IMF backs off state bankruptcy

The fallout from a debt default without restructuring

Plans at the International Monetary Fund (IMF) to set up a system to allow sovereign states to go bankrupt are being watered down in the face of pressure from a sceptical USA.

In November last year, the Fund suggested that there should be a more reliable way for countries to manage financial crises than ad-hoc negotiations with creditors.

A structure was needed to give countries in trouble a breathing space to restructure their debts before meltdown could occur.

The ideas were given urgency by the then-developing crisis in Argentina, which has since seen the troubled country default on $141bn in debt and spiral into economic chaos.

But the Fund is now talking down its own involvement in any such system, shifting the emphasis onto the lenders themselves.

Stepping back

The change of heart was flagged in a speech by the IMF's first deputy managing director, Anne Krueger.

Ms Krueger said she was gratified by the warmth of the general reaction to the proposal.

"The need for better incentives to ensure the orderly and timely restructuring of unsustainable sovereign debt is now widely accepted," she noted.

But dissatisfaction with the IMF's central role has had its effect.

Instead of leading the way itself when a country effectively filed for bankruptcy, it is now planning - once it has declared the need for restructuring - step back and leave the main power in the hands of creditors.

"A lot of people reacted uneasily about having the fund too much in the driving seat," Ms Krueger told the Institute for International Economics on Monday in Washington DC.

Look to the markets

For "people", observers say, read the US. The US administration has made it clear that it prefers a market-led solution, with clauses in bond contracts which would dictate what collective action should be taken in the event of a default.

To push through such a radical change in its procedures as is being suggested, the IMF needs support from 60% of member countries and 85% of their votes.

The US, with its 17.5% stake in the Fund, wields an effective veto, and pressure from Wall Street is likely to ensure that further shifts are necessary. Without US support any IMF evolution is unlikely to take place.

Asked whether the changes would be enough to get the US onside, she said: "I don't think we're there yet... It's an ongoing discussion."

Still, the central thrust of the plan remains, growing out of the sheer number of bailouts in recent years, from Mexico in 1994 to Argentina last year via the Asian currency crisis in 1997-9.

While some bailouts, such as Mexico's, have been more successful than others, the process is still seen as far too hit-and-miss for comfort.