IMF Scales Down 'Bankruptcy' Plan By Paul Blustein Washington Post Staff Writer Tuesday, April 2, 2002; Page E01
The International Monetary Fund, which is trying to forge a new approach to handling financial crises, yesterday agreed to limit its role in a proposed "bankruptcy" procedure for countries overburdened with debt. Anne O. Krueger, the IMF's deputy managing director, backed away from some of the most controversial elements of a proposal she made in November that would effectively give the IMF the power to grant financially strapped countries protection from creditors. Krueger maintained that the modifications did not fundamentally change the plan, but some analysts said that at first glance the original proposal appeared to have been watered down in important ways. And even after modifying the initial plan, the IMF must still overcome misgivings by the Bush administration, Krueger acknowledged. Krueger's comments, in a speech and a conference call with reporters, underscored both the IMF's determination to establish new international rules aimed at quelling crises and lowering the obstacles it faces in doing so. The fund has been stung by criticism over the way it addressed crises in Asia, Russia and Latin America, where it granted huge loans that often failed to halt turmoil while bailing out some wealthy banks and investors. The idea behind Krueger's November proposal was to create a procedure for giving crisis-stricken countries a means of halting panics and keeping investors from pulling their money out of the nation, which would give political leaders time to work out debts in an orderly fashion -- much the same as people and companies get in U.S. bankruptcy courts. The proposal marked a radical shift for the IMF, which has tended to frown on measures that restrict the flow of capital across international borders, especially when they keep debtors from paying their obligations. Under the proposal, when a country had clearly reached the stage of being unable to pay its debts, the IMF could approve its request to declare a "standstill" -- a temporary suspension of payments -- on condition that the country was taking steps to put its economy on a sound footing. The IMF's approval would prevent creditors from attempting to collect their debts by going to court. The version Krueger outlined yesterday retained much of the basic thrust of the original plan, but she bowed to complaints from international investors and the U.S. Treasury that the IMF should not assume too much control over how the standstill would work or how debts would be restructured. "A lot of people reacted uneasily to having the fund too much in the driver's seat," Krueger told reporters. Under the new plan, a country in financial distress could ask the IMF to "validate" a "stay" on its debt payments for a short period -- say, 90 days -- while creditors organize themselves. After that, a supermajority of creditors -- Krueger said the figure might be 60 percent to 75 percent -- would have the right to decide whether to allow the stay to continue and whether to accept a restructuring. As with the original plan, one of the main purposes of the revised proposal is to make it possible for a country to reach a debt-restructuring agreement with its creditors without obtaining consent from all the creditors, which is required in many bond contracts. In her speech, which was delivered at the Institute for International Economics, Krueger suggested that the IMF's articles of agreement be amended -- which has the same legal force as an international treaty on the fund's 183 member countries. That way, the laws governing creditors' rights would be effectively changed. Asked about the reaction of the U.S. government -- the IMF's dominant shareholder nation -- Krueger acknowledged that John Taylor, the undersecretary of Treasury for international affairs, will maintain his preference for an alternative approach in a speech he is scheduled to deliver to the same audience today. Taylor has said he favors broader use of "collective action clauses" in bonds issued by sovereign governments -- provisions that allow a supermajority of bondholders to approve a restructuring. One major problem with that idea is that it wouldn't cover bonds that have already been issued without such clauses. Krueger disputed assertions that the new approach is weaker than her November proposal. But Jeffrey Sachs, a Harvard professor who has long favored a bankruptcy system for sovereign governments, said that while he has not had a chance to review Krueger's speech, he was concerned about the idea of limiting IMF-backed standstills to 90 days. Under U.S. bankruptcy law, creditors don't get to vote after 90 days on whether to continue a standstill on their claims, Sachs noted, and giving them such rights might "throw too much power" to them, he said.
