Global Policy Forum

Romilly Greenhill

During the recent Annual Meetings of the World Bank and IMF in Washington DC, the IMF's International Monetary and Finance Committee (IMFC) agreed to continue work on an international bankruptcy plan - or 'Sovereign Debt Restructuring Mechanism' (SDRM). The official communiqué - the statement issued by IMFC members at the end of their meeting - called on the IMF to 'consider the issues further and to develop, for consideration at its next meeting, a concrete proposal for a statutory sovereign debt restructuring mechanism to be considered by the membership.'

Jubilee Research, which has long been advocating an insolvency framework for poor countries , cautiously welcomes the decision, noting that opposition from the private sector and some developing countries, and mixed signals from the US Treasury, had raised fears that the plan would be thrown off-track. However, the IMF's plan, particularly in its latest formulation, looks rather different to that advocated by Jubilee Research.

For us, any international insolvency process should operate under a 'framework of justice; accountable to the people of the debtor nation, as well as all creditors.' Its fundamental principles should be those underlying all insolvency procedures: the application of justice and reason; the protection of the human rights of debtors, as well as the rights of creditors; independence of the court from both debtors and creditors; and the right of citizens affected by a debt crisis to have their voices heard in the resolution of that crisis.

The IMF's plan, as stated in the latest formulation by the Deputy Managing Director Anne Krueger, looks somewhat different. The main aim of the Fund's plan is to deal with the 'collective action' problem underlying sovereign debt crises. 'Collective action' problems arise because even when debt restructuring for a developing country is in the interests of creditors as group, individual creditors 'may consider that their interests are best served by trying to 'free-ride' in the hope that ultimately they can secure repayment in line with their original contracts .' For the IMF, the SDRM can help to overcome this problem by enabling creditors to negotiate with their debtors, and ensuring that all creditors are bound by what a 'super-majority' decide.

There are other differences between the SDRM and the 'Jubilee Framework' advocated by Jubilee Research. Most notably, the IMF's plan would exclude multilateral debt, in particular their own debt and that of the their sister organisation, the World Bank. It may also, according to recent formulations, exclude the debt of official bilateral creditors such as the UK and US. For Jubilee Research, this violates the fundamental principle of 'burden sharing' that should underpin the resolution of any debt crisis.

Furthermore, the IMF's plan would not provide for any independent arbitration, except under a Dispute Resolution Forum (DRF) with relatively limited powers. In particular, earlier formulations by Ms Krueger emphasised that the DRF should not be allowed to over-rule the decisions of creditors - though in later formulations this has been toned down somewhat. Furthermore, although the IMF have stressed that that the DRF should be independent of the IMF board, it is clear that the IMF would effectively retain a veto over the DRF's decisions. Finally, the IMF's proposal includes no provision for citizen participation in the resolution of financial crises - according to a representative from the private sector, such participation would be 'too expensive.'

So is the latest announcement good news? The best that can be said is that it is not bad news. The IMFC could have blocked the plan, effectively sending us back to square one. The IMF's plan, weak though it is, will at least be an improvement on the mayhem which currently exists in the global financial system, with significant costs to debtor countries.

But it is not good news. Good news would have been an independent, fair and transparent process which would genuinely serve to bring justice and reason into international finance. A good plan would have ensured that citizens would have a right to be heard in the negotiations which - as any Argentine knows - will deeply affect them. A good plan would have been applied across all classes of debtors, including the heavily indebted poor countries which are currently gaining so little out of the HIPC process. And similarly, a good plan would have been applied to all classes of creditors, resulting in fair burden sharing across all.

Ultimately, Jubilee Research believes that a 'good' plan would force all creditors to take their share of the responsibility for financial crises, and give a fresh start, on a dignified basis, to debtor countries.

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