain outstanding with the old-style requirements for
> unanimous approval.
>
>  Taylor, while stressing that the debate on the SDRM "has been very
> useful," said, "from a practical perspective, for now the clause approach
> is the one we should be focusing on."