By Rowan Callick
Australian Financial ReviewJanuary 23, 2002
The International Monetary Fund is considering fast-tracking a plan to introduce a form of bankruptcy for countries like Argentina whose debts become unsustainable.
Recently appointed IMF deputy managing director Professor Ann Krueger said in Melbourne yesterday that the proposal - of which she is the crucial promoter - might be formally agreed by the fund as early as April.
Professor Krueger, formerly World Bank chief economist, said the fund had become a very different place since the 1997 Asian crisis. "It has opened up in a big way," she said.
The increased involvement of private sector finance houses with the IMF was a major element of this, she said - an opening that has helped smooth the way for a new rules-based structure previously rejected by the US giants and the City of London.
Engagement between the IMF and the private sector was a missing piece in the global financial architecture that was now moving into place, Professor Krueger said. She flew from Canberra to Melbourne yesterday to brief corporate and banking leaders and Victoria's Treasurer, Mr John Brumby.
"We don't have a system that works very well where debt becomes unsustainable," she said. "We need a mechanism to get creditors and debtors to a table sooner."
The IMF is now urgently addressing the technical issues in launching such a process, before a detailed paper goes to its executive in two weeks, followed by a full proposal to the board either at its next meeting in April or at the annual meeting later in the year.
Professor Krueger said it was essential that a sovereign debt restructuring program - which had had a surprisingly positive reception, she said - be applied universally and mandatorily once it was introduced.
This would require that a decision be made within hours as to whether to apply such a program, which would involve a debt standstill as well as sanctions to bring people to the table.
An advantage of having the IMF spearhead this structure would be that its members have domestic laws that could be used to prevent a creditor jumping to the front of any queue
. Both the US Administration, since the arrival of Treasury Secretary Mr Paul O'Neill, and the major US finance houses have effectively withdrawn their vetoes on such a structure as part of the aftermath of the Asian crisis of 1997-99.
"That taught us that official money couldn't be kept apart from private money," Professor Krueger said. "There's no point in the fund putting money into a place from which the private sector is pulling money out."
She said that there was no international mechanism at present to help a country with an overhang of debt to resume growth. Argentina, for instance, "will need a haircut" - an element of debt forgiveness - but the fund did not know what creditors might accept.
"So the fund is looking for a more formal framework, somewhat analogous to domestic bankruptcy, although you can't look at the dissolution value of a nation."
She said: "Most creditors, knowing the framework was there, would hope they would never have to use it, and instead attempt ordinary work-outs at an early stage of a crisis."
In the past, private creditors have tended to expect they will get bailed out by the international institutions. The new proposed structure would place more pressure on them to improve their due diligence processes in emerging countries.
"Countries with good credit profiles would attract good rates," she said. "It would mean more homework for the lenders."
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