Global Policy Forum

By Paul Blustein

The International Monetary Fund, bowing to strenuous objections from banks and investors over its proposed "bankruptcy" system for indebted countries, unveiled a proposal yesterday that omits one of the plan's most controversial features.

The IMF dropped the mechanism that would block creditors from suing to recover their money for a certain period after a country has suspended payment on its debts.

That move marks a partial retreat from earlier proposals that were aimed at giving countries legal protections from creditors similar to those available to companies and individuals in the United States and many other nations. Although some experts said the IMF appears to be watering down its plan in significant ways, fund officials said they had concluded that these "standstill" provisions aren't necessary because of other protections the plan provides to countries.

"It looks like a big change," an IMF official said. "But it's really just a refinement."

The IMF surprised the financial world when its first deputy managing director, Anne O. Krueger, first announced in November 2001 that the fund's management would back an international bankruptcy regime. One of the main motivations was to establish an alternative to the much-criticized rescues the IMF had launched during crises in Russia, Brazil and Argentina, which involved massive loans from the fund aimed at helping those nations avoid default.

The "sovereign debt restructuring mechanism," as Krueger called it, is intended mainly for middle-income, emerging-market nations and is separate from another debt-relief program for extremely poor countries. Under the original plan, if a country were deemed by the IMF to be burdened with debts that are unpayable for all practical purposes, it could seek IMF approval to suspend payments to foreigners temporarily -- with legal shelter provided by a "comprehensive stay" -- and negotiate more realistic terms for repaying its obligations.

To make the whole scheme work, the laws of many nations, including the United States, would have to be changed so that individual bondholders would no longer have the automatic right to obtain court judgments against foreign governments for full repayment of their claims. The stay, and permanent restructuring of repayment terms, would become legally binding once creditors had approved them by supermajority vote -- say, two-thirds to three-quarters of the total.

With few exceptions, international bankers and investors ardently oppose the IMF plan as a violation of their property rights that could cause a drying up of private capital flows. For that reason, many emerging-market government officials have opposed it, too. Armed with formidable political clout, financial firms have lined up behind a proposal put forward by the U.S. Treasury under which creditors and countries would voluntarily change bond contracts to allow supermajority approval of debt restructurings.

The latest alterations in the IMF plan don't appear likely to appease the bankers. "Quite frankly, serious flaws remain and continue to exist with this basic notion," said Charles H. Dallara, managing director of the Institute of International Finance Inc., an organization of major firms that invest and lend in emerging markets.

As a result, some specialists derided the IMF's move as a futile gesture. "They keep watering the plan down in the hope of reducing the creditors' opposition, and the creditors just get angrier," said Peter B. Kenen, a Princeton University economist.

But dropping the stay doesn't make the plan substantially weaker, IMF officials said. Aggressive creditors are unlikely to pursue litigation for full repayment of their claims because it will be costly and time-consuming, and the reward for doing so could be zero if they end up being legally bound by a debt restructuring approved by a supermajority of other creditors. The plan unveiled yesterday also proposed other complex provisions to discourage such litigation.

"I don't think it's so serious [to drop the stay] so long as de facto, the borrower feels he has some protection one way or another," said Morris Goldstein, a scholar at the Institute for International Economics.

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.