Debt bailouts or workouts?

Just as there is little agreement about the causes of Argentina's collapse, so there is no consensus about how to prevent similar crises or deal with them once they have arrived. In the immediate wake of the 1997-98 collapse in East Asia, the IMF came in for unprecedented criticism, not only over its specific policy advice, but also over whether existing financial institutions are really capable of managing such a volatile world economy. But as that crisis subsided, serious talk of reforming the "international financial architecture" also declined. With the global economic slowdown last year -- worsened by the September terrorist attacks and Argentina's crisis -- such discussions have begun to revive, but so far only in a piecemeal fashion.

One area of debate has revolved around the foreign debts of large financially troubled economies. In Mexico, Indonesia, Turkey, Brazil and a few other cases, the IMF frequently helped put together massive loan packages to forestall outright default or the spread of financial instability to other countries, in return for very stringent austerity measures by the recipients. These, however, were often criticized by some as simply throwing good money after bad, and by others as using public funds to "bail out" private creditors, who often knew the risks they were taking. Moreover, with financial crises coming so frequently and conservative G-7 politicians reluctant to vote significantly greater funds for the IMF, there was concern the Fund's limited resources could become dangerously overstretched.

The first sign of a possible shift in approach came in mid-2001, when the IMF and US Treasury declined to put together a major package for Argentina. They seemed less concerned than before about the risks of contagion -- and indeed, so far the international impact of the Argentine crisis has been modest, except on a few neighbouring countries.

Then in two major speeches in the last months of 2001, Ms. Anne Krueger, the IMF's first deputy managing director, stirred a flurry of debate when she proposed an alternative to perpetual bailouts. Countries that simply could not service their large debts, she suggested, should be able to apply for a form of international bankruptcy protection. Based on domestic bankruptcy laws that safeguard individual or corporate debtors from losing everything to their creditors, such a system would permit "a temporary standstill in a country's debt repayments," while an arbitration body helped negotiate a "workout" of the debt obligations between the country and its major creditors.

As in a domestic bankruptcy court, Ms. Krueger noted, such a process would oblige a debtor country to negotiate "in good faith" for at least partial repayment. Any agreement reached with major creditor banks and financial institutions would then be binding on all the country's creditors, including "vulture" companies that speculate in the secondary market for developing country debt.

At a discussion of the proposal at UN headquarters in January 2002, Mr. Michael Chamberlin, executive director of the US-based Emerging Markets Traders Association, termed Ms. Krueger's proposal a "step in the wrong direction," even a "terrible idea." Mr. Frank Fernandez, chief economist of the Securities Industry Association, also rejected the notion, claiming that it would "deter investors" in emerging markets. "The best we can do," he said, "is shelve this proposal.".

From the other side, the US, UK and French governments have expressed interest in the recommendations. Significantly, a number of analysts and non-governmental organizations (NGOs) that have long been agitating for debt relief for developing countries have also welcomed the proposal, despite their general scepticism of IMF policies. Mr. Jeffrey Sachs, head of Harvard University's Centre for International Development, noted shortly after Ms. Krueger's first speech that he had been advocating such a scheme for 15 years. He was "pleased and surprised that so much progress has been made so quickly."

Mr. Jürgen Kaiser, coordinator of the German Jubilee anti-debt movement, said that Ms. Krueger's proposal was basically a "good idea." He wondered, however, why such a scheme should be limited only to middle-income countries, and recommended extending it to poorer countries that also had unsustainable debts. "We need an open framework," he said at the UN discussion. He also urged that debts owed to the IMF not be exempt from such a "workout," and emphasized, in agreement with some IMF officials, that the Fund itself should not serve the function of an arbitration court, since it too is a major creditor. Mr. Kaiser and other NGO activists have proposed that a more neutral, independent body be set up, preferably under UN auspices.

Alongside such ideas, African NGOs, worried about the limited impact of prevailing debt-relief schemes for poor African countries, are also pressing for an independent UN body to help facilitate debt cancellations. To solve Africa's debt crisis, said Ms. Eunice Mafundikwa of the Zimbabwe-based African Forum on Debt and Development (AFRODAD), "we need a treaty which will allow the setting up of an arbitration mechanism on debt." Specifically, she said, African countries would use such a body to seek cancellation of debts inherited from past dictatorships or accumulated because of faulty projects and programmes originally pushed by the IMF, World Bank and other donor institutions.