WORLD NEWS: US set to block 'sovereign chapter 11' proposals 
By Alan Beattie in Washington
Financial Times; Mar 31, 2003


The US is preparing to block the International Monetary Fund's radical proposal for an international bankruptcy procedure for insolvent governments, a move that could kill the plan.

The plan for a sovereign debt restructuring mechanism (SDRM) - first floated in November 2001 by Anne Krueger, the IMF's second-in-command - has aroused strong opposition from private financial institutions and poorer countries, which say it will make investors more reluctant to lend to emerging markets.

Officially, the US has yet to express an opinion on the final SDRM plan, which will be presented to ministers at the IMF's spring meetings in two weeks' time. But clear indications from the US Treasury, expressed in meetings with other rich-country governments, are that it will withhold support from the SDRM.

US support for the proposal - sometimes known as a "sovereign chapter 11" after the equivalent section of US bankruptcy law - would be vital to secure a majority in the IMF's governing board.

Under the IMF's plan, a country in financial crisis would be able to suspend payments on its debt and seek protection from litigation by its creditors in return for entering a judicial arbitration process.

The US, which is still formulating its tactics for the meetings, may decide to leave the threat of the SDRM alive as an incentive for emerging market countries to follow its alternative proposal for "collective action" clauses to their sovereign bonds to ease restructuring negotiations. But officials familiar with its thinking say the US will leave no significant chance of the mechanism being created under its current administration.

Paul O'Neill, the former US Treasury secretary who was dismissed in December, was a firm supporter of the principle behind the plan. But other Treasury officials, including John Taylor, the undersecretary for international affairs, much preferred collective action clauses as a way of easing debt crises. John Snow, the new US Treasury secretary, has indicated that he shares Mr Taylor's view.

Mr Snow is also concerned that to push the change through Congress, whose approval would be required to create the plan, would risk failure and encourage lawmakers to start proposing damaging changes to the IMF.

The decision will be a blow to governments such as the UK and other large European countries that have strongly supported the mechanism. The US recently scored a success by persuading Mexico to add collective action clauses to its sovereign bonds. The decision, which reversed Mexico's earlier opposition to such clauses, put international momentum behind the alternative scheme.

From: Financial Times World News