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Contributions from
the Column
Studies and reports
Development driven by technology?
So far only a vague prospect
AIDS vaccine: no breakthrough
Interview with Michael Krakowski
Poverty reduction strategy papers:
donors still dominant
Sovereign debt restructuring:
IMF proposal does not go far enough
Fresh water
Foreign investment: democracies preferred?
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InWEnt Policy Dialogue
Sovereign debt restructuring:
IMF proposal does not go far enough
By Kathrin Berensmann
What should be done when countries cant pay their debts? That was the subject of an international policy dialogue staged on 21-22 February in Berlin by the InWEnt Development Policy Forum in conjunction with the Federal Ministry for Economic Cooperation and Development (BMZ) and the International Monetary Fund (IMF). Participants included German and foreign politicians, staff of international organisations and representatives of financial service providers and non-governmental organisations. At the heart of the debate was the proposal for an Sovereign Debt Restructuring Mechanism (SDRM) put forward at the end of November 2002 by the IMFs First Deputy Managing Director Anne Krueger – a proposal that has been revised several times since then and will be tabled for approval at the IMFs next spring conference in Washington in the middle of April.
In Berlin, supporters and opponents of the IMF proposal gathered round the table to discuss its pros and cons in comparison with other procedures, where the emphasis is more on contractual solutions – for example, majority action clauses in bond contracts, which would enable a majority of government bond-holders to force a decision to reschedule debts against the will of the minority in a crisis. In Berlin, two arguments were found in favour of the kind of institutionalised insolvency procedure the IMF envisages: first, it would enable debts to be rescheduled faster and more efficiently; secondly, unlike majority action clauses, which are discussed only in connection with government bond contracts, it offers the possibility of taking account of different types of debt.
Where the debate in Berlin heated up was over the question of whether the SDRM should encompass all claims or only those of certain creditors. Some participants shared the IMFs belief that multilateral creditors should be excluded from rescheduling to avoid increasing the cost of their loans and the burden they place on poor countries. Others, however, took the view that all creditors should be embraced by the procedure in the same way. Another moot point was whether debtors should be protected from being taken to court by their creditors while insolvency proceedings are taken place. A clause providing for that was deleted from the IMF proposal at the end of 2002 (cf. D+C 2003:2, p. 50). Objections were also raised against the IMF proposal on the grounds that it would take a very long time for IMF member states to make the legislative changes needed for the procedure to come into force.
NGO representatives complained that, in the final analysis, the IMF proposal does not go far enough to prevent financial crises and bring about a sustainable reduction in the depth of developing country debt. The need to secure a minimum living standard, for example, every state is dependent on to fulfill fundamental obligations, plays no part in the IMF proposal in defining what is a tolerable burden of debt. Nor is there any provision for an independent court of arbitration as a guarantor of fair and transparent proceedings.
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