Private Lenders and Stand-By Arrangements
- International Monetary Fund
- Published Date:
- January 1982
A stand-by arrangement may be a condition for entry into agreements by private banks to lend to a member. The condition may be formal or informal. A formal condition is one that is made explicit and is intended to have legal effect. For example, an agreement may be completed but may contain a term that no advances will be made under it unless the Fund approves a stand-by arrangement. An informal condition may be an understanding that is not given legal form. It may take the form, for example, of an extralegal understanding that the agreement contemplated by the negotiating parties will not be completed unless the Fund approves a stand-by arrangement.27
A reason for reliance on stand-by arrangements by private lenders is that the Fund’s conditionality is regarded by them as an assurance that the member for which a stand-by arrangement is approved has formulated a program that the Fund considers satisfactory enough to justify support with its resources. A program supported by the Fund is intended to bring about, within a reasonable period, a sustainable balance of payments and reserve position. A member that achieves this position should be able to eliminate its outstanding use of the Fund’s resources and to repay creditors on time. A survey of opinion among leading international bankers28 published in 1981 under the auspices of a study group of the Group of Thirty29 concluded that: “On balance, it is clear that bankers view the ability of the Fund to impose policy conditions on borrowing as a mainstay of the system.”30
This general approbation does not mean that banks invariably, or even in most cases, look to the Fund for “policy conditions” before they decide to lend. A distinguished banker and former Executive Director of the Fund has said:
The purposes of the IMF’s advice and lending to its member countries are sometimes frustrated by commercial banks. In some cases banks lend more than is in the long-run interest of either themselves or the borrowing countries. In other cases the lending is appropriate but the timing is unfortunate. For example, banks may extend credit just before, or during, credit negotiations between the IMF and the country.31
The Fund does not advise prospective lenders that they should lend to a member because the Fund is likely to approve or has approved a stand-by arrangement. Lenders can have no basis, therefore, for a complaint against the Fund such as banks participating in a syndicated loan have brought against the syndicate manager in some circumstances. On these occasions, the dissatisfied banks have alleged that they have suffered loss as a result of participation induced by the manager’s representation that they should rely on it as an expert.32 The Fund’s attitude is that each lender must take responsibility for its own decision to lend. Nevertheless, officials of the staff sometimes give technical assistance to a member, at its request, in its efforts to negotiate loans that will augment the resources available under a stand-by arrangement. The officials who perform this service are likely to have participated in the consultations that led to understandings with the member on the program set out in its letter of intent. The service is provided confidentially and informally under the authority of the Managing Director as chief of the operating staff, in which capacity he conducts the ordinary business of the Fund under the direction of the Executive Board.33
Normally, the Fund does not provide all the resources that a member may need to deal with its problem. Often, therefore, additional resources are necessary, and the Executive Board, when considering a proposed stand-by arrangement, is informed whether other resources will be, or are likely to be, forthcoming. Even though a member needs other resources in support of its program, the Fund does not depart from the principle that lenders take full responsibility for their decisions to lend.
Banks do not follow automatically in the wake of the Fund in deciding to lend, even though they take stand-by arrangements into account when arriving at their decisions. The Fund’s objective of adjustment, although essential, may not always be considered a sufficient protection against commercial risk. As early as 1952, the Fund made it clear that the use of its resources could not be without risk.34 The clarification implied a greater willingness to take risks in promoting adjustment than banks may be willing to countenance in their lending. An observer with much private and official experience has been at pains to express the austere philosophy of the banks:
The standards and criteria by which private banks evaluate country conditions, outlook, performance and risk must be most cautious and strict; in most cases, stricter than the IMF. The private banks will, however, be greatly helped by knowing that the IMF judgments on use of its resources reflect a favorable judgment on country performance and outlook made by an expert nonpolitical group.35
The private banks do not establish economic conditions for countries, but must examine whether actual and likely economic policies, conditions and outlook will meet their criteria of country creditworthiness. Thus, private banks, particularly in cases where unfavorable events have damaged a country’s creditworthiness with them, may well wish to wait to see whether a Fund-agreed program is implemented and whether other conditions are created by government and private sector actions before making their own decisions on lending commitments. In this sense, private bank criteria must be more stringent and comprehensive than the Fund’s…,36
In the course of an extensive discussion of the cooperation of banks with the Fund, another distinguished banker and former Executive Director of the Fund has written that:
Nevertheless, in my opinion, joint or parallel financing by banks and the IMF is easier said than done. The Fund can neither compel deficit countries to draw on its facilities nor exercise any control over the commercial banks’ lending policies. In the end, the only possibility is voluntary cooperation, based on enlightened self-interest, between all parties concerned.
As far as the modus of linking commercial bank credits with Fund assistance is concerned, it is largely agreed that this cannot be regulated by rigid rules or procedures but must be handled pragmatically on a case-by-case basis …
Ultimately, implementation of the Fund’s stabilization concept will always have to be based on its agreements with the debtor country. By the same token, effective Fund control of additional private lending to a given deficit country is only possible via the debtor and not via the commercial banks. Some sort of negative clause—there have been examples—has then to be agreed in respect of the debtor’s further borrowing from private sources. The brake is thus applied on the demand side and not on free market supply.
In a realistic assessment of the scope for cooperation between the IMF and the banks, it must be recognized that each side has different tasks and responsibilities and neither one can relieve the other of its risks and obligations. And each one also wants to preserve its freedom of judgment and action. While some progress seems possible in the field of Fund information to banks on borrowers’ economic prospects and policies, the IMF’s role as confidential adviser to its members must not be endangered. For this reason the idea of an IMF certificate of good credit standing, in my view, cannot materialize and, even with more extensive information on prospective debtors, the credit decisions of commercial banks will still remain the outcome of a highly complex and subjective process of assessment in which such factors as competition, corporate strategy, and liquidity play a part.37
The reluctance of banks to “establish economic conditions for countries” has not prevented the attempt on some occasions. On the whole, however, banks have regarded efforts of this kind as unbecoming, in addition to which they have been loath to put themselves at a disadvantage in competition with other banks that would be willing to lend without engaging in these efforts. The reluctance of banks to establish conditions on economic policy for countries has been not less than, and has probably been surpassed by, the unwillingness of governments to engage in discussions with private interests on the initiation of sensitive policies relating to fiscal, monetary, and exchange rate matters. All these considerations may induce banks to place major reliance on the Fund’s judgment.
The 1981 survey of opinion among leading international bankers referred to earlier38 contained the question whether the Fund’s approval of a stand-by arrangement would be regarded by the respondent’s bank as a decisive factor in the bank’s decision to extend new credit. The unanimous reply was that the Fund’s action would be considered “a positive but not decisive” influence. One factor responsible for this attitude was the distinction drawn by most bankers between the Fund’s role of tiding a member over temporary difficulties, often by dampening domestic demand, and the role of market capital in contributing to development and the expansion of net foreign earning capacity over the longer term.39
Banks and the Fund share an interest in stabilization and a preference for order rather than disorder in international finance. It is not surprising, therefore, that ideas have been advanced, sometimes boldly and sometimes tentatively, for greater cooperation.40 Suggestions have been made for combined financing when governments borrow, for the participation by officials of the Fund’s staff in the negotiation of loans to governments by banks, for publication by the Fund of reports assessing the situation or policies of its members, for the provision of more extensive information by the Fund to banks, and for the more extensive exchange of information between the Fund and banks.
A question in the 1981 survey referred to earlier asked the banks what they considered the appropriate long-term relationship to be between the Fund and the banks on the sharing of information and on cofinancing. Nearly all banks replied that more sharing of information would be helpful, and one bank charged the Fund with being unnecessarily secretive.
The banks assumed that cofinancing implied a more formal relationship between the Fund and the banks, on the model of the activities of the World Bank, than was involved in the influence of a member’s observance of economic programs supported by the Fund. Nearly all respondents favored some degree of more formalized cofinancing by the Fund and banks, but all of them thought that the potential was limited, and that banks must continue to exercise an independent judgment. The distinction between the roles of the Fund and banks mentioned already was referred to by one of the respondents in the minority that opposed a more formalized relationship.41
While contacts of the staff of the Fund with private banks have increased compared with the practice of earlier years, the Fund must continue to exercise discretion as to the types of information that can be provided to the banks. The transmission of confidential information could prejudice the effectiveness of the Fund because members might be disinclined to provide some kinds of information to the Fund if the information was going to be passed on. The information that has been made available has been limited to materials that are or will be publicly available but that the banks may not yet be aware of. The range of information published by the Fund in International Financial Statistics and the IMF Survey has been broadened. These functions are within the mandate of the Fund to
act as a centre for the collection and exchange of information on monetary and financial problems, thus facilitating the preparation of studies designed to assist members in developing policies which further the purposes of the Fund.42
A bank that responded to the survey mentioned above urged the Fund to do more to persuade members that the sharing of information was in the interests of members as well as lenders.43 A caveat that would require the consent of the member most directly involved, however, would face it with the dilemma of consenting to the transmission of embarrassing information or putting itself in the invidious position of refusing. A member that would consent to the transmission of information probably would be willing to provide it directly. Unfavorable assessments of the situation of members provided by the Fund to banks could embitter relations between members and the Fund.
Circumstances might make it difficult for the Fund to be evenhanded in cooperating with both large and small banks. The equal treatment of banks in the United States, the country of the Fund’s headquarters, and banks in other countries might be another problem. The release to banks of an unfavorable assessment could be difficult to reconcile with the attitude of the Articles that the publication of unfavorable reports about a member is a severe pressure that is to be applied with the safeguard of a high majority:
The Fund may, by a seventy percent majority of the total voting power, decide to publish a report made to a member regarding its monetary or economic conditions and developments which directly tend to produce a serious disequilibrium in the international balance of payments of members.44
The editing of documents by deleting embarrassing material before passing them on could provoke the charge that suppressio veri est demonstratio falsi.
Members have been opposed to an extension of the Fund’s collaboration with banks for all the reasons that have been mentioned, and for the further reason that the Fund should not give the appearance of aligning itself with creditors against the interests of debtor governments. Although the Fund has a legal personality that is distinct from its members,45 it would be impractical and indeed impossible, given the structure of the organization, for the Fund to act in opposition to its members’ wishes in activities that affect them so strongly.
Banks that decide to make loans at early dates during the period of a stand-by arrangement, instead of awaiting the later results of the program of adjustment, often seek the safeguard not only of a stand-by arrangement but also of the member’s continued ability to have recourse to it. Nevertheless, the Fund does not enter into contractual engagements with banks on any form of conjoint or parallel financing, does not participate in tripartite negotiations with a member and banks, and does not make representations to banks in connection with their lending. A consequence of this policy is that although the loan agreement of a bank may provide for the withholding of advances if a member’s right to make purchases under a stand-by arrangement is in abeyance, there is no term in a stand-by arrangement under which this right is in abeyance because advances are withheld under a loan agreement for any reason, including a default.
The absence of any term in a stand-by arrangement resembling the cross-default provisions of loan agreements is without exception even for the loan agreements of the International Bank for Reconstruction and Development (the World Bank). The two Bretton Woods organizations see their purposes as distinct but complementary. They have reached understandings on the appropriate field of activity of each organization and on collaboration between them. Collaboration has become even closer than in the past because in current conditions of the world economy each organization has advanced somewhat closer to the border between them under some policies. The suggestion by the World Bank in some instances that a member should approach the Fund for a stand-by arrangement as a complement to the World Bank’s own financial arrangements with the member can be regarded as an example of the policy of encouraging requests that has been discussed in an earlier section of this pamphlet. The practice of the World Bank, however, is informal and does not involve official representations to a member. Nor does the Bank make representations to the Fund that it should approve a stand-by arrangement.
If both organizations arrange to provide resources to the same country, it is natural to ask why the continued availability of resources from one organization is not a condition of the continued availability of resources from the other. The desire of each organization to preserve its independence is one explanation. Another explanation is that the membership would resist a policy under which the prospect of resources from both organizations might result in resources from neither because each organization applied, as criteria for the proper use of its resources, both its own criteria and those of the other organization. Although there are no express conditions resembling cross-default provisions, the management of each organization, in deciding whether to support a member’s request for resources, may take into account the actions of the other organization or the views of its management and staff within its recognized province.
The World Bank does apply one formal condition involving the Fund. It is of interest in relation to the representations called for by some private loan agreements. The Bank’s General Conditions Applicable to Loan and Guarantee Agreements provide that the Bank may suspend advances under an agreement, and even cancel it, if a member ceases to be a member of the Fund.46