Journal Issue
IMF Survey Vol.31, No.18 October 2002

All sides have their say on SDRM proposal

International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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IMF First Deputy Managing Director Anne Krueger, widely credited with having triggered the current search for a more orderly and predictable means of resolving sovereign debt crises, opened the discussion with a pointed reminder about the unduly large costs that the current system imposes on debtors and creditors alike. We must, she said, find mechanisms that will allow countries with unsustainable debt burdens to reach agreement with their creditors in a timely manner while limiting the economic dislocation and loss of asset values. The increasingly diverse and diffuse creditor community has created problems of coordination and collective action.

To address these problems, Krueger said, the IMF is pursuing a twin-track, complementary approach that supports efforts by the Group of 10 and others working closely with the private sector to develop guidelines for the inclusion of collective action clauses in bond contracts; and elaborates on the SDRM proposal. The SDRM, she argued, would strengthen the architecture for debt restructuring by creating a more predictable framework within which a sovereign debtor and a supermajority of its creditors could make a number of decisions regarding restructuring.

In terms of coverage, Krueger noted that the preliminary thinking has been that only private creditor claims governed by foreign law would be covered by the SDRM. Debts covered by domestic law and official bilateral debt (for example, Paris Club) would be excluded. The IMF’s role under the mechanism would be indirect and stem from its traditional financing responsibilities. Looking ahead, Krueger said that the IMF would be further developing the SDRM proposal, with the aim of designing a legal framework that could be considered by the membership at the spring 2003 meetings.

Paris Club perspective

Ambroise Fayolle, Vice-Chair of the Paris Club, noted that the Paris Club had yet to form an official position on the SDRM, but he supported pursuing the twin-track approach—modifying bond contracts to include collective action clauses and elaborating a statutory debt restructuring mechanism. He noted that the Paris Club faced neither disruptive creditor litigation nor a collective action problem, which distinguished its claims from those of the private sector. If official bilateral debt were to be brought into the SDRM, the Paris Club would need to modify its procedures and decision-making process, he added.

Private sector views

Robert Gray, Chair, Debt Financing and Advisory Group, HSBC Investment Bank, and Chair, International Primary Market Association; Richard Gitlin, President, Gitlin & Company; and Mohamed El-Erian, Managing Director, PIMCO, provided private sector perspectives and articulated differing views on the merits of the SDRM. Gray argued that the SDRM was the wrong way to go and indicated that the current debate was impeding efforts to forge a market-based solution to the problem, such as the collective action clauses that, in his opinion, were definitely preferable. He advocated changing bond contracts to include provisions whereby litigation can occur only when a designated trustee is so instructed by a qualified majority of creditors, as is the case currently under trust deed instruments issued in the London market.

Gitlin welcomed the impetus that collective action clauses had received, but thought the SDRM warranted support because it afforded a more predictable framework that would help “lay the table” for negotiations. He also noted that the existence of an “in-court” mechanism would help facilitate “out-of-court” agreements. He favored including bilateral and domestic debt in the SDRM’s coverage, with due recognition of the need for flexibility to take into account the specific circumstances of each creditor group.

The debate on the SDRM, El-Erian noted, has triggered an intense discussion on sovereign debt restructuring in the private sector and between the private and public sectors. There is now, he indicated, a convergence in the private sector on the role of collective action clauses in improving the process of sovereign debt workouts. It’s still an open question, however, whether the benefits of SDRM per se would outweigh its costs—particularly once the other elements of crisis prevention and management have been put in place, notably, the introduction of collective action clauses, clarification of the policy on exceptional access to IMF resources, and modifications to IMF policy on lending into arrears. More generally, he welcomed the benefits of greater interaction between the private and public sectors.

Thomas Palley, of George Soros’s Open Society Institute and formerly of the AFL-CIO, supported an SDRM that would include a mechanism to allow ordinary citizens to be involved in discussions on debt restructuring. This would be a partial remedy, he said, for the lack of democracy, transparency, and accountability that exist in governments. Palley also favored an SDRM that covered IMF loans, other than concessional loans, and that permitted loans extended to corrupt regimes to be written off when creditors should reasonably have known about the corruption.

In closing, Jack Boorman noted that, in the period ahead, the official community plans to continue working on the two-track approach. It is looking to maintain a dialogue with all players, especially the private sector, in developing collective action clauses. The IMF has been asked to elaborate on a more detailed SDRM proposal by the spring meetings. What is needed now, Boorman added, is constructive engagement by all parties in developing these proposals.

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