Global Policy Forum

US Eases Stand on 'Bankruptcy' Idea

By Paul Blustein

The International Monetary Fund's proposed "bankruptcy" procedure for troubled countries came back from the dead yesterday -- thanks to the U.S. Treasury, which last week appeared to have killed the idea.

The IMF should continue developing its proposal, said Randal Quarles, assistant Treasury secretary for international affairs, because although the IMF's plan would take much longer to implement than a different approach favored by Treasury officials, "We support the fund's work on their approach as well."

Those words contrasted with comments made last Tuesday by Quarles's boss, Treasury Undersecretary John Taylor, who seemed to dismiss the IMF proposal by referring to it as an "academic" exercise and emphasizing the urgency of advancing the Treasury plan.

The latest twist in the Treasury position could help bridge an unusually public rift between the IMF and its dominant shareholder, the U.S. government, over one of the thorniest issues in the global economy: how to rewrite the rules of international finance to contain crises like the ones that struck emerging markets in Asia and Latin America in recent years.

Last fall, the IMF and the Treasury appeared to have similar views. Treasury Secretary Paul H. O'Neill told a congressional hearing that he had talked with top fund officials about an "international bankruptcy law," which he hoped would offer a better approach for resolving crises than multibillion-dollar IMF bailout loans. In November, IMF Deputy Managing Director Anne O. Krueger advanced a proposal under which the fund would give countries protection from creditors of the sort companies get under the U.S. bankruptcy code -- a radical move that would require a change in the IMF's charter.

But Treasury officials later hinted they were uncomfortable with Krueger's plan and that they preferred an alternative, known as "collective action clauses," in which countries and their creditors would agree on new contracts making it easier to restructure burdensome debts.

The disparity in views spilled into the open last week at a conference on the issue, at which Krueger presented a modified version of her plan, followed the next day by Taylor's speech calling for the use of collective action clauses.

When asked whether he was suggesting it was no longer worthwhile to consider the IMF plan, Taylor said that as a former professor, he abhorred the idea of stifling academic research. But he also said the debate over various options had gone on too long, asserting that the time had come to induce countries and creditors to adopt collective action clauses.

"My message is, we should get on with it," he said.

The dismissive tone of those remarks shocked some IMF officials and drew criticism from some commentators who favor an international bankruptcy mechanism. But Treasury officials maintained yesterday that they had never meant to convey such a negative stance.

Quarles, who was sworn in last week as assistant secretary, was brought to the department's press room to speak with wire service reporters -- a tradition for newly inducted Treasury officials -- and when asked about the issue, he said there had been a misunderstanding.

"I was a little surprised at the reaction some had" to Taylor's speech, Quarles said in a telephone interview. "It was his intention to be encouraging.

"The view we've always had is that the two approaches are complementary; [they] aren't exclusive of one another," Quarles said. "The [Treasury] approach is easier to start up quickly, while there's obviously a longer ramp-up time on the [IMF's] approach.

The IMF declined to comment.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.