IMF shifts approach to bailouts

Written by New York Times | Washington | Updated: Nov 28 2013, 07:55am hrs
The International Monetary Fund (IMF), convinced that Europe erred in forcing debtor countries like Greece and Portugal to bear nearly all the pain of recovery on their own, is pushing hard for a plan that would impose upfront losses on bondholders the next time a country in the euro area requests a bailout.

Scarred by its role in misjudging the depth of the Greek recession and rebuffed in its attempt to get European governments to write down their Greek loans, the IMF is advocating a more aggressive approach to debt restructuring to try to ease the rigours of German-style austerity.

But the proposal which is still being hashed out behind the scenes by top economists and lawyers at the fund is encountering stiff resistance, not just from the powerful global banking lobby, but also from European policy makers, and more recently, the US government, which is the IMFs largest financial contributor.

Germany is leading the opposition. Policymakers in Berlin and Frankfurt see the Greek debt restructuring in 2012 as a one-off. And they regard any deviation from their core principle that debilitating debt is to be reduced almost solely via the hard medicine of spending cuts and tax increases as an escape from fiscal responsibility.

The IMFs debt plan has been endorsed by the bodys top leadership, including the first deputy managing director David Lipton, a widely respected former Treasury official. The initiative is seen by a number of outside sovereign-debt experts as the best of a range of admittedly tough choices in responding to future debt crises.

But the pushback against the proposal, which has caught IMF officials off guard, has delayed a planned introduction early next year, with any blueprint now not expected to be presented to the funds executive board until June, at the earliest. The fund declined to make any executives involved in the project available for comment.

At the root of the issue is the long-simmering dispute between Europe and the IMF over who should pay the bill the next time a country in Europe needs a bailout: Taxpayers and workers, or bankers and investors.

These tensions were on full display during the IMF meetings in Washington this autumn, when Jrg Asmussen, the powerful German representative on the European Central Banks executive committee, explained why Germany vetoed the funds idea that some of Greeces debt, most of it now held by Europe, should be written down. The fund is talking about other peoples money, Asmussen, cracking a thin smile, said at a German-sponsored policy forum.

In some ways, the clash is a function of whose money is at stake.

With Europe on the hook for around 340 billion euros ($460 billion) in loans to bailed-out countries in the euro area, compared to 79 billion euros for the IMF, it is not surprising that Asmussen and his sponsors in the German finance ministry have responded to the IMFs push for others to accept losses on existing debt by saying, in effect, you first.

That could never happen given that the IMFs status as a preferred creditor meaning its loans get paid back before those of any other lender is perhaps global finances most sacred writ.

According to recent data from the European Central Bank, euro area countries have 6.4 trillion euros in government bonds outstanding, 70% of annual economic activity in the currency zone.

Given the strains within the euro zone, a fiscal crisis of some sort is considered highly likely, especially in countries with higher debt burdens like Italy or Spain. Under the funds proposal, the next time a country has trouble tapping debt markets, it would be given a brief period to resolve its problems. During this so-called standstill and here is the rub private sector creditors wou-ld be forced to hold on to their bonds (and take a loss), as opposed to just dumping them.

What it comes down to is that next time around, the IMF does not want to just repay private creditors, said Jeromin Zettelmeyer, a sovereign debt expert and a lead author of a recent paper that supports the funds emerging position on the topic.

While it was expected that the global banking lobby and German officials would oppose a plan requiring them to accept debt losses as inevitable, the emerging opposition from the Obama administration has come as a bit of a surprise. It is important that efforts to increase the orderliness and predictability of the sovereign-debt restructuring process be undertaken on the basis of a consensual, market-based contractual fr-amework, Holly Shulman, a Treasury spokeswoman, said regarding the IMF proposal.

Translation: We dont like plans that mess around with the rights of bond investors. We didnt like them 10 years ago, and we dont like them now.

Amid the dense, carefully couched jargon of the funds initial paper on the topic, critics have latched on to one sentence in particular.

In making the case for the private sector to share the cost of a bailout at the outset of a rescue, the authors suggested that a presumption could be established that some form of a creditor bail-in measure would be implemented as a condition for Fund lending.

It was a bland bit of bureaucratese, but to many it crossed a red line.

If you are talking about debt reduction at the beginning of a programme, then its a problem for me, said a senior government official in Europe, who was not authorised to speak publicly. Middle-income countries in Europe must pay their creditors its the normal thing to do.

But to IMF policymakers it is precisely this resistance to debt restructuring that has made Greeces economic recovery so elusive and kept much of southern Europe mired in recession. And they want to be sure that next time, things are done differently.