By Bodo Ellmers
As the United Nations moves rapidly towards alternative proposals to sovereign debt work-out, it seems that the International Monetary Fund (IMF) does not want to be sidelined on the issue. A ground-breaking new IMF study that has just been released acknowledges the failure of debt crisis management as we know it. Among the proposed solutions is a Fair and Transparent Arbitration Process, which Eurodad and our members have been campaigning for over many years.
Looking back at debt crises that have happened since 2005, the IMF finds that debt restructurings often come “too little too late” and fail to achieve sustainable results. Among the reforms proposed are new bail-in procedures for private and official lenders, new measures against vulture funds and a revitalised proposal for a sovereign debt restructuring mechanism. However, justice and human rights do not play role, as debt sustainability and renewed market access are the IMF’s sole purposes for restructuring.
Sovereign debt restructuring: somewhere, something went terribly wrong
The new IMF study, entitled Sovereign Debt Restructuring – Recent Developments and Implications for the Fund’s Legal and Policy Framework, looks at the recent experiences of debt restructuring and admits that something, somewhere has gone terribly wrong. Three countries – Jamaica, Grenada and Dominican Republic - had to apply for new IMF emergency assistance programmes just a few years after restructuring. In other countries, such as Greece, IMF monies have been used de facto to fund capital flight of private creditors who left the country, rather than to stabilise the financial and fiscal system.
On the other hand, Argentina’s debt restructuring – which did not follow the IMF’s blueprint for such cases – has led to a massive reduction in the country’s debt stock and thus to sustainable results. However, the country has since embarked on what the IMF authors call “the long litigation odyssey”. Holdout creditors – vulture funds – that did not accept the debt restructuring offer continue to sue the country for full payment. In the view of the authors, this is a challenge for inter-creditor equity because, if they succeed, they will have an advantage over those who are participating. It also makes it less likely that creditors would participate voluntarily in future debt restructurings, in Argentina or elsewhere.
If it’s broke, fix it: IMF proposes reforms
In the light of these findings, IMF staff have started to think about necessary reforms. This is within the narrow framework of the IMF mandate and ideology, whereby debt restructuring is simply a tool for crisis countries to restore debt sustainability as the IMF defines it, and to regain market access. Governments’ needs to deliver on their human rights obligations, which are threatened by high debt service burdens, do not get a mention. The UN processes will hopefully go further in this regard.
The study indicates that most of the challenges could be solved in one go if there was a new and global “statutory” approach, a global institution such as the Sovereign Debt Restructuring Mechanism (SDRM). This was developed by the IMF at the beginning of the millennium, and was criticised by civil society organisations (CSOs) from the outset for some fundamental flaws. However, the study also maps out eight alternative proposals for new debt work-out mechanisms, including –for the first time from IMF’s side – the Fair and Transparent Arbitration Process (FTAP), which has stood as an alternative to the SDRM for a long time.
The public minutes from the IMF Executive Board meeting on 20 May 2013 reveal that the political appetite of the IMF’s Executive Directors to support such statutory approaches is still in development. However, directors mandated the IMF staff to continue working on most other reform proposals mentioned in the study.
First steps to improve the management of global debt (crises):
For example, the authors propose to condition the use of IMF loans to the resolution of collective action problems, in order to avoid the use of IMF funds for creditor bail-outs. They suggest introducing “some form of a creditor bail-in measure ... as a condition for Fund lending … to ensure that creditors do not exit during the period while the Fund is providing financial assistance”. They also suggest blocking future programme financing in case of holdouts, or to make non-negotiated offers to creditors the norm.
In the light of a changing and increasingly complex debt landscape, the paper also calls for better mechanisms to involve private creditors and official creditors that are not members of the Western official lenders’ Paris Club. This could be achieved either by reforming the existing lending into arrears policy, extending it to official arrears and doing away with the current requirement for sovereign debtors to negotiate with representative creditor committees. An alternative recommendation by the IMF is that the Paris Club should extend its membership to the increasingly relevant new creditors, which (although not explicitly mentioned in this study) include countries such as China, Brazil or the oil-exporting countries.
Private creditors’ bail-in should be promoted by introducing more robust aggregation clauses into sovereign bonds and making aggregated voting in collective action clauses the standard practice, suggests the IMF. This should make holding out more difficult. Last but not least, the study proposes making IMF financing available on better terms, for instance, through longer maturities, which would give crisis countries some breathing space to recover.
Viewed in isolation, the reforms proposed by IMF staff are certainly useful steps towards overcoming some of the flaws we have seen in recent sovereign debt restructurings. The fact that the IMF prefers the SDRM proposal, in which the IMF’s Managing Director would designate a panel of judges, to alternatives such as the FTAP is due to institutional self interest. The criticism that a creditor institution such as the IMF is an interested party and therefore cannot be the judge – or appoint the judges – is here to stay. What is missing is a deeper analysis and understanding about how lending and borrowing, debt management and debt restructuring can make a more effective contribution to internationally agreed development goals, poverty eradication and human rights. However, this goes beyond the IMF’s role and mandate. It is an issue for the UN to solve.