Recent discussions at the IMF have only partly clarified its approach to possible mechanisms for countries facing unpayable debts. But private creditors opposing the proposed ‘sovereign debt restructuring mechanism’ (SDRM) have become more vocal and the Fund seems ready to further dilute a plan that NGOs already considered flawed.
Final decisions on SDRM proposals should be made at the time of the Spring Meetings of the Fund and the Bank in April. In late December the Fund’s Executive Board discussed the IMF staff’s latest proposal. Though IFI debt will probably not be dealt with by the mechanism, it is still unclear whether claims of bilateral lenders would be included. Given the balance of power within the IMF, such claims will probably be excluded and dealt with through “coordination” with the Paris Club (a notoriously opaque club of rich countries which negotiates bilateral debt repayment with borrowing countries). NGOs have questioned why IFI claims should be excluded from the outset – partly because all creditors should pay a price for their mistakes.
While the Fund says its role in the proposed mechanism will be limited to convening and facilitating the relevant actors, some of its shareholders argue for a stronger involvement. To prevent potential abuse by borrowers, private lenders argue that a “third party” (most likely the IMF) should give independent confirmation of a country’s debt unsustainability. Similarly, NGOs complain the IMF‘s plan would lead to establishing a weak institution (the pithily-named Sovereign Debt Dispute Resolution Forum) on which the IMF would keep a grip – members of arbitration panels would be selected by the Fund’s Managing Director for instance.
The Fund’s plan is unworkable in the eyes of some Wall Street and European bankers. They have strongly opposed the plan, advocating a market-based solution in its place. As for US officials, while former US Treasury Secretary Paul O’Neill had expressed clear support for the IMF‘s approach, it is unclear what his successor will say. But critics argue that the Fund has already watered down its plan. The Fund seems to have given up on one of the ‘bold’ aspects of its proposal: an automatic stay on litigation that would prevent private creditors being able to sue a country until creditors have made a joint decision on the status of the various claims. Instead private creditors would be entitled to claim back their money ahead of any arbitration, provided they reimburse it if arbitration says they were not entitled to this amount. European representatives unanimously rejected this compromise and argued for a legally binding approach.
The latest developments lead NGOs such as Germany’s Erlassjahr to conclude that there is now “little common ground” left between the IMF‘s proposal and the ‘fair and transparent arbitration process’ (FTAP) that academics and NGOs have been promoting for years. The major differences include the requirement of full transparency, no a priori exclusion of any creditors’ claims, a narrow role for the Fund to prevent conflict of interest, and a long-term view on debt sustainability.
Even in its modest form, the Fund’s plan has failed until now to gain strong support – not only from private creditors but also from key borrowers. The G20 recently failed to come to a common position on the issue. Governments of countries such as Brazil, Mexico, Poland, Turkey and Argentina are reported to oppose such a mechanism on grounds that it would deter foreign investors, while South Korea is supportive and India and China “agnostic”. However the Fund considers it likely that it will be able to build sufficient buy-in to go ahead with its plan in April.
Summary of IMF Board discussion
Krueger sets out IMF latest on debt arbitration
Kunibert Raffer’s papers on FTAP
Erlssjahr.de publications on FTAP
NY Times on Banks’ opposition (free subs)
