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Sunday, 29 September, 2002, 22:23 GMT 23:23 UK
Analysis: IMF's 'state bankruptcy' plan
A trader reading a Bible in a Sao Paulo session
A trader reads the Bible as Brazil's currency plunges
The BBC's Andrew Walker

The debt problems of Argentina and Brazil have loomed large over the annual meetings of the International Monetary Fund and the World Bank.

Finance chiefs have made some progress on ideas for how to prevent countries suffering all the economic consequences of a chaotic default on debts owed to the private sector.

The second-in-command at the IMF, Anne Krueger, has put together some outline proposals for a new system that is sometimes likened to a bankruptcy process for countries.

Using the language of American company insolvency law, it is sometimes called a "sovereign Chapter 11".

The finance ministers gathered here have given Ms Krueger and her colleagues instructions to come up with something more concrete by the time they next meet in April 2003.

Economic deadline

There is no question that the near collapse of the Argentine economy over the course of the year has really focussed minds.

One element - though only one - in the country's problem was a debt burden that it could not cope with.

IMF deputy managing director Anne Krueger
Anne Krueger's plans to protect crisis-hit states are opposed by creditors
It eventually gave up trying to cope towards the end of last year and announced a default in December.

The result has been an economic decline that one of Ms Krueger's colleagues at the IMF described as almost unprecedented.

Ms Krueger's ideas are intended to allow this kind of situation to be resolved in a more orderly way.

There would be a forum which countries could go to if their debt burden became impossible.

They would then negotiate with creditors.

If a large enough majority agreed, the debt would be restructured - to make the repayments more manageable for the country.

In practice it would mean creditors taking a loss.

And it would be binding on them all, including those who voted against.

During the negotiations, creditors would not be able to sue the country in court for immediate full payment.

'Messy, drawn-out process'

In previous debt crises, there have been agreements between lenders and borrowers.

But Ms Krueger says the lack of formal procedure makes the process messy and drawn out.

Street protesters in Buenos Aires, 2001
Argentina's economic crisis sparked mass public protests last December
It is a much more difficult process than in the 1980s, when a country's creditors were mostly a fairly small number of large banks who could be persuaded to get round a negotiating table by the IMF or the US Treasury.

Now middle-income developing countries - the likes of Brazil or Mexico - borrow more by selling bonds.

These are traded in financial markets and by the time a debt crisis comes along there may be thousands of bondholders - creditors who need to be represented in any debt negotiations.

The fact that developing-country bonds can be traded can also lead to a particular problem that Ms Krueger calls "hold-out" creditors.

These are creditors who demand full payment of what they are owed while others are negotiating new payment terms.

It does not happen very often, but she says is it is getting to be more of a problem. And it can be very disruptive.

'Vulture funds'

There is a type of investment institution, known as "vulture funds", that buys up debts owed by companies or countries in financial difficulty for a deep discount, and then tries to get full payment.

In one recent case, Ms Krueger says the Democratic Republic of Congo, emerging from a wrenching civil war, was sued successfully for full payment of $17m in a US court.

In another well-known case in the 1990s, a New York fund, Elliot Associates, paid $11m for Peruvian debt with a face value of nearly $21m.

Peru had a debt problem and agreed a restructuring with most creditors.

Elliot, however, sued for full payment and was eventually awarded more than $55m by a US court; the figure included overdue interest payments.

And Elliot then went on to use a court in Belgium to, in effect, disrupt the new, reduced, payments negotiated by Peru with its other creditors.

That was enough to persuade Peru to pay up in full.

Opposition voiced

Ms Krueger's proposals are meeting some opposition.

IMF managing director Horst Koehler
IMF managing director Horst Koehler wants to see a way forward agreed soon
Many creditors - not just the vulture funds - do not like the idea of an official agency interfering in their relations with countries which owe them money.

Some of them warn that if there is a system which might force them to take a loss, it will be bad news for the developing countries - they will end up paying higher interest rates when they borrow.

Some may find it hard to borrow at all.

Jerome Booth of Ashmore Investment Management has argued that the real motive of the G7 leading industrial countries is a desire to cut foreign aid budgets.

If private creditors take a loss there may be less need for official bailout loans from the IMF or the rich countries' governments, the reasoning goes.

Some development lobby groups say that there should an opportunity for the population of affected countries to participate in the negotiations.

They also say that debts owed to the IMF and rich country governments should be included in a sovereign bankruptcy process.

Frustration

The idea of some sort of formal process for dealing with debts to the private sector has been around for many years.

It was given a new lease of life after the Asian financial crisis of 1997.

But even then the idea seemed to flounder for a while and Ms Krueger's boss, IMF managing director Horst Koehler, seems frustrated that it has taken so long.

The next step is for Ms Krueger and her colleagues. They must produce a detailed scheme for the IMF's member countries to consider in April.

And even if the finance ministers do reach an agreement then, there would still be changes in laws needed to make it happen.

So, if there is going to be progress this time, it will be too late to be much help to Argentina - or Brazil for that matter, which some people in the financial markets think is perilously close to default as well.

But perhaps it will be some help to the next country that gets into the same kind of difficulty.



Developing countries

World economy
See also:

29 Sep 02 | Business
28 Sep 02 | Business
28 Sep 02 | Americas
27 Sep 02 | Americas
28 Sep 02 | Business
27 Sep 02 | Americas
27 Sep 02 | Business
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