Global Policy Forum

Treasury Official Rejects Proposal a Day After It Is Advanced

By Paul Blustein

A top Bush administration official yesterday shot down a proposal by the International Monetary Fund to establish a new international bankruptcy procedure for countries in financial crisis -- one day after the IMF's No. 2 official advanced the proposal.

John Taylor, undersecretary of the Treasury for international affairs, said the U.S. government strongly prefers an approach to handling financial crises that is much more "decentralized and market-oriented" than the IMF's. Under the administration's proposal, countries would negotiate changes in the terms of their bank loans and bond contracts so they could strike deals with their creditors to restructure their debts if necessary.

Because of the clout the United States wields as the dominant member of the 183-nation IMF, Taylor's comments effectively doomed a plan put forward by Anne O. Krueger, the IMF's deputy managing director, for the fund to offer overly indebted countries temporary protection from their creditors. Krueger's proposal, originally unveiled last November, was a striking departure from IMF orthodoxy and was one of the most radical ideas for revamping the global financial system to emerge from the international financial establishment since the spate of crises that struck Asia, Russia and Latin America in recent years.

Taylor's speech, delivered to a conference at the Institute for International Economics, was especially remarkable because Krueger was picked for her job by the Bush administration, and the evening before, she had presented the same audience with a modified version of her plan that was aimed at dealing with some of the concerns raised by the Treasury.

Taylor left no doubt that he spoke for the administration, and that the administration won't support Krueger's plan, even as revised. That is in part, he said, because the administration wants to end the debate over options for reforming the international financial system; Krueger's plan, which would require amending the IMF's articles of agreement, has drawn stiff opposition, especially from commercial banks and other private financiers.

"The time for action is here," Taylor said in his speech. "A decentralized approach . . . makes much more sense and is much more workable" than Krueger's plan. Asked afterward whether Washington was flatly rejecting Krueger's idea, he replied that "the work that the IMF has done is valuable" but "my message is, we should get on with it."

The administration's stance, though disappointing to advocates of radical reform, is a victory for banks, securities firms and other financial institutions. Wall Street has been hostile toward Krueger's idea of giving the IMF the power to "validate" a suspension of payments by a country that could no longer afford its debt burden.

Taylor, like Krueger, started from the premise of favoring substantial changes in the system that has prevailed in recent years, whereby the IMF has provided massive loans to troubled countries. That approach has bailed out many rich investors, and it has often failed to stop turmoil, with countries such as Argentina forced in the end to declare disastrous and costly defaults.

Taylor said the worst problems of the current system can be avoided by the widespread use of "collective action clauses" in contracts for bonds issued by national governments. Such clauses allow a majority of bondholders to ratify a debt restructuring, rather than requiring 100 percent approval, so they make restructuring easier and big emergency loans less necessary.

Critics scoffed that the idea has been advocated for years by financial experts, to little effect. "People say it's a good idea," said Daniel Tarullo, a Georgetown University professor who was President Bill Clinton's chief international economic policy adviser. "But for a variety of reasons creditors and debtors are reluctant" to write the clauses in their bond contracts, so unless "carrots and sticks" are offered to encourage their use, "little is likely to be achieved."

Taylor tentatively offered some carrots and sticks: He said the IMF "could require" use of the clauses by countries that have, or are seeking, its loans. And the IMF "could provide some financial enhancement, such as slightly lower [interest] charges on IMF borrowing." That would encourage countries to swap their existing bonds for new bonds containing the clauses, he said.