Econintersect: As the world enetered the 21st century the IMF (International Monetary Fund) embarqued on a brave new policy initiative, known as “lending into arrears” (LIA). In the simplest terms, this process instituted a means for the IMF to enter into a rescue process for countries that not only had an unsustainable sovereign debt situation but were in or on the verge of default to private lenders. This involved the IMF directly in debt restructuring negotiations with private lenders (banks). The IMF staff has published a paper which opens the entire lending into arrears process for examination.
Click on image for full picture view at source (via Wikipedia Commons).
The latest IMF paper is a confessional. The short form:
- Debt restructurings have been both too little and too late.
- Creditor participation may become insufficient to be effective if past practices are continued.
- Official sector involvement (read as soveriegn haircuts?) will be required.
- Consideration could be given to extending LIA to official arrears.
The long form, from the IMF report:
First, debt restructurings have often been too little and too late, thus failing to re- establish debt sustainability and market access in a durable way. Overcoming these problems likely requires action on several fronts, including
(i) increased rigor and transparency of debt sustainability and market access assessments,
(ii) exploring ways to prevent the use of Fund resources to simply bail out private creditors, and
(iii) measures to alleviate the costs associated with restructuringsSecond, while creditor participation has been adequate in recent restructurings, the current contractual, market-based approach to debt restructuring is becoming less potent in overcoming collective action problems, especially in pre-default cases. In response, consideration could be given to making the contractual framework more effective, including through the introduction of more robust aggregation clauses into international sovereign bonds bearing in mind the inter-creditor equity issues that such an approach may raise. The Fund may also consider ways to condition use of its financing more tightly to the resolution of collective action problems;
Third, the growing role and changing composition of official lending call for a clearer framework for official sector involvement, especially with regard to non-Paris Club creditors, for which the modality for securing program financing commitments could be tightened; and
Fourth, although the collaborative, good-faith approach to resolving external private arrears embedded in the lending into arrears (LIA) policy remains the most promising way to regain market access post-default, a review of the effectiveness of the LIA policy is in order in light of recent experience and the increased complexity of the creditor base. Consideration could also be given to extending the LIA policy to official arrears.
An article by Delusional Economics at Macro Business suggests that the IMF authors are hinting at greater use of collective action clauses (CACs) in sovereign securities when they (the IMF) say there is a need for “more robust aggregation clauses into international sovereign bonds ” Delusional Economics summarized:
In short, the assessments of debt sustainability have been woeful, there aren’t strong enough binding terms (read CACS) in sovereign securities, the official sector, but not the IMF itself, need to play a part in defaults and the IMF should investigate the optimal debt resolution mechanisms available for negotiating between creditors and debtors.
The IMF appears to be attempting a serious post mortem for patients still presumably alive. (Greece and Argentina are front and center.) The conclusion at present seems to be that LAI is a process that should be continued, but with added complexity and more realistic assessment of sovereign debt situations than has ocurred in the past, Greece being a recent prime example.
Below is the IMF paper via Scribd.
Sources:
- Sovereign Debt Retructuring – Recent Developments and Implications for the Fund’s Legal and policy Framework (IMF, 26 April 2013)
- IMF rethinks sovereign defaults, again (Delusional Economics, Macro Business, 27 May 2013)
- IMF “Lending Into Arrears” In Ecuador (IMF, Bretton Woods Project, 14 June 2000)
- The Role of the IMF in Recent Sovereign Debt Restructurings: Implications for the Policy of Lending Into Arrears (Javier Díaz-Cassou, Aitor Erce-Domínguez and Juan J. Vázquez-Zamora, Documentos Ocassionales No. 0805, 2008)
- Collective action clause (Wikipedia)
- Collective Action Clauses: No Panacea for Sovereign Debt Restructurings (Bob Emons, Viewpoints)
