Ministers at the Spring Meetings agreed that the IMF should not, except in “exceptional circumstances” provide large bailouts to countries in financial crises. They also agreed that further work should be done on new approaches for countries facing unpayable debts. But there is still a fierce debate about how this should be done. Jubilee Research and other NGOs have been pushing for a statutory mechanism modelled on US bankruptcy law, while the US government favours a market-based approach.
The communique of the International Monetary and Finance Committee (IMFC), the ministerial body which guides the IMF, welcomed “the consideration of innovative proposals to improve the process of sovereign debt restructuring to help close a gap in the current framework”. These include a statutory, legally binding option where an indebted government and a super-majority of its creditors could reach an agreement which would then be binding on all creditors. This could work in combination with private banks introducing new clauses in government bonds. The Committee will review proposals at its next meeting at the end of September.
Anne Krueger, the IMF‘s Deputy Managing Director, has been pushing for new institutional approaches to prevent private investors assuming that the IMF will provide bailout finance to any economy that is in trouble. She urged the creation of an “orderly, predictable framework”. However it is clear that geopolitics constantly intervenes. Turkey has, for example, received much more favourable treatment than Argentina. The IMF has also been trying to ensure that its own loans will not be subject to any new quasi-judicial mechanism and to ensure that it continues to have a leading role in giving policy advice to indebted governments.
The G7/IMF proposals might well, however, help prevent companies using legal threats to extract full payment from poor countries – as Elliot Associates, a so-called ‘vulture fund’, did with Peru recently. However, the private sector is mounting a campaign to limit the reforms. The chair of the Institute for International Finance, a banking industry association, wrote recently to Gordon Brown, chair of the IMFC, proposing that the IMF set up a Private Sector Advisory Group to give guidance on debt restructuring to “sustain investor confidence and lay the basis for orderly restructurings”. There would be many problems with the legitimacy of such a group.
Some observers are wary that these discussions may be a case of the IMF creating new roles to justify its existence. NGOs have long demanded the creation of an impartial body representing all stakeholders in the discussions. Conversely, a number of groups such as Jubilee South, have rejected the establishment of such a group, maintaining their demand for unconditional and immediate debt cancellation.
Sovereign Debt Restructuring: New Articles, New Contracts or No Change? Marcus Miller, April 2002