Krueger backs off

["Ian Murray" <seamus2001@xxxxxxxxx>]

IMF Scales Down 'Bankruptcy' Plan
By Paul Blustein
Washington Post Staff Writer
Tuesday, April 2, 2002; Page E01



The International Monetary Fund, which is trying to forge a new approach to handling financial
crises, yesterday agreed to limit its role in a proposed "bankruptcy" procedure for countries
overburdened with debt.

Anne O. Krueger, the IMF's deputy managing director, backed away from some of the most controversial
elements of a proposal she made in November that would effectively give the IMF the power to grant
financially strapped countries protection from creditors. Krueger maintained that the modifications
did not fundamentally change the plan, but some analysts said that at first glance the original
proposal appeared to have been watered down in important ways.

And even after modifying the initial plan, the IMF must still overcome misgivings by the Bush
administration, Krueger acknowledged.

Krueger's comments, in a speech and a conference call with reporters, underscored both the IMF's
determination to establish new international rules aimed at quelling crises and lowering the
obstacles it faces in doing so. The fund has been stung by criticism over the way it addressed
crises in Asia, Russia and Latin America, where it granted huge loans that often failed to halt
turmoil while bailing out some wealthy banks and investors.

The idea behind Krueger's November proposal was to create a procedure for giving crisis-stricken
countries a means of halting panics and keeping investors from pulling their money out of the
nation, which would give political leaders time to work out debts in an orderly fashion -- much the
same as people and companies get in U.S. bankruptcy courts.

The proposal marked a radical shift for the IMF, which has tended to frown on measures that restrict
the flow of capital across international borders, especially when they keep debtors from paying
their obligations.

Under the proposal, when a country had clearly reached the stage of being unable to pay its debts,
the IMF could approve its request to declare a "standstill" -- a temporary suspension of payments --
on condition that the country was taking steps to put its economy on a sound footing. The IMF's
approval would prevent creditors from attempting to collect their debts by going to court.

The version Krueger outlined yesterday retained much of the basic thrust of the original plan, but
she bowed to complaints from international investors and the U.S. Treasury that the IMF should not
assume too much control over how the standstill would work or how debts would be restructured.

"A lot of people reacted uneasily to having the fund too much in the driver's seat," Krueger told
reporters.

Under the new plan, a country in financial distress could ask the IMF to "validate" a "stay" on its
debt payments for a short period -- say, 90 days -- while creditors organize themselves. After that,
a supermajority of creditors -- Krueger said the figure might be 60 percent to 75 percent -- would
have the right to decide whether to allow the stay to continue and whether to accept a
restructuring.

As with the original plan, one of the main purposes of the revised proposal is to make it possible
for a country to reach a debt-restructuring agreement with its creditors without obtaining consent
from all the creditors, which is required in many bond contracts.

In her speech, which was delivered at the Institute for International Economics, Krueger suggested
that the IMF's articles of agreement be amended -- which has the same legal force as an
international treaty on the fund's 183 member countries. That way, the laws governing creditors'
rights would be effectively changed.

Asked about the reaction of the U.S. government -- the IMF's dominant shareholder nation -- Krueger
acknowledged that John Taylor, the undersecretary of Treasury for international affairs, will
maintain his preference for an alternative approach in a speech he is scheduled to deliver to the
same audience today. Taylor has said he favors broader use of "collective action clauses" in bonds
issued by sovereign governments -- provisions that allow a supermajority of bondholders to approve a
restructuring. One major problem with that idea is that it wouldn't cover bonds that have already
been issued without such clauses.

Krueger disputed assertions that the new approach is weaker than her November proposal. But Jeffrey
Sachs, a Harvard professor who has long favored a bankruptcy system for sovereign governments, said
that while he has not had a chance to review Krueger's speech, he was concerned about the idea of
limiting IMF-backed standstills to 90 days.

Under U.S. bankruptcy law, creditors don't get to vote after 90 days on whether to continue a
standstill on their claims, Sachs noted, and giving them such rights might "throw too much power" to
them, he said.