In late November the new number two at the IMF, Ann Krueger, proposed that the IMF should support temporary debt standstills for indebted countries. Krueger described a new mechanism which would fill a “gaping hole” in the international financial system.
IMF backing for a suspension of debt payments would protect a country against private creditors taking legal action to recover debts in full, giving the government breathing space to work out debts in a more orderly fashion. The IMF has also indicated that it would support the temporary use of exchange controls during the standstill period, limiting the amount of cash creditors could take out of the country. In return the government would be expected to negotiate a restructuring agreement with its creditors and implement sound economic policies.
Both the US and the UK governments have expressed support for the idea. The standstill proposal is regarded as an alternative to huge IMF loan packages – given in recent years to Mexico, Indonesia, Thailand, Korea, Brazil and Turkey – which have been severely criticised for bailing out foreign investors whilst failing to prevent crises or support domestic enterprises. By forcing foreign investors to help sort out crises, it is argued a standstill mechanism would encourage them to make better investment decisions. Backing a voluntary standstill approach, the Bank of England and Bank of Canada argued in a November paper for strict, clear limits on IMF lending to crisis countries.
Krueger’s proposal stops short of suggesting that the IMF should act as a judge in the debt renegotiation process. Each country must itself reach agreement with its creditors. Several NGOs and researchers linked to the Jubilee debt campaign, such as Kunibert Raffer of Vienna University, have advocated clear rules for debt restructuring procedures which treat debtors and creditors fairly. Many argue that the IMF should not be the administrator of such a mechanism on the basis that it is often a major creditor and that debts to the IMF have privileged status. Ann Pettifor of Jubilee Plus commented: “the process of negotiation between international debtors and creditors should be overseen by an independent arbiter which listens to the views of all stakeholders.”
Although the IMF will refrain from adjudicating disputes and verifying creditor claims, Krueger argues that the IMF should be central to a debt-standsill procedure: “The Fund’s involvement would be essential to the success of such a system. We are the most effective channel through which the international community can reach a judgement on the sustainability of a country’s debt and of its economic policies, and whether it is doing what is necessary to get its balance of payments back into shape and to avoid future debt problems.” She also commented that the IMF would monitor the progress of any standstill agreement: “like an IMF-supported adjustment program, the standstill could be endorsed for limited periods and renewed following reviews of the country’s economic policies and its relations with its creditors”.
UNCTAD contests the IMF‘s role. Its recent Trade and Development Report states that: “the IMF Board is not a neutral body and cannot, therefore, be expected to act as an independent arbiter, because countries affected by its decisions are also among its shareholders. An appropriate procedure would thus be to establish an independent panel for sanctioning such decisions.”
Whilst there has been a sudden flurry of activity around the standstill idea, creating a bankruptcy mechanism under the auspices of the IMF could take several years. It would probably entail a change in the Fund’s articles of agreement, requiring an 85 per cent majority of the Executive Board. Approval by the US Congress is vital since the US has 17 per cent of the votes on the IMF Board.
See also: Bank and Fund Take on Terror, an article analysing the agreement at the World Bank and IMF annual meetings that the World Bank and IMF should play new roles in countering money-laundering.