Transcript of a Teleconference on Sovereign Debt Restructuring Mechanism with Washington-based Journalists and First Deputy Managing Director, Anne Krueger
April 1, 2002
Transcript of a Teleconference on Sovereign Debt Restructuring Mechanism with Washington-based Journalists and
First Deputy Managing Director, Anne Krueger
International Monetary Fund
Monday, April 1, 2002
MS. KRUEGER: Good afternoon, and thank you all for being there. I'm sure I will hear from you by name a little later on, but I thought I might just make a few brief points to start out the conversation before I take questions.
I believe you all have a copy of the speech I'm giving tonight. What we are trying to do in that speech is to explain how our thinking on sovereign debt restructuring has progressed since I first spoke on the subject last November. In the meantime, we've had a lot of discussions with the private creditor community, NGOs, academics, our member countries, including the Board, and of course among the staff.
I think that there's a fairly wide consensus that we were right in our basic diagnosis that we lack incentives for orderly and timely restructuring of unsustainable sovereign debt and that this is an important weakness of the international financial system. But I think we do now understand the problem and the potential lines along which there could be solutions better than we did then.
The approach I'll be putting forward tonight maintains that we need to give the restructuring process a sound, statutory basis, but one that puts the key decisions in the hands of the debtor and a super majority of the creditors so that they would be the ones that were handling the restructuring itself and the Fund would be not involved in that process. This is I think the key difference in the speech from last November. The original approach did have the advantage of firm, formal foundations, but a lot of people reacted uneasily about having the Fund too much in the driver's seat in terms of the rescheduling itself.
We think that relying entirely on a contractual approach using collective action clauses gives ownership to the debtor and creditors, but can't deal effectively with different sorts of debts across different credit instruments in a comprehensive way, the way a statutory approach could.
So the variant I'm proposing tonight really combines the strengths of both approaches and we think avoids most of the weaknesses of each. It's effective and comprehensive and yet it leaves the debtors and creditors in charge, and of course again we hope that this process or mechanism, if it were put in place, would be there in the background and facilitate rescheduling in a way that would very often have them happen voluntarily without resort to the formal mechanism.
We don't expect the mechanism itself to be activated formally very often. First off, there aren't very many countries that need any kind of debt restructuring and, secondly, as I said, the incentives to get something done would be improved, the process would be more predictable, and so it could happen without it, but the formal framework does need to be clear and predictable if it is to encourage creditors and debtors to meet and agree between themselves.
We don't think collective action clauses alone can do as much. Wider uses would be helpful in solving debt problems, especially liquidity problems where the debt isn't completely unsustainable, but when you really get into a circumstance where you need a reduction in net present value and intercreditor equity is important. We think that there would be awkward mechanical delays and things like that.
We need, however, to make more of an effort to promote collective action clauses and to do whatever else could be done so that if and when such a problem should arise again, we would, in the international community, be able to handle it with less delay and less cost to the country involved.
So with that introduction, let me take your questions.
QUESTION: Ms. Krueger, last November you said that you expected it would take years before consensus could be reached on this. Now that you have had an initial round of reactions, what's your estimate on that?
Second of all, would you still have the IMF as the one that would be making the formal declaration of a standstill?
MS. KRUEGER: Well, let me take them in order.
As to years before it could be done, if you went for an amendment of the articles, as we think might be the most efficacious way to get universal agreement. That would clearly be a process that before the mechanism was fully activated would take a couple of years, so I would distinguish between the time for getting consensus and the time for getting it activated. I think there's some hope that a consensus might evolve sooner than that, but until we have it, we don't know. So that's an open issue.
Clearly, if we did get a consensus to amend the articles along the lines I'm discussing tonight, then the process of amendment and ratification would be I think a matter of a couple of years, yes.
The original talk had the IMF declaring that, yes, we've always said that the debtor would have to ask for a stay or a standstill or it wouldn't be granted, and that's still true. There's no change in that.
What we initially then said was that the Fund would then validate it in the sense of sort of certifying that there was cause for it. The change tonight is not to change that. We think it would take a while to have the creditors organize themselves, and we would expect to have a mechanism whereby that could be done and that could get underway, but only after the debtor had requested it, the Fund had validated it.
Once they got underway, then the proposal is that the creditors themselves, once they had their creditors committee organized, would be able to validate the stay and say, yes, the debtor was negotiating in good progress and so forth. So we have changed it to the extent that we would still have the Fund doing the initial validation just because it takes a while to assemble a creditors committee. Once that committee was assembled, they would take over.
QUESTION: How long would that initial validation last?
MS. KRUEGER: That's not something that we put a firm, hard number to. I think our talks internally we sort of thought, we are told by our capital markets people that it normally takes about 90 days for the creditors to present their claims, have their claims validated, be sure there's a notification period so everybody can submit their claims and so on.
QUESTION: But it would be variable depending upon the realization of that, the validation of, the submission of claims and so on.
MS. KRUEGER: That's certainly a straightforward way to go.
QUESTION: If a country is participating in this mechanism and breaks one of the rules, let's say by paying a nonpriority creditor, for some reason, they might be punished by the credit markets later, but would the IMF take any action against them as one of their own members?
MS. KRUEGER: Well, certainly once they've called a standstill and if they did do such a thing, I would have thought that would be negotiating in bad faith in the meantime, and certainly that would be cause for concern. I think one of the things that we do respect is the need for intercreditor equity in these things, and so I think that—in a way, I can't imagine what incentives a country would ever have to do that. So I'm having trouble answering your question, but I think the answer is certainly this is something that would raise real questions as to whether the debtor was negotiating in good faith with its creditors.
QUESTION: Just a question on amending the articles of the IMF. That would require new laws and a super majority in all of the 183-member countries?
MS. KRUEGER: Well, to amend the articles of the IMF requires 85 percent of the shares and a vote of 60 percent, I think, of the members of the Fund, the membership. So it's both a number and a share criterion, both of which have to approve it. Once that happens, how it goes through in individual countries is a function of their own legal arrangements. In some countries, automatically treaties take precedence over domestic law, and so it's automatically enacted; in others, enabling legislation is required.
QUESTION: Do you have a definition of what you mean by a super majority and how would you calculate the claims of different assets classes, and would domestic owners of foreign currency debt be included?
MS. KRUEGER: Let me take those in order. There are several parts to that.
As to how we would calculate claims, that's I think exactly the same mechanism as is used in any bankruptcy proceeding, whereby the bankruptcy court person or creditor or group that does that basically hears from Joe Blow who says I've got a bond due in 2008, paying such and such an interest rate, et cetera. Someone else says, well, I've got a bank credit outstanding that's a syndicated loan with the following other banks due in 2005 at such and such. The basic idea is just calculate net present value and the various claims, add them up and give everybody their proportional share.
Obviously, it's more complicated in the details when you get a lot of creditors, and a lot of different trade credits and all of the other instruments, but that's the basic idea. And I think we're talking about doing exactly the same kind of mechanical "subject to rules" thing.
As to the amount of the super majority, that is something that obviously would have to be decided by our membership. The numbers that have been I've heard bandied around go between about 60 and 75 percent. I think we want to do a little bit more empirical investigation on that. One of the concerns is, of course, the very large number of retail holders that you can have and the risk that if you take super majority too high, you just wouldn't get enough people coming in. Obviously, you don't want it too low to deny creditor rights, so it would be a balance there.
The issue of domestic holders of debt is an interesting one. If you do things by credit instrument, in a way they have to be included because most credit instruments are ones that are held by both domestic and foreign residents. On the other hand, there are some other issues which make it difficult, one of which is simply the issue of how much is held by the banks and what are you going to do to the domestic banking system.
In my talk tonight, I will simply say that this is a difficult issue and that there are a number of considerations that have to be addressed, and I think we have to do further work on that.
QUESTION: Do you have any model in your head or any sort of existing model of how the judicial panel might work? Is it going to be based on a sort of WTO model or World Bank dispute model or what?
MS. KRUEGER: Well, it could be any of those or it could actually be something from the International Court of Justice, whereby you have these judges who are called in for particular cases, and so you have—well, as WTO does, too—we don't have a model in mind, but I think the idea is that there would be a panel that could be called in as these cases arose.
QUESTION: The Bush administration has been fairly international treaty shy in its first year or so, and John Taylor's comments about the workout mechanism were not exactly glowing, though he seemed cautiously open to it. How do you gauge your political chances of getting this over with your biggest shareholder?
MS. KRUEGER: Well, I don't think that we're there yet. I think we're still talking to lots of people in the private sector and in the official community here and abroad. It's an ongoing discussion, I know John is going to be talking on tomorrow, and he's going to be pushing collective action clauses as much as he did in his testimony. He and I have talked about it. He says he doesn't want to foreclose discussion at this stage, and we certainly are willing to support trying to see what collective action clauses will do.
My view is that, okay, let's see what they can do because, of course, they could be put in faster. On the other hand, I think they are going to be awkward instruments to use across creditor claims of different bond classes, even much less between bonds and bank loans and trade credits and so on. So, with all of that, we'll encourage CACs, and we'll have an ongoing discussion and see where it goes.
QUESTION: J.P. Morgan has its own news to clients out there called the Two-Step Sovereign Debt Restructuring Plan, which it says could be in place to help Argentina. Do you think that some aspect of your plan or something along the lines that J.P. Morgan is suggesting could be in place to help Argentina?
MS. KRUEGER: Well, unless I misunderstood, and the J.P. Morgan plan is the one where you give creditors a 5-percent sign-up fee so to speak?
MS. KRUEGER: Well, this is not at all about Argentina, of course, because it couldn't happen that fast, but I mean, if you think about it, the amount of money that would have to go in even to any of these things as an up-front payment, I think Morgan's number is 5 percent of face value. That's pretty big, and I suspect that that one is just—you know, obviously, creditors like anything that will give them a higher probability of a bigger payout, but this is not something that I think would fly. I haven't heard any support for it in the international community yet.
QUESTION: Do you see any of these proposals being in place to help Argentina?
MS. KRUEGER: I don't see how. I mean, Argentina is there now, and any of these things, I mean, even collective action clauses can only go in new contracts unless you do some renegotiation. If you renegotiate, I guess you're talking a long period of time, although I don't know how long, and if you don't renegotiate, why then you're going to be starting with whatever is a new debt, and Argentina is not going to have very much of that to the private sector in the near future.
QUESTION: Outside the U.S., there's obviously been some support from the G-7, but not very much from the emerging markets with the exception of Brazil, who has come out against it. Do you think you can win them over as well?
MS. KRUEGER: Well, I think some of the emerging market authorities that have contacted us have been more supportive than that. So I think that we have not met the degree of opposition that your question implies. Again, we are in a discussion stage, so nobody has really given a formal vote on either side. The Brazilian authorities have expressed some doubts, but as we talk to them, I think those doubts are less strong than they were, and meanwhile I think the Korean authorities, for example, are strongly supportive. I think there are others that are at least mildly supportive.
So I think there's very little strong opposition so much as there are people who are raising questions, and as I said, there are some issues we haven't sorted out yet.
QUESTION: What sort of response have you had from countries who, though they may not be an Argentina-style crises now, could possibly be in, though, in the next couple of years, some of the emerging markets that are not so fiscally stable? How do they look at this?
MS. KRUEGER: Well, we try to have an early warning system to identify countries that are in that situation, but as of right now I don't think we've got our list of countries in that situation anything like on the horizon. So I don't know how to answer the question.
QUESTION: I wonder if you could come back to some of the points you were making, if you could flesh them out a bit, about how this differs from what you were saying last November. You don't use the term "standstill" in this speech today. I don't know if that was deliberate or—
MS. KRUEGER: Not particularly.
QUESTION: Not particularly? You used the term "stay," I suppose is—
MS. KRUEGER: It's the same.
QUESTION: But, I mean, to what extent do you feel that you've watered this down a bit in response to some of the objections that were raised by people in the financial community?
MS. KRUEGER: The big, I mean, I don't think we've really watered it down, but a lot of people said, "Well, look, this gives the Fund too much power. The Fund is a creditor, and therefore would have a conflict of interest in deciding creditor claims and stuff like that."
And we never felt, we just felt this was a job that had to be done. We are busy in business anyway of doing the medium-term projections going forward, which in turn implies what is sustainable debt, so we thought it would make sense to have the Fund basically doing that job, but lots of other people seem to think otherwise.
So the big change in the proposal is simply the organization of the creditors who themselves can then vote on the stay, whether it would be continued or not, and obviously then they would, as we proposed, undertake the negotiations for the restructuring, and then when it's done, as happens even now, I mean, quite clearly what the Fund says is sustainable by way of primary surpluses going forward, in some sense, does determine the parameters for any restructuring, and that's always been true. That's not a change.
QUESTION: One thing that Secretary O'Neill has said, repeatedly has said, while a sovereign debt restructuring mechanism would be nice, he wants to focus on avoiding the situation where countries get into an unsustainable situation, and he said that he thinks it's possible for countries, for developing countries, if they were to live within their means, to have investment-grade ratings on their debt.
Do you think that that kind of a circumstance is possible? And, if so, do you think the IMF could start issuing analyses of what a sustainable debt level for a country, say, like Bolivia would be?
MS. KRUEGER: Well, again, you've got lots of parts to that question. Let me see if I can go at them in turn. Quite clearly, we are in the crisis prevention business, and there is no doubt that we try all the time in our Article IV consultations and everything else, to be talking with the authorities in terms of their vulnerabilities, ways of addressing them and ways of strengthening their macro and other policies in such a way that they will be more crisis avoiding and that we won't have any future crises.
Of course, if it so happened from here on out there is never another financial crisis in any emerging market, we will declare victory with great glee and great pride. That's not an issue.
I think the first part of it is that no matter how hard we try to do that, first off, there are some countries that have really unanticipated things happen to them and where their policy frameworks aren't totally strong, and there's always a question of how strong you have to make the policy framework in order to be absolutely foolproof against all shocks. The answer sometimes is stronger than you would like in terms of giving up other things. So there is always going to be an outlier there, and there will be some crises. So that is the first part of the answer.
Turning then to the question of can all countries get to investment grade status? I, of course, think so. I think that's what we're all about in the development business is getting everybody there. Some will take longer than others. There are more actions that need to be taken. There is not one single one-size-fits-all mechanical formula in all cases, but certainly that's what we're working toward, and certainly some developing countries have gotten policy stances now that really are—make them eligible for investment grade, as we know, and 20 or 30 years ago they certainly worked. So we've had some successes along those lines due to their policies, and I hope with our support.
Now, in addition to that, there is of course our thought that once we have or if we have a sovereign debt restructuring mechanism in place that enables people, market participants, to calculate somewhat better what the various possibilities are in the future, that in itself would get the market to react, or I guess make better judgments is a better way to say to it, to the circumstances in which they should or should not lend. That, in turn, might make debt volumes more sustainable on that ground as well.
So we see the SDRM as addressing the crisis issue, but also being part of crisis prevention.
QUESTION: Could you talk a little bit about what you would like to see happen at the spring meetings. Will this be debated? Will there be a vote in any way on this proposal? How will the spring meetings move this forward?
MS. KRUEGER: Basically, I don't think we expect much at the spring meetings on this. It's not really on the agenda. There may be some discussion of it in the hallways or informally, but it's not planned. We think, at this stage, we're still very much in the formulation, discussion with various groups both in the private and the public sector and that, at this time, it's not appropriate to be asking our members for anything.
We have had meetings with our Board. Our Board has endorsed our continuing to work on it, and at the moment that's what we foresee doing. I think that that's, you know, it's sort of—basically, I do not see the spring meetings as any kind of milepost along the way in terms of a discussion.
I should tell you I have about 5 more minutes.
QUESTION: We assume that the main constituency to convince here is the U.S. as your main stockholder, but do you see it that way or do you see the creditors' representatives as more important, the major financial institutions and banks?
MS. KRUEGER: Well, of course, I think in every country the various players are part of the political constituency domestically, so I don't really see a difference in that regard between convincing some in the private and the public sector, although of course there are differences of emphasis, and weights, and all of that.
I don't think the U.S. is the only country that we need to be talking to. I think there are concerns in other countries, and that we basically are not trying to do something simply because it will or will not please one shareholder, but because it will indeed address the issues of crisis prevention and management, and I hope to get enough discussion and understanding so we can build a consensus.
As I said, that discussion already has led us to change our thinking on some things and the inputs of people from the academic policy communities, the official communities, the private sector have all been very useful, and I think we just really want to keep that process going along in all parts of the world.
QUESTION: I just wanted you to clarify, again, I'm sorry I'm being so slow on this, but you said when you were talking about some people felt that the original proposal the IMF was too much in the driver's seat, is the one change that you talk about the IMF not declaring temporary debt standstills or is that just modified from how it was?
MS. KRUEGER: Okay. We think that it is possible to go without debt, but we think that there would be a period of approximately 90 days, during which the creditors would not have organized, so there could not be a creditor committee. We think that we would validate the stay initially and then that the creditors would organize, and as soon as they were organized, they would basically then take over the validation process having to endorse it initially and announcing a period of time for which it would hold while negotiations were in progress.
QUESTION: But just to clarify, the Fund would have a very important role to play, even at that point, in the sense that if it were showing basic approval of what the country was doing, in terms of macroeconomic policy, and in negotiating in good faith and all of the other things that they're supposed to do, so, in effect, you would still be—
MS. KRUEGER: Yes, the Fund has always of course in these circumstances been working with the authorities to get to a sustainable fiscal, monetary, exchange rate, trade, banking, financial system framework that offers promise of a resumption to growth and in that process this does look toward the medium term, asking what is fiscally and otherwise sustainable. That has always happened. That would continue to happen.
QUESTION: If I could just clarify on that same point, some people may argue that that still leaves you with a gatekeeper. You still make that initial determination, and that initial determination in effect, if not in practice, puts the country in default, it puts its debt ratings in default, and it cuts the value of its debt accordingly.
And some people may think that, okay, so it's only 90 days, but by making that determination, it is sort of, if you build it, they will come because then the creditors need to organize, and they need to follow through in the process. They can't, in 90 days' time, organize and say we don't validate it, we're not going to restructure it because the debt is now in default, right?
MS. KRUEGER: Not—
QUESTION: The problem remains.
MS. KRUEGER: Not necessarily. But on the other hand, we assume that the debtor would never, in good faith, call for such a restructuring, unless, in fact, they couldn't be fruitfully servicing it any way. And, indeed, if you look at what has happened to the prices of some debts in the market, we think that perhaps the falling price would be less this way.
The second thing is, the Fund would not, I mean, it is not necessary, as part of proposal, that the Fund validate it, but we think that there needs to be a validation, and we think the creditors do take time to organize. We don't think it's much of a concern because we think most of our members are highly responsible, but we do think without somebody validating it somehow, initially, there would be some risk if some member country gets a new government which irresponsibly just says, "We're not going to pay our debts," and even though they have all of the foreign exchange in the world, they just announce that. And the Fund's role initially would just be to say, yes, there's a case for something here, nothing more than that.
But that's, as I said, something that wouldn't necessarily have to be part of it, except for the fact that otherwise you would have this big, long delay where things would—you'd have a big, long delay, during which you would sort of be in limbo, unless somebody validated, and they could start work on how do the creditors get organized.
MS KRUEGER: Okay?
Media Relations: Okay. Great. Thanks for coming. 7:15 embargo, and if you've got any follow-up questions, give me a ring in Media Relations.