Abstract
Reforming the Fund's Policy on Non-Toleration of Arrears to Official Creditors
A. Context and Motivation
1. The scope of the proposed reform is limited. It is important to recognize that the proposed modifications to the policy on non-toleration of arrears to official bilateral creditors (“non-toleration policy” or “NTP”) are relevant only in situations where the Fund has already determined that a member country seeking financial support cannot address its balance of payments problems without a restructuring of its sovereign debt, and where that restructuring requires the participation of the country’s sovereign creditors. The proposal does not, therefore, imply any increase in the frequency with which official bilateral creditors may be called upon to restructure their claims in future cases. Rather, the reform is aimed at ensuring that, where a restructuring is already determined to be necessary, the provision of Fund support is not held up by the unwillingness of hold-out creditors to join an effort that is supported by an adequately representative group of creditors (as defined under the policy). Prompt provision of support maximizes the value of creditors’ claims (or minimizes their losses). By contrast, if a Fund-supported program is blocked or delayed, the debtor’s payment capacity is impaired and the payout to official bilateral creditors will be significantly reduced.
2. The proposed reform strengthens incentives for collective action and reduces the risk of holdout behavior by eliminating the potential veto enjoyed by individual official bilateral creditors over Fund lending decisions. Just as in the private sector context, there can be incentives for an official bilateral creditor to hold out from a collective agreement in the hope of getting paid out in full, at the expense of other creditors that are contributing to the financing of the Fund-supported program. The leverage of such holdout creditors is strengthened by their ability in certain cases to block Fund financing under the current NTP. The proposed policy framework seeks to reduce the ability of holdout creditors to undermine the objectives of the majority creditors. By eliminating a holdout creditor’s veto power, incentives for holdout behavior either within or outside the Paris Club would be effectively removed so that Fund financing can proceed subject to the three criteria in the proposed policy (see Annex I, second para.).
3. The proposed reform, while strengthening incentives for collective action, also provides safeguards for official creditors. In particular the criteria on ”debtor good faith” and “the Fund’s ability to mobilize future financing” in the proposed policy provide safeguards for official bilateral creditors in recognition of their critical role in international finance and crisis resolution. The ”good faith” criterion is intended to ensure the debtor acts in good faith—both in process and substance—when interacting with creditors. The criterion related to “the Fund’s ability to mobilize future financing” is intended to guard against situations where lending into arrears may send an undue negative signal to official bilateral creditors as a group, given the specific circumstances of the case. The proposed articulation of the new policy—see Annex I— elaborates on both these safeguards.
B. Form of Board Decision
4. Staff is of the view that a summing up would be the best vehicle to articulate the Board’s decision regarding the proposed reform of the NTP. Use of a summing up would be in line with the form generally taken by previous decisions on the arrears policy. More generally, a summing up permits the Board’s decision to be framed by background, underlying motivation, and context that may prove useful for purposes of interpretation in future cases. Further, a summing up will be able to record consensus views among Directors while simultaneously taking account of any significant nuances of views that would be difficult to reflect in a formal decision. Based on extensive consultation with Directors, both bilaterally and in the informal session to engage, Annex I to this supplement sets forth a description of the policy proposal that, if approved, will serve as the core of the summing up.
C. Clarification of Operational Issues
Deletion of the second criterion (Main Paper, para. 18)
5. Following input from Executive Directors, staff has deleted the second criterion, as redundant, for two reasons. First, as noted by Executive Directors, if an agreement has been reached with each official bilateral creditor (whether bilaterally or under alternative groupings), the debtor would not be in arrears, so the question of lending into arrears to official bilateral creditors would not arise. Second, the absence of a representative Paris Club Agreed Minute is actually a pre-condition for the application of the criteria and so has been moved to the chapeau sentence of the second paragraph in Annex I.
Definition of “significant share” (Main Paper, para. 15)
6. This supplement clarifies that the concept of “significant share” requires that a creditor agreement must be “adequately representative” of the official bilateral creditor base. An agreement will be considered “adequately representative” when it covers a majority of total financing contributions from official bilateral creditors over the program period. These contributions would comprise, and be limited to, debt service claims falling due—which represent potential debt relief—and any new financing (e.g. loans, bond financing, guarantees, and grants) over and above the amount needed to service such claims. If, in a particular case, it is evident that the program parameters require less than full rescheduling of debt service coming due during the program period, this calculation could be adjusted accordingly.
Application of policy in the absence of an adequately representative Paris Club agreement (Main Paper, para. 18, bullet 2)
7. Where there is no adequately representative Paris Club agreement, arrears to non-Paris Club official bilateral creditors would no longer be ignored (“deemed resolved”).
Rather, the new policy would require the debtor to seek agreement with each of its official bilateral creditors, and in the absence of such agreement, the Fund would not be prepared to lend into arrears unless the criteria set forth in the new policy are satisfied. Agreements with each creditor could be sought bilaterally or in groupings (including ad hoc committees).
“Good faith” criterion (Main Paper, para. 18, bullet 3)
8. The Fund would consider, inter alia, the following elements relating to process and terms offered when assessing whether a debtor is acting in good faith:
Process: Broadly analogous to the private-creditor context, the Fund would consider, inter alia, whether the debtor has engaged in a collaborative process with the creditor to reach agreement on contributions and has offered to engage in substantive dialogue. However, the debtor should be willing to engage with official creditors independently from private creditors. Engagement with official creditors could take place through the Paris Club, an alternative grouping, or bilaterally. The debtor should also provide the creditor with relevant information on a timely basis, while respecting the Fund’s policy on confidentiality of information.
Terms offered: The terms offered to official bilateral creditors would be expected to be consistent with the parameters of the IMF-supported program, in particular those relating to financing and debt sustainability. If the debtor requested terms from an official bilateral creditor that would result in financing contributions that exceeded the requirements of the program, it would generally not indicate good faith.
Criterion relating to the impact on the Fund’s ability to mobilize official financing packages in future cases (Main Paper, para. 18, bullet 4)
9. The Executive Board would need to ensure that the Fund’s arrears policy remains consistent with the Fund’s role in preserving the stability of the global financial system. An important element of this is securing adequate and timely support from official bilateral creditors for Fund-supported programs. In assessing whether the decision to provide financing would have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases, the Fund will consider the signal that providing financing despite arrears owed to an official bilateral creditor would send to official bilateral creditors as a group, given the specific circumstances of the case. In particular, this criterion would not be met where the creditor or group of creditors that has not reached agreement with the debtor accounts for an adequately representative share, i.e. a majority, of total financing contributions from official bilateral creditors over the program period, as defined above. Some Directors have expressed a strong preference that the Board should retain a limited degree of flexibility in applying this aspect of the criterion. If the Board were to decide to adopt such an approach, one option would be to insert the word “normally”, as shown in the relevant text of Annex 1 (3rd paragraph).
10. Separately, an assessment of whether this criterion is satisfied would also take into consideration the reliability of the creditor’s provision of support in past debt restructurings under Fund-supported programs, even if the creditor does not account for an adequately representative share of total financing contributions.
Annex I. Description of Proposed Policy
If an agreement is reached through the Paris Club that is adequately representative, the Fund would rely on its current practices—i.e., arrears would be considered eliminated (for purposes of the application of this policy) for both participating and nonparticipating creditors when financing assurances are received from the Paris Club in anticipation of an Agreed Minute. Should another representative standing forum emerge, the Fund would be open to engaging with such a forum.
In circumstances where an adequately representative agreement has not been reached through the Paris Club, the Fund would consider lending into arrears owed to an official bilateral creditor only in circumstances where all the following criteria are satisfied:
prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies;
the debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution;
the decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases.
In applying the above criteria, the Fund will need to exercise judgment based on case-specific circumstances. In exercising this judgment, the Board will be guided by the following considerations:
First, an agreement will be considered “adequately representative” when it covers a majority of total financing contributions from official bilateral creditors over the program period. These contributions would comprise, and be limited to, debt service claims falling due— which represent potential debt relief—and any new financing (e.g. loans, bond financing, guarantees and grants) over and above the amount needed to service such claims. If, in a particular case, it is evident that the program parameters require less than full rescheduling of debt service coming due during the program period, this calculation could be adjusted accordingly.
Second, in assessing whether a debtor is acting in good faith, the Fund will consider, inter alia, whether the debtor has approached the creditor to which it owes arrears either bilaterally or through a relevant grouping of official bilateral creditors; has offered to engage in substantive dialogue with the creditor and has sought a collaborative process with the creditor to reach agreement; has provided the creditor relevant information on a timely basis consistent with the Fund’s policy on confidentiality of information; and has offered the creditor terms that are consistent with the parameters of the Fund-supported program. If the debtor requested terms from an official bilateral creditor that would result in financing contributions that exceeded the requirements of the program, it would generally not indicate good faith.
Third, in assessing whether the Fund’s decision to lend into arrears owed to an official bilateral creditor would have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases, the Fund will consider the signal that such a decision would send to official bilateral creditors as a group, given the specific circumstances of the case. In particular, this criterion would [normally] not be satisfied where the creditor or group of creditors that has not reached agreement with the debtor accounts for an adequately representative share, i.e. a majority, of total financing contributions from official bilateral creditors over the program period, as defined above. Separately, an assessment of whether the third criterion is satisfied would take into consideration the reliability of the creditor’s provision of support in past debt restructurings under Fund-supported programs, even if the creditor does not account for an adequately representative share of total financing contributions.
An official bilateral creditor may choose to consent to Fund financing notwithstanding arrears owed to it. In such cases, the Board would not need to make a judgment as to whether the three criteria above are satisfied. The Fund would, nevertheless, continue to encourage the parties to come to an agreement during the program, since the regularization of arrears is an objective of any Fund-supported program and important for the functioning of the international financial system at large.
There may be emergency situations, such as in the aftermath of a natural disaster, where the extraordinary demands on the affected government are such that there is insufficient time for the debtor to undertake good faith efforts to reach agreement with its creditors. When a judgment has been made that such exceptional circumstances exist, the Fund may provide financing under the Rapid Credit Facility or the Rapid Financing Instrument despite arrears owed to official bilateral creditors and without assessing whether the three criteria above have been satisfied or obtaining the creditor’s consent. However, it would be expected that the Fund support provided to the debtor in such cases would help advance normalization of relations with official bilateral creditors and the resolution of arrears, so that the approval of any subsequent Fund arrangement for the member would again be subject to all three criteria set out above.
This policy will enter into effect immediately and will apply not only to Fund financing under existing Fund arrangements but also to future financing requests. Further, so long as unresolved arrears owed to official bilateral creditors are outstanding, every purchase or disbursement made available after the approval of the arrangement will be subject to a financing assurances review by the Board to determine whether this policy continues to be met for the further use of the Fund’s resources in the member’s circumstances.