Washington, DC — The International Monetary Fund's plans for a "Sovereign Debt Restructuring Mechanism" (SDRM), designed to reduce the complexity of debt negotiations and protect indebted countries from multiple demands for repayment, were discussed at a conference in Washington, DC, January 22.
"Twenty years ago, when sovereign debt consisted mainly of syndicated bank loans, a debt restructuring - while never pleasant - was relatively straight-forward," said Köhler opening the meeting, Wednesday. "But today, the market is characterized by an enormous diversity of debt instruments and a multiplicity of creditors."
According to the IMF's First Deputy Managing Director, Anne O. Krueger, increasingly debt is the result of private capital flows rather than "official" flows. One result of this shift, as with bonds, has been a dramatic increase in the number of creditors - Argentina has over 700,000 retail creditors according to IMF managing director Horst Köhler - and increased resistance to restructuring when debt becomes "unsustainable".
With retail creditors there is a "collective action problem", Köhler said. [They] "may have an incentive to decline participating in a cooperative agreement and instead pursue aggressive litigation in an attempt to recover payment on the original contract terms."
The SDRM proposed by Krueger at the 2001 Fall meetings of the Bank and Fund would first put so-called "collective Action Clauses" into bond contracts enabling the renegotiation of debt. A second step called "sovereign chapter 11" would permit countries effectively to declare bankruptcy, opening the way for arbitration between creditors and debtors.
Krueger had to leave the forum early, but addressing the European Commission in Belgium two weeks ago, she explained: "As with a domestic insolvency law, it would aggregate claims... and could apply to all existing claims. An independent and centralized dispute resolution forum would be established to verify claims, insure the integrity of the [process] and adjudicate disputes that might arise."
The SDRM is still a "work in progress" Krueger told her Wednesday audience, but in a statement following an IMF board meeting to discuss the mechanism last month, she said preferential treatment is likely to be given to some creditors by the board.
"There was broad agreement that claims held by international financial institutions should be excluded, reflecting the unique role that these institutions play in the existing international financial system... IMF directors did not reach a definite view on how to treat claims held by official bilateral creditors [but] many directors reiterated their view that official bilateral claims should be excluded from the SDRM."
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The "Paris Club" - an informal 19-nation group of creditor governments with large claims on debtor nations - will "closely coordinate" with the SDRM, says Krueger.
All of this is a nice try but hardly goes far enough, said Ann Pettifor, Program Coordinator of Jubilee Research, successor to the Jubilee 2000 debt cancellation movement, who shared the platform with Krueger. There is much "institutional self-interest" in the new plan, she says, "it's IMF business as usual." She complained that the IMF would effectively be writing the economic plans for debtor nations. IMF staff will be the consultants on the SDRM.
But, she said "it takes two to tango... Both the IMF and [debtor] governments are responsible for the crisis and that has to be acknowledged."
Given the tens of billions of dollars of probably unpayable debt owed by poor nations, her group would like to see cancellation of the debt owed by the poorest of countries "under a fair and transparent process." It's important to understand that there are three parties to the debt crisis: creditors, debtors and "the global tax payer," she says.
Wednesday's conference brought together representatives from the Fund and Bank, from the financial sector, civil society and academia to exchange views on the specific design features of the SDRM.
