FINANCE: IMF Releases Rules on Bankrupt Nations Despite Opposition

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Jan 8 2003 (IPS) - The International Monetary Fund (IMF) revealed late Tuesday a set of rules that would provide the basis for a global bankruptcy mechanism capable of anticipating debt crises across the globe and helping insolvent countries streamline their debt.

IMF Deputy Managing Director Anne Krueger said in a statement that the Fund’s debt-relief plan was being intensively discussed by the 24-member executive board and the final version would be revealed in April.

International financial leaders in September called on the IMF to draw up a detailed and specific proposal by the next joint meetings of the World Bank and the Fund, in April.

Krueger also said that the Fund would later this month host a conference on the proposal, known as the Sovereign Debt Restructuring Mechanism (SDRM), to clarify outstanding issues and build a consensus on the design of the high-profile plan.

The proposal, first presented by the Fund late last year after the noisy 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 halt, know as a ”standstill”, on repayments.

The SDRM is the IMF’s main reaction to a number of recent financial crises in emerging markets, including Russia and South Korea, which have caused sharp drops in investor confidence, financial volatility, and severe losses of output.

Under the new details that emerged Tuesday, a country with unsustainable debt would be allowed to activate the mechanism unilaterally, without third-party confirmation that the activation is justified.

The SDRM would be triggered when the insolvent country notified a panel of debt experts, to be known as the Sovereign Debt Dispute Resolution Forum.

The panel would work independently of the IMF, but its members would be appointed by the Fund’s managing director.

Some Fund directors have said that the IMF should further explore before April whether a third party – possibly the Fund itself – could independently certify a country’s claim of unsustainability.

The plan would include registration of creditors and verification of their debt claims.

Among the measures enacted to ensure transparency and accountability, a government would be required to reveal all information regarding its indebtedness.

The information would be verified and disputes adjudicated by the panel over a period of 30 days.

The Fund said that it saw no reason not to include a ”standstill” period, during which the debtor will not repay its debt, contrary to demands from international creditors and bondholders, including heavyweight banks such as Citigroup, J. P. Morgan Chase UBS and Deutsche Bank.

The period would protect the debtor during the initial stage of a restructuring process as well as ensure inter-creditor equity and give creditors time to become ”sufficiently organised to vote on an extension”, the IMF added.

Krueger said the standstill, originally her idea, ”would encourage early engagement of the debtor and creditors in restructuring negotiations”.

Following the standstill, a country could only restructure and renegotiate its debt if at least 75 percent of registered debt claims holders agreed to the plan.

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.

Critics of traditional bailouts have long urged the need for a global bankruptcy mechanism.

But three weeks ago, lobbying groups representing international private creditors, who hold billions of dollars in loans to governments around the world, said they remained adamantly opposed to the debt-renegotiating proposal.

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

It is not only creditors who have misgivings about the plan. Debtor countries, such as Poland and Brazil, 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.