The International Monetary Fund (IMF)is to draw up urgent proposals for a bankruptcy system that will provide crisis-hit countries such as Argentina with the protection currently offered to companies.
Fearful of a continued run of financial crises, the IMF has been given six months to come up with a blueprint that will provide countries with a mechanism for coping with debt defaults.
The proposals were put forward recently at an IMF/World Bank meeting amid admissions by IMF members that the recovery in the global economy had not taken hold as rapidly or as strongly as hoped a few months ago and as concerns grow that Brazil may be the next country to be faced by a run on its financial markets.
British Finance Minister Gordon Brown said the past year, which has seen banks closed and rioting on the streets of Latin America, had made the case for developing a more consistent approach to dealing with financial meltdowns. The proposals would allow sovereign nations in effect to file for bankruptcy in an international court and restructure their debt loads.
”We agreed on the need to strengthen the mechanisms for crisis prevention and crisis resolution,” Brown said. The world economy faced a ”testing time”.
The plans have met an angry response from Wall Street and London banks, which lend vast sums to Latin America and other parts of the developing world. Citigroup and JP Morgan Chase, two of the biggest lenders, have already written off millions of dollars in bad debts from the Argentina crisis this year. The economic woes in Latin America have been a strong factor in the slide of world stock markets.
United States Treasury Secretary Paul O’Neill, whose support had wavered, endorsed the idea of sovereign debt restructuring.
Argentina plunged into crisis in January when it defaulted on its debts and has since floundered, unable to agree terms for aid. There are concerns that Brazil will default on $250-billion of debt due to a collapse in confidence ahead of presidential elections next month, prompting a record $30-billion bailout by the IMF.
Policymakers in some developing countries also opposed the proposals. They expressed fears that the potential of bankruptcy might scare off lenders and only precipitate further financial ills. Brazil’s central bank chief said he was ”sceptical” about the concept.
Brown said there had been ”rigorous discussion” with the financial industry in the four years since the proposals were mooted. He denied that the industry had not been properly consulted.
The plans for sovereign debt restructuring were discussed at the IMF meeting a year ago but Brown said there had been a ”distinct shift” since.
”Things have moved forward — there wasn’t a consensus last year. We have called on the fund to develop a concrete proposal for consideration at our next meeting. ‘Concrete’ is not a word that is often used in official communiques.”
Horst Kohler, managing director of the IMF, described the bankruptcy option as a last resort and said it was not intended to undermine the world’s lenders.
”This is part of an integrated concept for better crisis prevention, to strengthen the international financial architecture and in particular have better instruments within the IMF to support countries rapidly,” he said.
Fifteen of the world’s richest countries have pledged an extra $1-billion in debt relief to help rescue poor nations hit by the collapse in global commodity prices.
Months of wrangling ended with the G7 countries being joined by some smaller European nations to top up the fund set up to reduce the debt payments of poor countries, the World Bank said this week.
James Wolfensohn, the president of the bank, said: ”The highly indebted poor country initiative [HIPC] looks to be well taken care of. One of the things that came through was a new commitment to writing cheques.”
The HIPC initiative has provided debt relief for more than 20 countries, but many have had more financial trouble as a result of weakness in the global economy.
Aid agencies said the extra money promised in Washington was welcome, but was not enough.
Phil Twyford, advocacy director of Oxfam International, said: ”This is a PR patch job on a failing initiative. We welcome additional funds for HIPC but this is the third time they have announced the same money.”
Jubilee Research said the $1-billion was a fraction off the $2-billion to $3-billion needed if HIPC debt burdens were to be brought down.
Following pressure from Britain, the G7 — which also includes the US, Germany, Japan, France, Italy and Canada — will provide the bulk of the extra cash. There have also been pledges from Sweden, Norway, Russia, Belgium, Switzerland and Portugal. — (c) Guardian Newspapers 2002