IMF Survey: One closely watched item at our spring meetings was what would be decided on the IMF’s proposal for a sovereign debt restructuring mechanism (SDRM) to help better resolve financial crises. Did the International Monetary and Financial Committee give the go-ahead for your proposal?
Krueger: Certainly it was a go-ahead for the IMF’s proposal. As you know, we did not, and do not, have every last detail of the proposed mechanism worked out. So, at each stage, we’ve asked our members whether we should keep developing it. And the committee certainly gave us a clear go-ahead for that.
At the same time, the international community is also keen to make progress on a complementary approach—namely, more ambitious use of collective-action clauses. Obviously, if that can be put into effect more quickly, it would help. We think, however, that the SDRM could do a number of things that these clauses would not achieve. So we are following a twin-track approach and working on both.
IMF Survey: How quickly could the collective-action clauses take effect?
Krueger: Anyone can put a clause in any bond issue anytime. But there are important jurisdictions in which there is no clear statutory basis that allows for the rights of a minority of creditors to be modified without their consent. And there are also jurisdictions in which a contract cannot be retroactively altered, which is a big problem. One possibility would be to have a country without collective-action clauses in its outstanding bonds offer to exchange them for new bonds that include them. If you did this at slightly more favorable terms, it could give people an incentive to switch over.
IMF Survey: In a recent interview with the IMF Survey, Professor Rudiger Dornbusch commented that he was surprised to see such a proposal coming from you. He thought you would have shared his worry about taking the job away from capital markets and giving it to some really bad institutions. Where does this proposal come from?
Krueger: Several people have said to me that they thought collective-action clauses were market-based, but that the SDRM was not. That has surprised me. I would have thought that anybody looking at the way modern market economies operate would see a rule of law as market-based. We have domestic bankruptcy laws, which are an indispensable part of a well-functioning market system. I see no reason why a similar approach would be any less market-based internationally than it is in a domestic context. But, some have argued for subsidizing the insertion of collective-action clauses, which is obviously not market-based.
The 14-point plan put forward by the [Argentine] President and provincial governors recognizes the need for a comprehensive approach to Argentina’s current situation.
IMFSurvey: How long would it be before the SDRM could be operational? What are the financial implications for the IMF?
Krueger: We think it would probably take an amendment to our Articles of Agreement, not to extend the legal authority of the IMF but rather to allow the key decisions in the restructuring process to be made by the debtor and a supermajority of creditors. If we have agreement fairly soon and people want to do this, then it would simply be a question of how long it would take countries to ratify the amendment to the Articles. It wouldn’t be something that could be done this year.
As for the financial implications for the IMF, it’s hard to say what they would be. There is no reason in principle why the creation of an SDRM would automatically mean more or less IMF lending than takes place now. In addition, debts owed to the IMF would not be included in any restructuring under the mechanism. This reflects the fact that we provide a public good by lending when the private sector is unwilling to do so—and at rates well below those the private sector would charge. Including loans to the IMF in any restructuring would curtail our ability to do this.
IMF Survey: Of course, neither the SDRM nor a collective-action approach would help Argentina. How can the problems there be resolved?
Krueger: We have been talking with the authorities, and we are anxious to have a program that we can support as soon as possible. The international community is determined to help Argentina emerge from the current crisis, but support can be given only to a program that is strong and comprehensive enough to regain the confidence of the Argentine people and lay the basis for strong growth.
Our early contacts with the new economics team of Minister Roberto Lavagna encourage us that there will be continuity in our discussions and that the new team will move quickly to build on the progress made in the previous months. The 14-point plan put forward by the President and provincial governors recognizes the need for a comprehensive approach to Argentina’s current situation. Now that plan needs to be developed into a consistent and sustainable program. This involves several key steps—for example, restoring order to the banking system, the payments system, and the foreign exchange market. A sound macroeconomic policy framework is, of course, essential in its own right and to restore confidence in the banks. Another key issue is amending the insolvency legislation and repealing the antisubversion law to provide a legal framework consistent with international standards. This is essential to get credit flowing again and to restore investor confidence, without which it will be very difficult to revive investment and growth in Argentina.
A critical area is addressing the fiscal weaknesses that have been at the heart of Argentina’s difficulties and restoring a sound consolidated budget position over the medium term. Of course, there are limits to the adjustment that can be achieved in the midst of a sharp contraction of the economy. And it is also important to strengthen the social safety net at this difficult time. Nevertheless, rebuilding confidence and restoring growth will require an early start on structural reforms to pave the way for a sustainable fiscal position. That is why we have emphasized the importance of including the provinces in the fiscal framework and why we are seeking an early end to the practice by some provinces of issuing paper that circulates as a money substitute.
We look forward to working with Minister Lavagna and his team on this agenda. But the situation clearly remains volatile and the risks are significant. So it is essential that the new economic team move quickly and decisively.
IMF Survey: The IMF recently appointed a Director of Special Operations to enhance its ability to respond to critical situations. What needs is this meant to address, and how do you see it functioning in Argentina and in other areas?
Krueger: The idea is to have a place within the institution that can support and strengthen the response of area departments when crises arrive. After all, we don’t have that many people working on a given country at any given time in the area departments. The Special Operations team has proved extremely helpful in dealing with Argentina’s crisis. Quite clearly, we’ll have to integrate this arrangement better into the institution for use in other cases. But area departments will stay in charge of country programs. There’s no intention of changing that. However, we do want to provide additional resources to handle individual problems and to have people who are alert to some of the things that come up regularly in crisis situations, but not in normal surveillance situations or normal programs.
IMF Survey: What should the IMF’s role be with regard to poverty and low-income countries?
Krueger: The evidence is overwhelming that, when you have macroeconomic instability, the poor are hurt the most. High inflation hits the poor the hardest, as they have fewer defenses. So I see our role first and foremost as providing governments with the tools and know-how to achieve macroeconomic stability, which is necessary for growth. And growth, in turn, will help the poor the most. In addition, on the budget side we can help countries in developing policies addressed more directly to the needs of the poor, such as rural health clinics or primary education.
IMF Survey: On trade, how detrimental do you find the current U.S.-E.U. flap over steel? Is there hope for a Doha Development Round? What do the developing countries need to do to position themselves to take advantage of it?
Krueger: Do I see it as a setback? Yes. Whether it’s major, that’s still a question. Certainly, it would have been better if it had never happened. Canadian lumber and U.S. agricultural subsidies are also now on the table. It is certainly true that if the developed countries increase their protectionism, then the prospects for growth in developing countries aren’t as good as they would be.
Still, I do have hopes for Doha. One of the things that is forgotten in these discussions is that anything that makes the global economy more buoyant helps developing countries. When the world economy is more buoyant, right away that tends to increase commodity prices. It gives countries that are getting their trade and exchange rate regimes and their incentive structures sorted out access to markets. Moreover, when developing countries liberalize their own trade, they’re also helping themselves. Sometimes, something like the Doha Round can be useful to give that final push to countries to do more of what they need to do anyway. It’s easier to do politically if you’ve got the international commitment. Of course, everybody comments on the waste involved in agricultural subsidies. Getting rid of some of them or reducing them would be much easier in a round in which you have Japan, Europe, and the United States all liberalizing agriculture at the same time.
Everybody comments on the waste involved in agricultural subsidies. Getting rid of some of them or reducing them would be much easier in a round in which you have Japan, Europe, and the United States all liberalizing agriculture at the same time.
IMF Survey: Why would it be any easier politically to act on subsidies now than before?
Krueger: One reason is that the European Union is about to get larger, and it is going to find the subsidies so costly. The Doha Round might be a face-saving way for it to finally act.
IMF Survey: As the former Chief Economist of the World Bank, and now as First Deputy Managing Director, what do you think is the right role for research at the IMF?
Krueger: In academia, a researcher does whatever he or she wants. The real difference in an international financial institution is that a bigger chunk of the research has to be linked—but not necessarily always very closely—with the problems and issues with which the institution is grappling. It wouldn’t be appropriate here, for example, to work terribly hard on aspects of auction theory that pertain to telecoms. This is an important research field, but we can’t afford to have an academic department where everybody is going after everything.
When the IMF was first established, it did really outstanding work on balance of payments issues. For a long time, it was way ahead of academics in terms of understanding balance of payments phenomena. The IMF’s Research Department became the premier place for doing research on these issues. Academics need to understand what the policy issues are, and where underlying research can really help Without a research department at the IMF to form that bridge, there would be problems. Also, having strong analytical people within the IMF is helpful in terms of commenting on various policy issues, such as the SDRM and debt sustainability. So I see the Research Department as an integral part of the IMF, standing back a bit from day-to-day operations, but giving all of us help in thinking about those issues.
IMF Survey: I hear you’ve been walking around to departments. Impressions?
Krueger: I regularly see lots of senior people from departments, but in the course of my daily work I don’t often get to meet many others. So it’s very helpful to just go around and meet people and find out what they are doing. It’s surprising how quickly one can form impressions of what’s going on. Once I’ve finished going around the departments, I’m hoping to get together with groups of younger IMF staff on an informal basis every now and then. But I’m still busy with my walk-abouts. I was going to try to do one a week, but I’ve been here eight months and probably done eight departments, which tells you how little spare time there is.
IMF Survey: Professor Dornbusch also told the IMF Survey that one of your best qualities for this job was that you had no problem saying “no.” Any reaction?
Krueger: I keep hearing this, but it kind of surprises me. Certainly economic analysis and an understanding of issues do provide some insights. Also, you aren’t doing any favors lending to countries if they are just going to end up more heavily indebted, with no improvement in their prospects. So where there isn’t much prospect of anything successful coming out of it, I don’t have any great difficulty in saying that I don’t think we ought to lend.