Krueger plan on sovereign debt avoids the issue

In a world where capital crosses borders with little restraint, the latest proposals for sovereign debt restructuring mooted by the IMF’s second-in-command will not bring long-term stability to a crisis-prone international financial order.

by Chakravarthi Raghavan

GENEVA: The latest ideas floated by the IMF deputy managing director Anne Krueger on sovereign debt restructuring, which slightly modify her initial ideas unveiled last November, will still provide no solution to the problem of sovereign debt, experts on international finance and debt issues suggest.

The latest modifications have failed to win the support of the US, which, with its voting power in the IMF, can block any such changes under the Fund decision-making process. But the US opposition cannot provide any strength to a faulty plan.

In a speech in Washington on 1 April, Krueger indicated a modification of her original proposals, and said that under the new plan, the IMF would not play a role in the actual debt restructuring exercise, but that it would authorize a standstill by a debtor country blocking all creditor actions to seize assets and enabling the debtor country and the group of creditors to negotiate and agree on restructuring the debt by writedowns.

In the November proposals, Krueger had envisaged a much more central role for the IMF in the negotiations over debt restructuring between the sovereign debtor and the creditors, and in effect for the IMF to be able to impose conditionalities on the debtor country.

In her latest foray, Krueger has said that while an IMF authorization would be required to enable a country in debt to activate a stay on its debt servicing and payments (declare a standstill, imposing temporary exchange and capital controls), the restructuring would be by negotiations between the sovereign debtor government and a creditors committee.

As in the initial stance on the Heavily Indebted Poor Countries (HIPC) debt relief initiative, the IMF and the World Bank are trying to ensure that the debts owed to them would not be ‘restructured’ or ‘written down’.

However, critics say that this would have to give way, and that the Bretton Woods institutions, whose policies (in advancing the interests of their major shareholders through the neoliberal policies of the Washington Consensus) have been responsible for the parlous state many developing countries now find themselves in, would have to take a ‘haircut’ themselves, with the major shareholder governments paying the price.

Debt restructuring through some form of international bankruptcy procedures, patterned on the lines of Chapter 11 of the US bankruptcy code, had been mooted as early as 1986 by the United Nations Conference on Trade and Development (UNCTAD). In the wake of the Asian financial crisis in 1997, UNCTAD dusted up these ideas and proposed international bankruptcy procedures and use of Article VIII of the IMF Articles of Agreement to ask the countries concerned to impose capital controls.

The UNCTAD proposals involved a body outside the IMF for renegotiating and restructuring. With the IMF itself being a creditor, there is a conflict of interest if it were to oversee the debt restructuring, and even merely an initial IMF role to enable countries to call a standstill (as Krueger now envisages) cannot resolve this.

Architectural defects

The debt restructuring plans are no doubt only a short- to medium-term approach, to be taken as part of a much larger attempt at changing and reforming the international financial architecture.

The postwar economic architecture had envisaged policies to achieve full employment and rapid growth. The IMF and the World Bank were to provide monetary and financial stability, while an international trading system (the International Trade Organization envisaged under the Havana Charter) would promote freer trade and a gradual reduction of barriers to trade. The founders (White and Keynes) envisioned an architecture where capital flows will be controlled and which would enable freer flow of goods across borders, with the IMF to provide temporary finance to meet countries’ balance-of-payments problems on the current account, while its Articles of Agreement prevented access of countries to IMF funds for capital transactions and capital outflows.

However, the neoliberal dogma unleashed in the 1980s freed the flow of capital (including, more recently, hot money) across borders, thus increasing the strains on trade. In such circumstances, the IMF and its programmes took on a life of their own, with developing and transition economies seeking IMF help and conditional funds, caught in perpetual dependency on and the control of the IMF, and promoting the interests of capital owners and capital flows as against trade and employment.

The preference for private capital flows over official exchange rate stability led to trade flows being distorted due to volatile or unstable exchange rates (rather than conforming to traditional trade theories of comparative advantage), and sent wrong market signals for investments. This has created major problems of instability and sparked a return to mercantilist policies of a bygone era.

This is the cause of the challenges and growing civil society protests against the IMF and the World Bank at one end and the WTO at the other.

Neither the WTO’s last Ministerial meeting in Doha (and the new trade negotiations that were launched there) nor the March Conference on Financing for Development in Monterrey have come to grips with the core issues. And the ‘free-trade’ rhetoric emanating either from Washington or from Brussels cannot paper over the crisis.

Efforts by the IMF management or the Washington establishment to preserve and enhance the rights and advantages of private capital to enter and exit countries, and, whether under official or creditor-managed restructuring, to force countries and their consumers and poor to tighten their belts to pay off debts, will be unable to cure this growing cancer. Cancers, before they metastasize, need to be surgically excised. (SUNS5092)    

From Third World Economics No. 278 (1-15 April 2002)