26 November 2013

NYT: IMF shifts its approach to bailouts

The IMF 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. But the proposal is encountering stiff resistance, with Germany leading the opposition. (Includes link to Expert Group report.)

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 United States government, which is the IMF’s largest financial contributor.

Indeed, despite tough talk on both sides of the Atlantic about making bond investors share the cost of bailouts with taxpayers, the world’s largest economies seem to have accepted the dire warnings advanced by investors and bankers that the IMF’s proposed new approach would badly roil still-fragile credit markets in Europe.

“The fund has been bruised and abused", said Susan Schadler, a former IMF economist and the author of a recent paper that argues the fund broke its own rules in lending to near-bankrupt Greece. “But in the end there is no trade-off between austerity and debt restructuring — you have to do both", she said.

Germany is leading the opposition. Policy-makers 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 IMF’s debt plan has been endorsed by the body’s 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 fund’s executive board until June, at the earliest. 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.

With Europe on the hook for around €340 billion in loans to bailed-out countries in the euro area, compared to €79 billion for the IMF, it is not surprising that Mr Asmussen and his sponsors in the German finance ministry have responded to the IMF’s push for others to accept losses on existing debt by saying, in effect, 'you first'. That could never happen given that the IMF’s status as a preferred creditor — meaning its loans get paid back before those of any other lender — is perhaps global finance’s most sacred writ.

Full article

Further reporting © WSJ

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See also: The Role of the IMF-in Future Sovereign Debt Restructurings © SSRN

This Report summarises the consensus views of the Expert Group on the practical implications of the suggestions contained in paragraph 32 of the IMF's April 26 paper, viz:

“There may be a case for exploring additional ways to limit the risk that Fund resources will simply be used to bail out private creditors. For example, a presumption could be established that some form of a creditor bail-in measure would be implemented as a condition for Fund lending in cases where, although no clear-cut determination has been made that the debt is unsustainable, the member has lost market access and prospects for regaining market access are uncertain.”

© New York Times