In the run-up to the 2014 Spring Meetings of the IMF and World Bank in Washington, DC, debt-relief campaigner Jubilee Germany (‘Erlassjahr’ in German) posed the following questions to a few veterans of efforts to improve the way the world handles countries’ financial troubles:
Can the Fund play a positive role in a reformed process of sovereign debt restructuring or is that ruled out because it is a creditor? And if so, what could or should be its role in both the reform process and any new mechanism to handle sovereign debt crises?
The International Monetary Fund (IMF) unequivocally can and does play a positive role in the process of continual reform of the global financial system and our methods of dealing with sovereign financial distress. As the pre-eminent global centre of crisis-fighting expertise and macroeconomic policymaking, the IMF must continue to occupy a central position in our collective efforts to achieve and maintain global financial stability and growth, and in the means by which we resolve crises when they arise.
For decades, the IMF has been a key player in improving the way the world handles sovereign debt workouts. From the Bretton Woods-era onward, the raison-d’être of the IMF has been the provision of financing and counsel to ease the process of closing balance of payments gaps. Indeed, the adjustment process for most countries would have been substantially more difficult in its absence.
Since the end of the Bretton Woods system, the gaps the IMF has been called on to fill—gaps in both policies and financing—have grown larger while the IMF’s firepower has expanded slowly. If the IMF hasn’t always been up to the tasks set for it, then it is to some extent a reflection of a variable commitment to multilateralism on the part of its major shareholders.
And yet, the IMF still represents an essential public good: it highlights vulnerabilities, works to provide early warning of incipient crises, provides mutual insurance against financial trouble, collects an institutional repository of best practice in several policy realms, and conducts meaningful and practical research. When a country falls into crisis, the IMF’s well-developed approach to debt sustainability analysis allows it to assess a reasonable balance between adjustment and debt relief, and convene stakeholders to implement the required policies and financing to restore a country to market access. No other institution or collection of experts is better placed to support our efforts to build what Christine Lagarde recently called “A New Multilateralism for the 21st Century.”
It was lamentable that the U.S. Congress didn’t ratify the G20’s agreed reforms of the IMF’s quota system back in January. But let’s put this miss in perspective: under any quota formula that has been institutionalized in the past or proposed for the future, the American quota is smaller than the United States’ role in the global economy implies it should be. Yes, the Fund’s governance must be re-weighted and improved, but even unreconstructed, the IMF still represents a subordination of national self-interest for multilateral good.
The IMF’s engagement in reform of the international system is hardly compromised by the fact that it provides debtor-in-possession financing. In fact, the extent and meaning of the IMF’s role as a creditor is vastly overblown. IMF lending represents only a small portion of the financing in most IMF-supported programmes and IMF arrangements are not intended to fill a country’s external financing gap. Instead, IMF funds are meant to catalyze co-financing from other official multilateral and bilateral sources, as well as from the private sector—and that is what they do.
This dependence on other creditors doesn’t make the IMF captive to their interests. Private creditors consistently view IMF programmes as tipped toward debtor interests. They see a presumption toward debt restructuring over adjustment in the IMF’s responses to its members’ financing challenges. Meanwhile, private creditors see Paris Club terms agreed without their participation and imposed upon them by bilateral public creditors under expectations of comparable treatment despite the fact that they don’t have a seat at the Paris Club’s table.
The IMF’s April 2013 Board paper, which reopened the Fund’s discussion on sovereign debt workouts, posited a series of changes that would limit creditor interests further. Amongst other things, the paper raised the possibility that delayed payments to bilateral creditors could be tolerated under the IMF’s “lending into arrears” policy. It also raised the possibility of making IMF financing contingent on automatic debt restructuring under defined circumstances. And finally, it discussed the need to make collective action clauses in bond contracts more effective in binding creditors to the terms of debt restructurings. These are not the proposals that would be floated by an IMF captured by either private or bilateral creditor interests.
To summarize, the IMF is not only expressly designed to play a role in continually improving the world’s efforts to maintain financial stability and growth, but it also can point to a good set of precedents in which it has made major contributions to this process. In this context, the IMF should clearly continue to be involved in global reform efforts.
Nevertheless, it’s premature for anyone—not least the IMF—to discuss renewed proposals for a mechanism to deal with sovereign debt. Since the rejection of the IMF’s Sovereign Debt Restructuring Mechanism (SDRM) in 2003, there has been no sign of renewed global appetite for a statutory sovereign bankruptcy court or a binding arbitration process, based either at the IMF or elsewhere. Given that it has proved impossible to secure even minimal IMF quota reform, it is, frankly, a folly to push now for renewed consideration of a statutory mechanism to restructure sovereign debt. In this context, the IMF shouldn’t be involved in either drafting such a proposal or in its putative operations. The IMF should, instead, be focused on the art of the possible—on articulating reforms that could have a meaningful impact and that could actually be implemented.
At present, such reforms include improved model language for bond contracts that provide for better collective action clauses, more effective aggregation, and sovereign commitments to engagement and transparency with creditors. The IMF should also work on refining decades-old proposals for model forms of state-contingent sovereign bonds that would allow for debt service suspensions and/or automatic maturity extensions during times of macroeconomic distress. Finally, the IMF could play a critical role in helping sovereigns and their creditors come together more proactively to address incipient signs of distress through venues such as the proposed Sovereign Debt Forum (SDF).
The IMF has an important role to play in refining and promoting these three sets of reforms, but that role does not yet—and may never—involve the creation of a statutory debt restructuring mechanism.
This article also appears in German in the Jubilee Germany (Erlassjahr) Debt Report (Schuldenreport) 2014. Brett House will be speaking about the global implications of public debt and what can be done to offset a major crisis at a CIC Montreal event on April 16.