FINANCE: No Rescue Plan In Sight for Countries in Crisis

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Sep 30 2002 (IPS) - It is likely to be years before the world’s borrowing nations and bankers agree on a plan that would delay legal action by private investors trying to recoup their money from ‘bankrupt’ nations such as present-day Argentina.

International Monetary Fund (IMF) Managing Director Hoerst Koehler said Saturday that his staff will develop the proposal in time for next April’s meetings of the IMF and World Bank, but the Fund’s number two official has already acknowledged that implementing the plan will take at least another two years.

The prospect of agreement on a sort of bankruptcy process that would allow countries in financial crisis to reschedule sovereign debt and call a temporary standstill on debt repayments was one of the bright lights of this weekend’s annual meetings of the two institutions.

On Saturday the Group of Seven (G7) economic powerhouses asked the IMF to work on the proposal, first raised by the Fund’s deputy managing director Anne Krueger.

But debtor countries were reportedly unenthusiastic because they fear such a system would make lenders shy to lend to “risky” nations, because the costs to lenders could increase.

Debtor nations also worry that declaring a standstill could send the wrong signal to potential lenders, who would be cautious to invest regardless of the actual credit-worthiness of those economies.

Krueger said the scheme, modelled on U.S. private bankruptcy procedures, would ease pressure on debtors, creditors, and the IMF, which traditionally has had to bail out governments to pay private holders of sovereign debt instruments such as bonds.

UK Chancellor of the Exchequer, Gordon Brown, who also heads the Fund’s policy-setting development committee, said that the group “called on the IMF to develop a concrete proposal for consideration at our next meeting (in April) of a statutory” sovereign debt restructuring mechanism (SDRM).

It would include bonds that carry “collective action clauses” to give breathing room to countries in crisis, as well as an international bankruptcy court.

In the event of a default – the case of Argentina, and Russia and Korea before it – countries could ask for a “standstill” on payment, preventing bondholders from going to court for full payment if a “supermajority” of other creditors agreed to restructure the debt.

Only in the case of further difficulties would the case be sent to the proposed bankruptcy court.

During the standstill period, the IMF would assist the borrowing government to draw up an economic plan to help it to restore solvency.

The new scheme would mean an end to expensive international rescue packages, paid mainly by the IMF and rich nations, for developing countries that experience a sudden outflow of capital.

Leftwing and rightwing critics of traditional bailouts have long urged the need for a global bankruptcy mechanism.

The IMF and some governments have sought ways to “bail in” private investors – to make them share the costs of financial stabilisation rather than simply rescue them at the borrowing government’s expense.

Others say that bailing out private investors simply encourages “moral hazard” – the repetition of the same rash gambles in expectation that the IMF would soften any future falls.

The proposal, expectedly, received cold reception from private investors, whose main grouping, the Institute of International Finance, said last week the scheme would undermine their rights for full repayments.

Observers say the new plan should be designed to encourage not restrain the run of private money to emerging markets and, at the same time, to impede irresponsible creditor behaviour.

Koehler said the new process would make it clear that ‘bankruptcy’ is a last resort.

“This bigger context makes also clear that this SDRM will not undermine the credit culture in the global economy. Saying that, of course the culture is that credits have to be paid back,” he added.