Global Policy Forum

By Ann Pettifor and Kunibert Raffer

On Wednesday, 22nd January, 2003, the IMF convened, at its headquarters in Washington, a formidable array of bankers, lawyers, judges, academics and NGOs to discuss and debate its proposals for what will effectively be a new international insolvency framework for sovereign debtors. The IMF's proposal is known as the Sovereign Debt Restructuring Mechanism (SDRM).

We have two major reservations about the Fund's latest draft design for the SDRM.

1. The first is that the SDRM would not return poor, indebted nations to viability/sustainability. The misery of the population of these countries will continue even though private creditors might be asked to grant considerable debt reduction.

2. It would enshrine an increased role for the IMF in international law. The inefficiency of present debt management would continue.

We note that the proposed design for the SDRM does not include the best features of the HIPC initiative: namely

a) the comprehensive approach to the plight of the debtor by including all creditors, commercial, multilateral and the Paris Club in the re-structuring; and b) the element of participation by civil society.

We expand on these reservations below:

Introduction

The first point to make about the IMF's conference on the SDRM is that this was another big step in the strategy of the Managing Director, Horst Koehler's to open up debate within the Fund and between staff and civil society. Mr. Koehler invited to the conference a wide range of actors affected by IMF staff proposals. Ms Krueger, the deputy MD, had already published a detailed summary of the views of the Fund's country shareholders (the Executive Directors (EDs)) which revealed dissension between EDs; as well as tensions between Fund Staff and shareholders.

Fund staff gave a full and frank presentation of their proposals, and were open to criticism about their design for the Sovereign Debt Restructuring Mechanism (SDRM). Although even they appeared surprised at the degree of criticism of the proposal. After the conference, the Fund's public relations department provided a platform for a government (Mexico) and an NGO (Jubilee Research @ NEF) to express concern about their proposals.

Sadly, aside from Mexico, the voice of taxpayers in the south, those most affected by debt crises, was not heard; very few southern participants were present.

The conference was a refreshing, and welcome departure from past practice; different from the way in which the Fund and the World Bank went about designing the Heavily Indebted Poor Countries initiative (HIPC).

The second positive point to make about the design of the SDRM is that Fund staff have already responded to criticism, and substantially improved and adapted their initial proposal for the SDRM. We welcome in particular the proposals for much greater transparency in the sovereign debt restructuring process (para 14 "guiding principles" and paras 273 and 291 of the report "The Design of the Sovereign Debt Restructuring Mechanism").

We also welcome the proposal for using national laws to ensure that lending and borrowing takes places legitimately - and that claims made corruptly are challenged (Paras. 60; 113; 197; 227; 264).

Fund staff have worked closely with the United Nations Commission on International Trade Law (UNCITRAL) to devise a scheme for the appointment of independent judges to the Dispute Resolution Forum, proposed under the scheme. This was first suggested by AFRODAD, and the Fund's recognition of the UN's expertise in this field is welcome.

We also welcome the Fund's increased references to "arbitration", especially recognising the suggestion for a third party (para 90), and for an "arbitral tribunal" (Para 226).

So, both the process, and the Staff's positive response to the views of others in formulating their design for a Sovereign Debt Restructuring Mechanism, is welcome.

Having said that, we have severe reservations about the Fund's latest version of the SDRM.

Some of these reservations were shared yesterday by the keynote speaker, Glenn Hubbard, the Chairman of President Bush's Council of Economic Advisers. Mr. Hubbard noted that there were three parties involved in the resolution of debt crises " the creditors, the debtor and global taxpayers". He questioned whether the problem of creditor "hold-outs" was so big, as to justify a statutory mechanism. He called for the establishment of a voluntary body, as a first step. Mr. Hubbard's speech was a warning shot across the bows of Fund staff, who seem determined to press ahead with their proposals for the SDRM.

In addition the Deputy Minister of Finance and Public Credit of Mexico, Mr. Agustin Carstens, while seeing room for improvement in the present situation, also expressed grave reservations about the design of the SDRM, and its impact on investor flows to Mexico.

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