January 3, 2002
An IMF plan for an international bankruptcy procedure could help financially troubled nations renegotiate their debt in an orderly fashion and thus avoid the type of chaos faced by Argentina, a Swedish central banker said on Thursday.
"An international bankruptcy procedure, which should have been instituted long ago, is now being officially discussed again in the IMF," Lars Heikensten, deputy governor of the Riksbank, said in the text of a prepared speech.
He was referring to the International Monetary Fund's plan to develop an international system to allow troubled countries to file for bankruptcy protection -- kind of a sovereign Chapter 11 clause -- if their debts become unsustainable.
"Such a system would probably help to make the management of acute financial crises more predictable," Heikensten said.
His remarks, which a Riksbank official said reflected the deputy governor's personal views rather than any official Riksbank or Swedish position, marked the first independent endorsement of the IMF's tentative proposal.
IMF First Deputy Managing Director Anne Krueger, who unveiled the plan during a dinner speech to the National Economists Club in Washington in November, said four of the Group of Seven nations, including the United States and Britain, were in favor of the idea.
The proposal would offer countries the type of bankruptcy protection enjoyed by companies in many countries but would take years to put in place, meaning there would be no benefit for nations like Argentina, which is on the brink of the world's biggest sovereign debt default.
The plan would make the IMF the gatekeeper of a new bankruptcy system with the lender being arbiter of whether to grant nations a "stay" on their debts to negotiate an orderly restructuring.
PEOPLE SHOULDN'T SUFFER
U.S. Treasury Secretary Paul O'Neill told Congress in September than an agreement on an international bankruptcy law was needed to allow governments to, in effect, go through a Chapter 11 reorganisation instead of letting people bear the brunt through social disorder.
In the United States, Chapter 11 helps a company conduct an orderly workout of debt crises by mandating creditor co-ordination and a payments standstill when a company has difficulty making debt payments.
Recent debt restructurings in countries like Ecuador, Peru and Russia have been disorderly and resulted in drawn-out legal proceedings.
The IMF plan would be built on such principles that creditors could not disrupt negotiations by filing suit in national courts, that indebted countries would not favour certain creditors, that creditors be encouraged to lend new cash by receiving seniority over earlier claims, and agreement with a majority of creditors and not by unanimous approval.
Since the Asian financial crisis of 1997-1999, the IMF has worked hard to shore up myriad problems in the global financial system. But despite improvements since then, there has been little progress on what to do when countries are suffocating under a mountain of debts.
Noting that the IMF had been providing support to troubled countries, often by guaranteeing short-term loans, Heikensten said it was debatable whether this approach was sustainable in the longer run as the programmes had accentuated the problems associated with growing flows of volatile capital.
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