Sovereign Debt Restructuring
New statutes, new contracts or no change?
It was at the National Economists’ Club in November 2001 that Anne Krueger, first deputy managing director of the International Monetary Fund, threw down the gauntlet. “There is,” she said, “a gaping hole [in the international financial architecture] – we lack incentives to help countries with unsustainable debts resolve them promptly and in an orderly way. At present the only available mechanism requires the international community to bail out the private creditors. It is high time this hole was filled. This policy brief begins with an outline of the options on offer, principally the “statutory” approach of the IMF Sovereign Debt Restructuring Mechanism, and the “contracts” approach supported by the US Treasury. It includes a brief look at the history of corporate debt restructuring in the United Kingdom and the United States, to see what light this might shed on the current lively debate. There follows a strategic analysis of why reform is needed to limit the risk of investors’ moral hazard in the international financial system and the value of “keeping your options open.” After a brief discussion of next steps, we conclude that, despite the apparent dissonance, the approaches taken by the IMF and the US Treasury could be complementary rather than contradictory. The way forward is to proceed with contractual changes, while keeping the option of statutory intervention very much alive.