The IMF is Not/Not - NOT- Reviving Its Sovereign Bankruptcy Proposal
For all the hopers, dreamers, and scaredy-cats out there--Relax. The long-awaited IMF overview paper on sovereign debt restructuring is here, the first since 2005. And it does not revive the Sovereign Debt Restructuring Mechanism (SDRM) proposal, which died in 2003 at the hands of the United States and the big emerging markets (or more politely, "failed to command the majority needed ... due to the members' reluctance to surrender ... sovereignty"). The new paper takes great pains to establish that the core political reality has not changed, even though SDRM would have solved many of the problems with sovereign debt restructuring that have arisen in the interim. O well.
Within its crystal-clear political constraints, the Fund goes on a measured march across sovereign debt restructurings from 2005 to 2012, or from Argentina to Greece, through Belize, Jamaica, St. Kitts and Nevis. I came away thinking that the paper was not particularly radical, generally constructive, and refreshingly precise. But it does point to potential changes.
Perhaps the most drastic of these (previewed in the FT yesterday) could be to condition programs on an early debt rescheduling, to lock in the creditors while the official sector debates the liquidity/solvency diagnosis. In a solvency case, more creditors would stick around to share the pain. It is effectively what happened in Latin America in the 1980s--except that it was not planned that way, took many years, and caused a huge amount of pain. Thirty years later, the Fund reacts to Europe's recent habit of letting public money finance private exits: by the time officials decide to administer haircuts to creditors, the barbershop has cleared out.
The rest of the paper is a mix of policy refinement, contractual incrementalism, and regrets about wrong turns and roads not taken. The core insight driving the work program is the fact that governments restructure too late (2-7 years by one count), and fail to get enough relief. Pre-emptive restructuring before default is the holy grail. To that end, here are a few more directions for policy change, along with the supporting arguments--
- IMF debt sustainability and market access assessments decide restructuring outcomes. They are becoming more standardized, transparent, and rigorous--but will always remain a mix of art, science, and staff judgment. Creditor participation is not on the horizon.
- It was a mistake to change the IMF's access policy to give Greece exceptional financing despite its dismal debt prospects, for fear of "international systemic spillovers." The systemic exception may not be long for this world.
- Diversity among private and public creditors is a recurring theme. For private creditors, this leads IMF staff to distance themselves from creditor committees (and, pointedly, from IIF advocacy of these committees). Exchange offers will continue to rule the day.
- For public creditors, diversity means new worries about governments outside the Paris Club playing hold-up, and a broader policy review of official sector involvement.
- In a passage that surely would have made it into the briefs had it been published sooner, the IMF predicts that recent U.S. court decisions on the pari passu clause would trigger collective action problems. Collective Action Clauses (CACs) are not the answer, but aggregated voting across the debt stock would help, especially if individual bonds cannot drop out. Conditioning IMF support on minimum participation thresholds could supplement CACs to promote creditor coordination. Ironically, the paper does not propose changes to the pari passu clause itself.
- To no one's surprise, the Fund's policy on Lending Into Arrears was found wanting and in need of a fundamental rethink.
The paper is full of useful tidbits from other IMF and academic studies: examples of debt restructuring inside monetary unions beyond Europe; the puzzling case of Turkey, which alone seems to have made it out of an unsustainable debt hole without restructuring; and a crisp explanation of the difference between Greece's foreign contractual and domestic statutory restructuring.
The Executive Board blessed the paper and the work program earlier this week. This means look out for papers on restructuring delays and overcoming collective action problems in the next few months. Papers on Lending Into Arrears and dealing with official creditors will come later.
A key part of the IMF overview that could fall by the wayside--but that should be tackled at the outset--is the fear of contagion. The authors recognize both the merits of the argument, and the fact that merits aside, fear is a real obstacle driving delay. In response, they advocate buffers and firewalls--the lessons of Europe--in rather general terms. To my mind, the credibility of all the other reforms spelled out in the paper and between the lines, from better debt sustainability projections to limits on official lending, rests on its capacity to address the fear of contagion. And here it gets really foggy.