IMF modifies bankruptcy proposal

By

Posted 10:17AM on Tuesday, April 2, 2002

WASHINGTON - The International Monetary Fund is pushing forward with a proposal to create the equivalent of a Chapter 11 bankruptcy process for individual countries in an effort to limit the damage from future international debt crises. However, IMF First Deputy Director Anne Krueger said Monday night she was making modifications to her original proposal to meet objections from the United States and other countries. Krueger outlined her revamped approach during a speech Monday night at the Institute for International Economics. The institute was holding a two-day conference on the issue of financial crises, which has gained new urgency with the default in December by Argentina. The Bush administration, which has been pushing a more limited plan to change current practices, was expected to give its reaction to Krueger's latest proposals on Tuesday in a speech to the same conference by Treasury Undersecretary John Taylor. Krueger's original proposal, which she unveiled last November, would have given the IMF the power to block threatened lawsuits by creditors if a country defaulted on its debt. Under her modified approach, the decision to prevent lawsuits would be made by a vote of a ``super majority'' of creditors, some figure above 51 percent of the bond holders that she did not define. ``A lot of people reacted uneasily about having the fund too much in the driver's seat,'' Krueger said in a briefing with reporters. She said she believed her changes would meet the principal objections although she said much work remained to be done to address a variety of questions. Her plan is likely to be a major discussion topic at the agency's spring meeting later this month although actual implementation of the measures is still years away. Krueger's plan would create for countries the type of bankruptcy protection that individuals and corporations currently enjoy such as the Chapter 11 process in the United States where a bankruptcy judge oversees implementation of a debt repayment plan. It would allow countries to escape lawsuits by bond holders, if the super majority agreed, giving the country time to negotiate a debt restructuring plan that would most likely require creditors to accept something less than full repayment for their loans. Krueger argues that her approach would be far superior to the uncertainty in the current system which forces countries and creditors to put off the inevitable, allowing a country's economic situation to deteriorate further. The Bush administration and the IMF, under the leadership of Horst Koehler, both have been seeking an alternative to the massive bailout packages the IMF assembled during the 1997-98 Asian financial crisis to stave off defaults in a number of countries after they were forced to devalue their currencies. Argentina in December defaulted on $141 billion in foreign debt, triggering a deep economic crisis that the country is still struggling to deal with. In her speech, Krueger said she was gratified with the support her ideas have received. ``I believe from the reactions we have received over the past four months that the need for better incentives to ensure the orderly and timely restructuring of unsustainable sovereign debts is now widely accepted,'' she said. The United States has been pushing a less sweeping overhaul that would implement change by having nations auction future bonds with clauses allowing for a super majority to make decisions for all bond holders in the event of a default. Krueger called this approach sound but insisted that more needs to be done because it would deal only with the sale of bonds in the future, not the sizable amount of debt owed by countries from past bond sales. The United States controls 17.5 percent of the voting shares in the 183-member IMF, giving it effective veto control over major policy changes.