IMF outlines new plan for bankrupt countries to restructure debt

Financial Times, Tuesday 2nd April 2002

A judicial panel would need binding international powers to
override litigation in national courts, reports Alan Beattie


Anne Krueger, the International Monetary Fund's second-in-
command called yesterday for a new international judicial panel
to allow bankrupt governments to restructure their debt without
being sued by private creditors.

Ms Krueger said that such a procedure would need a change in
the IMF constitution to create binding international rules which
could override litigation in national courts.

The speech was her first major intervention on the proposed
bankruptcy procedure - often called the 'Sovereign Chapter 11'
after similar rules in US domestic bankruptcy law - since she
declared IMF support for the radical plan in November.

Since then, governments of several rich countries including the
UK and France have declared their support in principle for such
a procedure while some private investors have argued against
the idea. The case of Argentina, which has entered a chaotic
and unplanned debt default, has also given the idea more
prominence.

Ms Krueger's speech to the Institute for International Economics
in Washington last night took a middle path between radical and
moderate approaches.

She went beyond the limited view adoped by the US Treasury
which has suggested that a mere change in bond contracts
could allow a majority of shareholders to impose a restructuring
deal if a sovereign government went bankrupt. But she said that
any restructuring would be supervised by an expert panel rather
than the IMF, allaying private sector fears that the fund would
play judge and jury in the process.

'If we are to crate a better framework for the restructuring of
unsustainable sovereign debt, the central feature would have to
be a mechanism enabling a super-majority of creditors - across
the broad range of credit instruments - to make the terms of a
restructuring binding on the rest', Ms Krueger said last night.

'But a purely contractual approach cannot resolve all the
weaknesses of the current system', Ms Krueger added.

Bond clauses, which allowed a majority of investors to impose
a restructuring deal on the minority did not allow a country
with multiple bond issues to bind all its creditors into an agreement,
she said.

A change in the IMF's constitution - which would require 85 per cent
of country shareholder votes - would allow the creation of 'a single
international entity that could arbitrate disputes and oversee voting'
Ms Krueger said. IMF officials suggested this could be modelled on
World Bank panels which arbitrate on disputes under trade agreements.

It would also 'prevent creditors from shopping around for jurisdictions
in which they could enforce their legal claims through the courts', by
creating a treaty obligation which overrode national law, she said.

The push for a regulated sovereign bankruptcy procedure has gained
new impetus in recent years following the case of Peru, which was
sued by a New York-based hedge fund following a debt restructuring.

Since Ms Krueger's initial speech in November, the IMF has consulted
widely with lawyers and investors in the private sector.