The International Monetary Fund is studying changes to how it handles sovereign debt restructurings after a turbulent period that has rattled the balance of power between governments and their creditors.
According to international officials familiar with the IMF’s deliberations, the Fund is primarily concerned with countries delaying necessary restructurings and the difficulties involved in corralling bondholders into agreements.
The IMF’s work, contained in a paper discussed at an executive board meeting on Monday, is its first high-level attempt to address the issue since efforts to create a sovereign debt restructuring mechanism failed a decade ago. It raises the prospect of big changes to how private bondholders will be treated.
The IMF declined to comment.
Greece imposed a restructuring on domestic bondholders years after its debt crisis began, while many international creditors including hedge funds have been fully repaid. Concerns over the current system’s integrity have been exacerbated byArgentina’s recent legal defeats at the hands of hedge funds over its 2001 restructuring.
One G20 official said that the IMF paper, which is likely to be published later this week, is an “opening gambit” that will only lead to change if backed by the US and European countries. Another said that the IMF – and its managing director Christine Lagarde – wants to reassert its role in sovereign debt restructurings.
The officials said that there are no plans for new legal mechanisms or changes to IMF statutes, with discussions focused instead on the Fund’s own policies and on how to make sovereign debt contracts more robust.
“IMF staff will not normally want to suggest anything too bold,” said Lee Buchheit, a partner at law firm Cleary Gottlieb and a leading adviser to indebted countries. “But there is sufficient momentum building up now, from a combination of the European crisis and the Argentine litigation, that has brought this back on the agenda.”
The IMF is concerned that its own loans may be part of the problem, because restructurings do not occur until it refuses to lend any more without a workout. When countries are locked out of markets and IMF programmes replace private debt, there is less debt left for an eventual restructuring.
One option is to call for creditors to accept a small rescheduling of their debt earlier in the IMF lending process. That would not involve a loss of value, but would keep their debts from maturing until it was clear whether a country needed a full restructuring.
The IMF paper also looks at a range of ideas on how to make it easier for creditors to act together, rather than holding out and litigating separately for a better deal or repayment in full.