Global Policy Forum

By Paul Blustein

The top International Monetary Fund official who advanced a radical proposal to create an international "bankruptcy" system for countries has privately acknowledged that the plan has failed to win enough support to move forward, according to people familiar with the matter. Although she didn't pronounce the plan completely dead, Anne O. Krueger, the IMF's first deputy managing director, conceded that because of insufficient political backing there is at present no chance for the legal changes necessary to establish a "sovereign debt restructuring mechanism," or SDRM. The mechanism is intended to give nations stricken by financial crises a form of protection from their creditors. Krueger's comments, which were made in a closed session at the Harvard Business School last week, will be released shortly by the IMF.

In another sign that the plan is about to be shelved, John B. Taylor, the U.S. undersecretary of the Treasury for international affairs, said yesterday in an interview that fierce opposition means the IMF proposal "is not practical right now." Bush administration officials have been major skeptics, together with private international financiers and the governments of many emerging market nations. The comments appear to herald the end of an extraordinary effort by the IMF's management and staff to reshape the rules of the international economy with the aim of providing a new approach for dealing with financial crises. The idea behind Krueger's proposal, which shocked the financial world when she unveiled it in November 2001, was to establish a procedure making it easier for countries facing catastrophic defaults to halt financial panics and negotiate an orderly restructuring of their debts.

Until then, the IMF had looked askance at such proposals, but its leadership felt impelled to come up with alternatives to the massive loan packages the fund had marshaled for a series of countries, including Thailand, Indonesia, Russia and Argentina. Those loans drew criticism because they often failed to stem financial turmoil, while bailing out many of the international banks and foreign investors who had placed risky bets in emerging markets. Under Krueger's plan, laws would be changed internationally so that governments of countries hit by crises would gain protection from creditors similar to those available to companies under domestic bankruptcy laws such as Chapter 11 in the United States. Most important, the new laws would override the rights bondholders have to insist upon unanimous approval for a debt restructuring.

But Wall Street reacted with outrage to the idea, warning that capital flows to emerging markets would dry up if creditor rights were infringed. The fear of losing access to cheap foreign funds sparked resistance from emerging market governments too. So although the issue will be a major topic at the spring meetings of the IMF and World Bank on April 12-13, IMF officials have abandoned hope, at least for now, that the fund's 183 member nations will approve the needed amendments to the fund's articles. "There's very strong support in Europe, but we do not have the support of the U.S. at the moment, or the key emerging markets," an IMF official said.

That leaves the way clear for a "voluntary" approach that Taylor proposed, in which emerging market countries borrowing money would be encouraged to issue bonds with "collective action clauses." The clauses would allow a supermajority of bondholders to approve a debt restructuring, instead of 100 percent. But critics question whether the clauses would be much help anytime soon in quelling crises, because so many bonds remain outstanding with the old-style requirements for unanimous approval. Taylor, while stressing that the debate on the SDRM "has been very useful," said, "from a practical perspective, for now the clause approach is the one we should be focusing on."

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.