FINANCE: Private Creditors Dump on IMF Debt Restructuring Proposal

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Dec 19 2002 (IPS) - Groups representing international private creditors are stepping up their campaign to bury a proposal by the International Monetary Fund (IMF) designed to help bankrupt countries streamline their debt owed to private lenders.

The groups said Tuesday that the IMF’s proposed controversial rules for a sovereign debt restructuring mechanism (SDRM) have “inherent flaws” that could further destabilise the world economy, weaken capital flows to developing nations and impinge on creditors’ rights.

The groups, which lobby on behalf of bondholders and private creditors, say that under the mechanism they may not be able to fully retrieve their loans or reap expected profits since the proposal would allow debtors to restructure their debts on easier terms.

The proposal, presented late last year after the spectacular collapse of Argentina’s economy and its subsequent debt default, is designed to allow cash-strapped countries to reschedule sovereign debt and call a temporary “standstill” on repayments in the interim.

The SDRM is the IMF’s response to a number of recent financial crises in emerging markets that have caused sharp drops in investor confidence, financial volatility, and severe losses of output.

The crises have been magnified because countries have increasingly resorted to bond issues rather than bank loans to raise capital, creating a more diverse credit market but also leaving borrowers more exposed at times of default.

Ann Krueger, the Fund’s deputy managing director who first proposed the SDRM, modelled her idea on U.S. private bankruptcy procedures, aiming to reduce the numbers of crises and the economic pains associated with default.

She said the plan would ease pressure on debtors, creditors, and the IMF, which traditionally has bailed out governments so they could pay back private holders of sovereign debt instruments, such as bonds.

Since a substantial portion of emerging market debt now is in the hands of bondholders, the plan would mean that borrowers on the bond market would have to put “collective action clauses” (CACs) in their debt contracts.

Under that mechanism, bondholders would not be able to go to court to demand full payment if a “supermajority” of other creditors agreed to restructure the debt.

In the case of default, a country could ask for a “standstill” on payment, a period during which the IMF would assist the borrowing government to draw up an economic plan to help it to regain solvency, while freezing repayments.

The IMF and some governments have previously sought ways to “bail in” private investors so they share the costs of financial stabilisation, rather than simply rescuing them at the borrower’s expense.

Some Fund officials also say that bailing out private investors, mostly bondholders, encourages “moral hazard” – the repetition of the same rash gambles because investors know the IMF will soften any future falls.

The IMF restructuring plan got a shot in the arm in September, when the powerful Group of Seven most industrialised countries gave the go-ahead for the Fund to work out the details of the scheme.

The specifics are expected to emerge during the spring meetings of the Bank and the Fund in April 2003 but it could be two or three years before the actual mechanism is applied.

In their statement Tuesday, the business groups, which mostly represent private creditors – including the Institute of International Finance, a grouping of hundreds of financial powerhouses from 60 countries – empathically rejected the SDRM.

“No changes in any specific aspects of the SDRM would alter their serious concerns about the proposal,” the groups said of the creditors’ apprehensions.

The seven leading associations of private financial services firms said in their most detailed response to the SDRM to date that “private investors accept responsibility for their investment and credit decisions” and do not look to “any official organisations to cover potential losses”.

It is not clear if that means investors will reject bailouts from the Fund or if they are signalling that they simply want business as usual.

The groups that issued the statement include the Emerging Markets Creditors Association, which lobbies for creditors rights, the Securities Industry Association, which works on behalf of hundreds of securities firms, and the Bond Market Association.

The groups said they notified the finance ministers of the Group of 10, who largely control the IMF, that G-10 backing of the SDRM has had an adverse effect on private sector flows to developing nations, already at one of its lowest level in 10 years.

They claimed their views were shared with many officials from emerging countries and warned that if implemented, the mechanism would raise borrowing costs and further weaken money flows to emerging markets.

The private lenders charge that the proposal could in fact be counter-productive, since the analogy between the proposed SDRM and private sector bankruptcy legislation is “fundamentally flawed”.

“Whereas private companies are subject to the jurisdiction of a bankruptcy tribunal, under an SDRM sovereign debtors would not be subject to the appropriate checks and balances that legitimise and make such a bankruptcy regime fair and effective,” said the groups.

But they added that they do not necessarily oppose collective action clauses (CACs) and proposed a new global code of conduct for crisis management.

Such a code would promote collaboration among all participants in emerging market finance, including the Fund, creditors and debtors, and would aim to resolve financial problems at an early stage, before they become unmanageable and lead to default.

FINANCE: Private Creditors Dump on IMF Debt Restructuring Proposal

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Dec 18 2002 (IPS) - Groups representing international private creditors are stepping up their campaign to bury a proposal by the International Monetary Fund (IMF) designed to help bankrupt countries streamline their debt owed to private lenders.
(more…)

FINANCE: Private Creditors Dump on IMF Debt Restructuring Proposal

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Dec 18 2002 (IPS) - Groups representing international private creditors are stepping up their campaign to bury a proposal by the International Monetary Fund (IMF) designed to help bankrupt countries streamline their debt owed to private lenders.
(more…)