IMF refines bankruptcy plan after creditors object
Paul Blustein, The Washington Post, January 9, 2003

WASHINGTON The International Monetary Fund, bowing to strenuous objections from banks and investors over its proposed "bankruptcy" system for indebted countries, has unveiled a proposal 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 debt payments. That marks a partial retreat from proposals that were aimed at giving countries legal protections from creditors similar to those available to companies and individuals in many nations.

Some analysts said the IMF appeared to be watering down its plan in significant ways, but IMF officials said they had concluded that the "standstill" provisions were unnecessary because of other protections the plan provides to countries.

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

The IMF surprised the financial world when its first deputy managing director, Anne Krueger, announced in November 2001 that its management would back an international bankruptcy regime.

One of the main motivations was to establish an alternative to the much-criticized IMF rescues during crises in Russia, Brazil and Argentina, which involved massive Fund loans aimed at helping those countries avoid default.

The "sovereign debt restructuring mechanism," as Krueger called it, is intended mainly for middle-income, emerging-market countries 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 a 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 government officials in emerging-market countries have opposed it too.

Armed with formidable political clout, financial companies 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 IMF's latest alterations do not appear likely to appease the bankers. "Quite frankly, serious flaws remain and continue to exist with this basic notion," said Charles Dallara, managing director of the Institute of International Finance, which represents companies that invest and lend in emerging markets.

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

But dropping the proposed stay does not 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 Tuesday also proposed other complex provisions to discourage such litigation.