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Bank of Italy;
Bank of Italy and International Monetary Fund. The authors are grateful to Giorgio Gomel, Alessandro Leipold, Marino Perassi, and Ignazio Visco for their helpful advice on an earlier draft of the paper. For their useful comments, the authors would also like to thank Tamon Asonuma, Fabrizio Balassone, Wolfgang Bergthaler, James Boughton, Thanos Catsambas, Varapat Chensavasdijai, Katharine Maria Christopherson Puh, Marika Cioffi, Stijn Claessens, Andrea Colabella, Carlo Cottarelli, Giovanni Dell’Ariccia, Damien Eastman, Andrew Giddings, Raffaela Giordano, Lorenzo Giorgianni, Manuela Goretti, Kajal Jagatsing, Mariusz Jarmuzek, Sebastiano Laviola, Ross Leckow, Claudia Maurini, Francois Painchaud, Francesco Paternò, Hoang The Pham, Helmut Reisen, Gabriele Semeraro, Claudio Visconti, and Rhoda Weeks-Brown. All remaining errors are the authors’ sole responsibility. The opinions expressed in this paper are the authors’ only and do not necessarily represent those of the Bank of Italy or the International Monetary Fund.
Sovereign debt crises might involve either a pre-emptive debt restructuring negotiated by a sovereign without suspending the servicing of its debt or an outright default, usually followed by restructuring. Crisis management and crisis resolution are notions often used interchangeably in the literature: for example, the IMF’s lending framework is generally referred to as a crisis resolution tool. We adopt a narrower definition of crisis resolution that refers to those situations involving either a pre-emptive debt restructuring or an outright default. Accordingly, in our interpretation crisis management generally deals with situations that involve an IMF-supported adjustment program but no restructuring/default of sovereign debt.
We focus on Fund lending on non-concessional terms, i.e. to both advanced and emerging market countries that typically have access to international capital markets. The IMF also has lending facilities on concessional terms for Low Income Countries (LICs).
The Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets were developed under the aegis of the Institute of International Finance and the Banque de France; they have a voluntary nature and are based on four pillars: transparency and timely flow of information; close debtor-creditor dialogue and cooperation to avoid restructuring; good faith actions during debt restructuring; and fair treatment of all parties. An Addendum to the Principles was drawn up on the basis of the lessons from Greece’s debt restructuring of March-April 2012 (IIF, 2005 and 2012; Ritter, 2009).
This literature is extremely vast. See, for example, the seminal papers of Eaton and Gersovitz (1981) and Bulow and Rogoff (1989). For comprehensive reviews, see Eaton and Fernandez (1995), Friedman (2000), Borenstein and Panizza (2008), and Panizza et al. (2009).
In 2010, Argentina offered to restructure the debt held by holdouts from its 2005 bond exchange. That offer was accepted by 66 per cent of the holdouts, bringing total creditor participation (from the combined 2005 and 2010 restructurings) to 93 percent.
An exit consent is a written permission for an amendment that is tendered along with the acceptance of an exchange offer (i.e. the consent is given as a bondholder exits the bond). This technique encourages full creditor participation in a bond exchange involving instruments that do not contain CACs, because it allows a simple majority to modify (with the issuer’s consent) non-payment terms of the old (tendered) bonds in order to make them less attractive. See, for example, Buchheit and Gulati (2002). Steneri (2003) illustrates the use of exit consent in the case of Uruguay.
The Mexican crisis had a major impact also on Fund surveillance over the financial sector. See Gola and Spadafora (2011).
The Preferred Creditor Status (PCS) occupies an especially important place in the Fund’s lending framework, as it represents a key prerequisite of all forms of Fund financing and, more generally, an element for the overall functioning of the international financial system as a whole. It allows the Fund to provide financing to a sovereign when other creditors are not willing to do so and at non-market interest rates, i.e. without imposing risk premia or requiring collateral (Martha, 1990).
The LIA policy was formally approved in 1989 and subsequently amended in 1998, 1999, and 2002. See IMF (1970, 1980, 1989a, 1989b, 1998a, 1998b, 1999, 2002d, and 2002e). For critical reviews of the existing version of the policy, see Lerrick (2005), Gelpern (2005), Simpson (2006), Buchheit and Lastra (2007), Bedford and Irwin (2008), and Diaz-Cassou et al. (2008a, 2008b).
These were conventional stand-by or extended arrangements where the beneficiary country expressed its intention not to draw, although Fund resources could be made readily available in case of actual balance-of-payments pressures, and provided that the country continued to observe the other conditions of the arrangement. Precautionary arrangements soon became a popular form of IMF monitoring with standard (i.e. ex post) conditionality that went beyond bilateral surveillance without necessarily involving Fund financing. The bulk of these arrangements remained well below the normal access limits to IMF resources, and they did not pose particular problems to the prevailing lending framework. It was only at the beginning of the 2000s that a demand emerged for high-access precautionary arrangements, highlighting the need to specify the rationales of these programs and to ensure their consistency with the overall lending framework (see Section 5.1).
For a discussion of the Fund’s access policy in a historical perspective, see Boughton, 2001 (Chapter 17) and IMF, 2001b (Chapter II).
In practice, however, the Fund’s willingness to lend is rarely disputed. Tarullo (2005) points to some anecdotal and empirical evidence on the IMF’s (moderate) institutional bias, in favor of lending to a country in crisis, grounded in political economy considerations. Gelpern (2005) notes that this bias is especially strong and justified when a country has met all the macroeconomic and structural conditions at the core of an IMF program.
In the words of John Taylor (2006), “…one of the problems with the IMF was that there was too little systematic behavior. Will they bail out a country or won’t they? When will they? Which country? On what does it depend?”
The lack of predictability was most evident in the case of Russia, where the IMF increased its financial support to the country in July 1998 and then, one month later, decided to remove it. The author regards this surprise move as a reason for the global contagion at the time (Taylor, 2010, p. 617).
At the time of the SBA approval in September 2003, Fund staff was satisfied that the authorities had met the good-faith criteria of the LIA policy as: (a) the authorities indicated that they wished to complete a debt restructuring by mid-2004; (b) they committed to keep Fund staff informed about progress towards such an agreement; and (c) the authorities had taken steps to begin engaging creditors in a collaborative process (IMF, 2003f, p. 25).
In April 1999, the Board had revisited the criteria underpinning the LIA policy, with a view to ensuring the Fund’s ability to provide timely financing to its members. The revision was triggered by a perception that its criteria appeared to be too restrictive, emphasizing specifically the risk that, in some instances, creditors (particularly bondholders) could exercise a de facto veto over Fund lending (IMF, 1999). A good faith criterion was thus introduced, calling on the debtor to make a good faith effort to reach a collaborative agreement with creditors. This criterion was the object of far-reaching changes in 2002, as it was developed into a detailed set of principles and procedures to guide the conduct of debtor-creditor negotiations (IMF, 2002d).
“Enhanced delineation of [the circumstances that would justify exceptional access] is warranted, with emphasis on a positive assessment of prospects for debt sustainability” (IMF, 2002c, p. 7).
“The reason why the …[EAP]… was acceptable to IMF shareholders, management, and staff was that there was a procedure (the CACs) that countries could use to restructure their debt without large-scale borrowing from the IMF. In technical terms, the CACs solved the time inconsistency problem”. Taylor (2010, p. 618).
In May 2010, Greece’s quota in the Fund was SDR 823 million. It increased to SDR 1,102 million when the 2008 Quota and Voice Reforms became effective on March 3, 2011.
In the related discussion, a few Executive Directors suggested further narrowing the definition of capital account crises that could warrant exceptional access by establishing a formal criterion relating to problems of contagion or the potential for systemic effects.
Similarly, a member that did not meet the systemic criteria should not on this basis be denied exceptional access, if the other substantive conditions established above are satisfied.
See, for example, IIF (2012) and Standard and Poor’s (2012).
Although, according to some authors, CACs could in principle be designed to replicate some features of a system of corporate bankruptcy, including debtor-in-possession financing (see Maris, 2010, p. 45).
This reluctance may be explained by several factors, including a decrease (until recently) of requests for financial assistance from Fund members; concerns about fueling moral hazard; hurdles in securing political consensus at the national level on the use of taxpayers’ money for multilateral institutions; and the fact that general increases in IMF quotas are frequently associated with adjustments in their distribution, with an impact on countries’ relative voting power at the Fund.
“Protection from the risk of holdout litigation won’t minimize the risk of a sovereign restructuring leading to costly spillover into the rest of the economy. It won’t make any easier to prevent a sovereign debt restructuring from triggering a collapse in the banking system, particularly when local banks are the sovereign’s major creditors” (Roubini and Setser, 2004, p. 334).