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Report of the IMF's conference on the Sovereign Debt Restructuring Mechanism. 22nd January, 2003, IMF Headquarters, Washington, D.C. By Ann Pettifor and Kunibert Raffer, 23rd January, 2003. Jubilee Research at the New Economics Foundation. 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. Proposed SDRM is Brady Plan II One of the most likely and predictable, outcomes of the SDRM would be that countries would not be returned to viability/sustainability. Indeed we believe that it has all the features of the failed Brady Plan of the 1980s. That is, as with Brady, only private creditors would have to reduce their claims. This means that even relatively generous reductions by the private sector might be insufficient for a fresh start. The IMF's paper asserts that all unsecured creditors would receive a combination of "cash and new securities, under par". (see footnote 17 on page 36). If this cash is provided in the form of an IMF loan (because the over-indebted country has no hard currency), less debt relief would be obtained and the share of preferred harder IMF claims would be increased. The IMF shapes the outcome: The proposed design of the IMF's SDRM (as outlined in the paper of November, 2002) would ensure that Fund staff, and the Executive Board, would play a pre-emptive role in shaping the outcome of any debt crisis resolution negotiations. They will do this by setting the country's level of "debt sustainability" from which the necessary debt reduction would logically follow. In addition, under the proposed SDRM, the Fund will continue its existing role of determining the debtor's economic policies. As a result the IMF will effectively draft the "composition plan" that should rightly be presented by the debtor, and that would provide the basis for negotiations between the debtor and creditors. (Under the Raffer model, the evolution of this plan would take place with the participation of civil society). By filing the "plan" the IMF effectively disempowers the debtor, all other creditors and civil society. The IMF could/will set "debt sustainability" to a level which does not place its own claims economically at risk, even if they were legally exempt from debt cancellation. (See paras. 84 and 85). There was a suggestion at yesterday's conference, that if the debtor were to agree to a solution considered "too generous" by the staff of the Fund, the IMF would penalise the debtor (by e.g. withholding funds) to block the solution agreed by both parties. Above all, this would allow the Fund to play the role of judge in its own cause - the defence of its own claims. The Fund of course, does this already. But by enshrining the SDRM in its Articles of Agreement, the Fund would go further. a) It would increase its importance by obtaining the sole mandate for debt re-structuring. (An amendment to its Articles would elevate the role of the Fund, and would change the present situation where the Fund and World Bank together engage in poor country debt management). b) Furthermore the Fund is considering enshrining the Board's authority to define the behaviour of the debtor as a breach of its obligations under the Articles of Agreement, and to determine sanctions against the Member country. c) The amendment to the Articles would legalise present practice - especially the practice of ensuring the Fund as preferred creditor (until now the IFIs enjoyed de facto but not de jure preferred creditor status). In other words, amending the Articles to incorporate the proposed SDRM would legalise and strengthen the IMF's current practice. The Dispute Resolution Forum The proposed SDRM includes a Sovereign Debt Dispute Resolution Forum (SDDRF) (para 28; and paras 230 - 263) - which is described as independent. The Fund goes to great lengths (by consulting UNCITRAL) to ensure a certain independence for this Forum (whose members are nominated and endorsed by the Fund). But the SDDRF has no powers to challenge the decisions of the Fund, in particular on the amount of debt reduction needed to resolve the debt crisis. While the members of the Forum are clearly subordinated to the Fund, they do have powers over creditors and the debtor. They have full authority to decide upon disputes between creditors, and between creditors and the debtor. This court was described by a senior judge at the IMF's conference, as a "bovine court" - with limited powers. |
