IMF Staff Suggests Tighter Debt Rules to Improve Restructuring

The International Monetary Fund may have been too optimistic in assessing the debt sustainability of some borrowing countries and could toughen loan conditions in an effort to make debt restructuring more successful, according to the fund’s staff.

Sovereign debt restructuring cases in recent years have often come “too little and too late,” IMF economists and legal experts wrote in a report published today. The Washington-based fund came under pressure at times from other public-sector creditors to accept delays in restructuring and should consider changes to its assessment rules, they wrote.

“In hindsight, the fund’s assessments of debt sustainability and market access may sometimes have been too sanguine,” according to the report, which the IMF board reviewed on May 20. The board, in a separate statement, asked staff to continue its analysis.

Delays in restructuring “were also sometimes facilitated by parallel incentives on the part of official creditors, who accordingly may have an interest in accepting, and pressuring the fund to accept, sanguine assessments of debt sustainability and market reaccess.”

Greece, which last year pushed through the largest sovereign restructuring in history and has received two bailouts from the IMF and European nations, is among the cases that motivated the fund to review its policy on the matter. Staff will continue exploring potential changes to its own guidelines, with a potential decision in a year, according to the IMF.

Tougher Rules

“There is scope for increasing the rigor of debt sustainability and market access assessments and tightening lending policy requirements,” IMF staff wrote.

The report also said that “there may be a case for exploring additional ways to limit the risk that fund resources will simply be used to bail out private creditors.” It suggested some form of creditor “bail-in” measure as a condition for fund lending in cases where it’s not clear that debt is sustainable and member nations have lost market access.

In the report, the staff said market-based approaches to restructurings including so-called collective-action clauses have worked “reasonably well.” Those arrangements aren’t a always effective, the report said, citing litigation involving Argentina. The South American country and some holders of its defaulted debt have been in U.S. courts trying to resolve a dispute over the nation’s record $95 billion default in 2001.

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