Global Policy Forum

By Mark Egan

A group of financial market associations strongly opposed on Tuesday the International Monetary Fund's plan to set up an international bankruptcy court for countries that default on their debts.

The IMF has proposed setting up a Sovereign Debt Restructuring Mechanism (SDRM) to allow for orderly defaults by nations unable to repay their debts. The plan would work in similar fashion to courts that allow companies to operate during bankruptcy.

Wall Street has already expressed strong criticism of the plan, but upped the ante on Tuesday, issuing a paper that called the IMF's plan fundamentally flawed.

"The associations noted that no changes in any specific aspects of the SDRM would alter their serious concerns about the proposal," the joint statement said.

The statement was issued by the Bond Market Association, Securities Industry Association, International Primary Market Association, Emerging Markets Creditors Association, Emerging Markets Trading Association, International Securities Market Association and Institute of International Finance.

After Argentina defaulted on much of its international debt in January, interest in creating a better way to deal with sovereign defaults has gathered steam.

The IMF wants to set up the bankruptcy court. Others, including the U.S. Treasury and Wall Street, proposed using new language in bond contracts as a more market-based approach.

The Group of Seven industrialized nations -- the United States, Japan, Britain, Germany, Canada, France and Italy -- and IMF are now pursuing both options simultaneously. Concrete proposals are to be unveiled at the IMF's meetings in April.

OLD WINE, NEW BOTTLE

IMF spokesman Tom Dawson dismissed the report as, "old wine in a new bottle." "Their rejection of even being able to discuss this calls into question their good faith," Dawson said. "We have a mandate from 184 nations to continue this work and this statement does nothing to help the process along."

The Wall Street groups said the basic premise for the IMF plan was falsely based on the assumption that there was an inherent collective action problem among private sector creditors in sovereign debt restructurings.

The groups said the use of collective action clauses, which would add language to bond contracts detailing how default would be dealt with, was a better approach. In addition, they said a new Code of Conduct could be implemented to govern conduct when countries default.

They said the IMF plan would override and render meaningless collective action clauses and have adverse effects on private sector flows to emerging markets while raising borrowing costs.

The analogy with private bankruptcy tribunals was "fundamentally flawed," they said, since sovereign debtors would not be subject to the "appropriate checks and balances that legitimize and make such a bankruptcy regime fair and effective."

A Code of Conduct could be used to resolve difficulties before problems become unmanageable and that they were drafting such a proposal, the groups said.

They issued an 11-page report running through a laundry list of their problems with the IMF proposal. In essence, the groups believe the IMF's plan would make matters worse.

But the IMF has long maintained that many problems in financial markets are created by uncertainty and that its plan would bring more order to markets and help both creditors and debtors better assess risk.

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