Argentina and the IMF
Brazil and the IMF
Iraq and the IMF
Russian Federation and the IMF
Proposals for a Sovereign Debt Restructuring Mechanism (SDRM) -- A Factsheet
IMF Surveillance -- A Factsheet
Technical Assistance -- A Factsheet
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By Anne O. Krueger, First Deputy Managing Director and Michael G. Kuhn, Deputy Treasurer
International Monetary Fund
Tuesday, September 17, 2002
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Mr.Hacche: Good morning and welcome to this briefing on the IMF's 2002 Annual Report, which covers the financial year that ended April 30. I am Graham Hacche, Deputy Director of the Fund's External Relations Department.
Before introducing today's speakers, let me remind you that we have a number of press and public events scheduled for the next 10 days or so, in the period leading up to the official meetings of September 28-29—that is, the meeting of the International Monetary and Financial Committee on the 28th and the Annual Meeting of the Governors of the IMF and the World Bank on the 29th, both here in Washington.
A schedule of these events is available at the back of the room. And for press who are not attending this briefing, the schedule can be viewed on the joint Annual Meetings website, which is available through www.imf.org.
Let me now introduce today's speakers. To my immediate right is Anne Krueger, the First Deputy Managing Director of the Fund. To her right is Michael Kuhn, the IMF's Deputy Treasurer, to whom Ms. Krueger may turn for questions that relate to the financial statements that are in the Annual Report.
The contents of this briefing, along with the Annual Report, are embargoed for release at 11:30 a.m. today. Again, the subject of this briefing is the 2002 Annual Report, and I would suggest that journalists focus their questions on subjects relating to the report, and as appropriate, to the upcoming Annual Meetings in Washington.
I believe that Ms. Krueger has some opening remarks, and then we'll take questions.
MS. KRUEGER: Welcome to this briefing on the Annual Report. After a very few remarks on what I consider some of the highlights of the report, I will be happy to take questions, again on the report and on the upcoming annual meetings.
The report, as Graham Hacche said, looks back at the work of the IMF in the financial year that ended last April. And of course there are pages and pages of financial statements, which is why Mr. Kuhn is here, because they get quite intricate, as all financial reports do.
But along with the financial information there is a lot of information about our activities this fiscal year and how the IMF is governed. This being the end of my first year here, I still learned quite a bit by reading parts of it where there is a great deal of explanation of how things are done.
For those of us at the IMF as well as for the international community as a whole, the year that ended April 2002 was certainly a period that would be remembered above all for the terrible and tragic events of September 11th. The terrorist attacks did of course have a substantial impact on the global economy, whose growth was already slowing, but most of those effects we think were temporary to a large degree.
The weaker global environment, slower growth, weaker commodity prices, and more risk aversion in financial markets showed through an increased demand for IMF loans by some of our member countries. The IMF exists of course to provide such loans so countries can overcome temporary financial difficulties and restore growth.
During the financial year the Fund committed to lend about US$50 billion under our regular loan facilities, up from $18 billion in the previous year. Much of this increase was accounted for by lending to two countries, Brazil and Turkey. With these activities the IMF's financial cushion was depleted somewhere but it did remain comfortable. Our net uncommitted usable resources, that is, the money available for new loans, stood at about US$82 billion at the end of the financial year. As an update, as of September 13, the money was US$68 billion, down from US$82 billion in April.
Global conditions were tough on our low-income member countries, where reducing poverty is of course the prime goal. Sustained economic growth is the only real cure for poverty. In countries which have shown a commitment to adopting pro-growth policies, which includes, obviously, a very solid macro framework, we have continued to provide support on concessional terms, which is described in Chapter 5 of the report. Our new commitments of loans to our low-income member countries under the Poverty Reduction and Growth Facility rose to about US$2.3 billion from about US$1.6 billion in the previous year.
This was an intensive year for reforms of IMF lending policies and conditionality, or the conditions attached to IMF loans. Chapter 4 of the report describes our ongoing reviews of these policies. Apart from a number of Executive Board meetings, the public were invited to comment on reforms in this area through a series of seminars held throughout the world. One review assessed our success at restricting conditions on our loans to those critical to achieving macroeconomic objectives of IMF programs, sometimes referred to as streamlining conditionality. Another looked at how to design programs such that countries assumed greater responsibility for their success or failure.
Another event of the year reviewed in the Annual Report was the establishment of the Independent Evaluation Office, which has been starting already to take a look at the effectiveness of IMF lending. Its first report, which will be released very shortly, investigates the prolonged use of IMF funds by some countries. It will be evident from the report that the office is fulfilling its mission of operating at arm's length from the IMF, and providing an objective assessment of our policies and operations, and we in the Fund believe that it is off to a very good start.
Our loans get most of the immediate attention and scrutiny, but a lot of our work is actually done to keep countries from needing a loan in the first place. Two activities that are important in this regard are surveillance and provision of technical assistance, which are described in Chapters 2 and 7, respectively. Through surveillance, which is the Article IV consultation, we monitor economic conditions in our member countries and enter into a dialogue with them on how staff perceive the required policy responses or difficulties they may be facing, and measures that might address them.
Having participated in this work for a year now, it is my view that the current system is working quite well. It is better tuned than it was to a world in which private capital flows are the dominant source of financing to emerging markets, and where capital markets are more integrated. But as the IMF's Executive Board noted in its view of surveillance this April, better coverage of institutional and structural issues, especially relating to financial sectors, improved analysis of debt sustainability, and for program countries, somewhat greater independence of the surveillance from the program work, can still improve the process further, and we continue to work on it.
Technical assistance was prominent as a part of our activities again this year, with the inauguration of a regional technical assistance center in the Caribbean and the ground work for the launch of two centers in Africa. Technical assistance can be especially valuable when the barrier to reform is not the lack of political will, but is the lack of human institutional capacity, which it is in a number of cases where the politicians want to get something done, and they just are not. Mechanisms are the knowledge of how to get processes in place which will do it.
Efforts to help individual countries through surveyance and technical assistance have to be supplemented by efforts to firm up the international financial system as a whole. Our work on crisis prevention and crisis resolution is described in detail in Chapter 3 of the report.
Last November, as you know, we started by saying that there had been much progress made in the many areas, but there remained a gaping hole—that being that we lack incentives to help countries with unsustainable debts to be able to resolve them and in an orderly manner. The shift over the past decade, or so, from bank loans to bond issues benefited emerging markets by expanding the sources of finance available to them, but at the same time, having a diverse and diffuse creditor community of bond holders can be troublesome when debt has become unsustainable and has to be rescheduled or restructured.
It is difficult to get everybody in the same room and hammer out an agreement that everyone accepts as a fair solution. There are problems of coordination, collective action and inter-creditor equity.
I am very happy that the initial speech triggered a lively and constructive debate among policy makers, academics and the many interested parties. Thanks to this, we have come a long way, in the 10 months since the first speech, in refining our thinking on how these problems have been resolved, and we have changed some aspects of the proposal. The international community has now endorsed a two-track proposal to improve sovereign debt restructuring.
The first track involves the more ambitious use of collective action clauses in sovereign bond contracts. These clauses facilitate debt workouts by providing majority action by bond holders.
The second and complementary track would involve creating a statutory mechanism to empower a super majority of creditors to make key decisions in the restructuring process in negotiation with the debtor country. A dispute resolution forum would be part of this mechanism, where the disputes in question would be as to the valuation and aggregation of claims of different creditors, much the same as happens in a domestic bankruptcy court.
As an interested party, the IMF cannot and should not be placed at the center of this forum, but we are confident that the forum could be established so that it was independent, perceived as being independent from the IMF. And there is a speech I gave on that subject on our website.
Those are some of the topics covered in our annual report. I am happy to take questions on the report and on the upcoming annual meetings.
QUESTION: I have two questions. First, why haven't you been doing Article IV's discussion with Iraq for the past few years, and what is your opinion of the current state of the Iraqi economy and how can it be affected by a possible action for the change of regime?
My second question is about SDRM that you mentioned at the end of your presentation. US$17 billion is the amount that Russia needs to pay next year. Some Russian analysts say it is even more than that. My impression is that sooner rather than later they will have to go to the bond markets again. So if you introduce this new SDRM mechanism, especially if it is statutory, how do you think it will affect a country like Russia going to the bond market, whether it will have more difficulty raising the capital that it needs? Thank you.
MS. KRUEGER: On Iraq, I do not know why we haven't had an Article IV consultation. I can check on that and get back to you. What I can tell you is that there is a dearth of information about the Iraqi economy that is available. I suspect even within Iraq that may be true, but it is certainly true from outside, so that it is very difficult to take a view on the economy for that reason among others.
As to what an invasion would do, we all know that what happens in the case of war is very unpredictable, and I think since we anyway do not know as much as we would like to know, it is very hard them to speculate on what the secondary effect of—if you have got an unknown, then something hits you, knowing what will happen is even more difficult than in general. So I would be very reluctant to pass a judgment.
Obviously, if somehow current tensions with Iraq could be resolved in a constructive way, and Iraq rejoins, so to speak, the international community, and oil flows were free and so on, this presumably would be of great benefit to the economy. So in the longer term getting the situation resolved would be of benefit, but the intermediate process I think would be very difficult to judge.
As to SDRM and how it will affect bonds, there is been a lot of discussion of that, and it is an interesting discussion. The whole idea of SDRM is not that everybody is going to default on their debt right, left and center. In fact, quite the contrary, I think SDRM goes back to crisis prevention and crisis management. Crisis prevention in the sense that I think creditors would be looking somewhat more carefully at the situation, at prospects for sustainability going forward in countries they lend to. For countries whose economic policies are in reasonably good shape, that would presumably mean that there would be more access to markets with perhaps less of a spread over LIBOR. In countries where difficulties are forthcoming, one would hope that the markets would anticipate them somewhat sooner than they have, and that in that sense the debt buildup might not be quite so extreme at the time when the creditors were looking at perhaps extending more issues.
So it seems to me that for countries where macroeconomic stance is sound, growth prospects are good and where debt is clearly sustainable, if anything, the existence of an SDRM mechanism ought to be favorable in the sense of lowering the spread over LIBOR of the country risk element.
QUESTION: In the report there is a phrase that says a growing volume of the IMF finance commitments are now treated as precautionary. Besides the commitment to Brazil that is described here, there was another, a further one. So I would like to have your analysis of how the country dealt with the commitments that it received through the IMF and what is the analysis of the IMF as of now—
MS. KRUEGER: For Brazil?
QUESTION: For Brazil.
MS. KRUEGER: Well, quite clearly, we think that Brazil's macroeconomic policy stance is sustainable going forward. Obviously, if the current high real interest rates persist, there would have to be an increase, and there would have to be further tightening of macro policy, but as of now, we believe that the market has reacted not to the underlying macroeconomic situation, but to the situation, the uncertainty running up to the election, and that as soon as that is resolved, one would see a resumption toward, quote, more normal real interest rates, unquote, in which case the whole point of the program is to enable Brazil to get through this difficult period of uncertainty.
QUESTION: Ms. Krueger, during this past year the IMF took very contrasting positions regarding Brazil and Argentina. I would like you to reflect a little bit on that, and to tell us if in doing the upcoming meetings do you see the possibility of the dialogue between the IMF and Argentina going to a more productive direction than it has so far?
MS. KRUEGER: I do not think we took such a contrasting position because I think our position with all our members is that we want to support them so that they have better prospects for raising living standards, poverty reduction and economic growth going forward.
In the case of Brazil, as I already mentioned, we see a very reasonably prudent macroeconomic stance. We see a lot of reform measures having been put in place. We see an inflation-targeting regime, floating exchange rates, a number of measures that underpin the Brazilian economy. Brazil has had a combination of bad luck, the energy shortage, then the worldwide recession coming on top of the presidential election, but it is our role to support those countries where policies show promise and where there is a temporary shortfall as we believe it to be the case in Brazil.
Now, in Argentina the situation is rather different. They do not have in place as of yet a set of economic policies that we believe offer that promise going forward. We are, contrary to your question, in continuous dialogue with them and have been urging on them the measures that we believe would enable them to begin to come out of their current crisis. They have a number of difficult issues. This corralito, which keeps the bank deposits in the system, leads to enormously difficult economic problems in terms of how you release it and nonetheless maintain some kind of monetary policy that offers hope for reasonable price stability. There had been issues with the provinces and how the federal government gets control over total fiscal expenditures for that reason.
So in the case of Argentina, I think we spent much more time than we have with the Brazilian authorities in terms of trying to reach an agreement which would be one that they are comfortable with, because they have to own it, and one in which we believe there is enough promise going forward, that we should support it.
Now, what the likelihood is that we could come to an agreement very soon, there is a possibility. I do not think we have really changed our thinking very much in terms of what we think would be essential to it over the past few months or over the past however many months. And at the same time I think the Argentine authorities have done some of the things that make it more possible to have an agreement, and we keep hoping that we can wrap up the rest of it. So we remain working at it and trying, but we are not there yet.
QUESTION: In November last year, the international bankruptcy or insolvency was very high on the international agenda. Can you tell us how far you got in the dialogue about this and how Argentina would have benefited from this tool if it were already approved?
MS. KRUEGER: That is a good question. The dialogue has I think progressed quite a long way. There is certainly much more recognition that there is a problem out there, that there are collective action difficulties, and that mechanisms need to be found, and as I mentioned, both the collective action clauses in individual borrowing contracts and SDRM are subjects where the International Monetary and Financial Committee has endorsed work going forward, and indeed is urging acceleration of that work so that I think that the dialogue is going well.
Now, the difficulty in answering about Argentina is, even when it was first proposed, it was known that no matter what, it would not be in operation soon enough to affect it. So there was no way that this was proposed with Argentina in mind.
When one says how could it have helped Argentina, you almost have to ask when, because Argentina's fortunes have—and the economic situation—changed so much over time that it is very difficult to speculate. It is true that there are countries where the authorities recognize that there are major, major difficulties, but where the process of doing anything to restructure the debt is so horribly messy and complicated right now, that they put it off longer than perhaps is necessary, and my thinking at least on this is that if you did have an SDRM in place, nobody is going to leap to do it. Nobody is going to want to restructure it because it still is going to be very costly. But if you can save six or eight weeks even of turmoil at the end before things turn around, that can be a lot, and it might make some authorities more willing to initiate the process. The proposal is not that the international community would ever tell a country, "You must restructure." It would be a mechanism that was there if restructuring were deemed by the authorities there to be necessary, and the international community agreed.
And so if a country had a very high debt burden, recognized or was fighting off, so to speak, the inevitable, my expectation would be that when it came to this recognition, that "Okay, we can't fight it off any longer," you might save one or two months of grave difficulties on the part of the country.
Some of the countries that have undergone serious debt crises have said to us—I do not want to name names— that they wish the mechanism had been there because it would have saved that last bit of time before things turned around.
QUESTION: Without going into the specifics of the World Economic Outlook to be released next week, can you give us an idea on the state of the world economy as of now?
MS. KRUEGER: It is obviously expanding, possibly somewhat less rapidly than it was earlier thought. There are obviously the downside fragilities, but beyond that, I would be reluctant to go.
QUESTION: There is a report today that you have gotten support from the United States to put forward your sovereign debt thing as an amendment to the IMF Articles of Agreement for the Spring Meeting. Could you talk about that, the status of that, and how long is it going to take to get the articles amended?
MS. KRUEGER: Well, I guess the IMFC meets the end of next week, and the authorization that we would need would come from the IMFC, not the United States alone. The U.S. position right along has been very supportive of moving forward both on the SDRM and on collective action clauses. And as I said I think there is almost a sense of impatience to keep the work going, so I am confident we will get an endorsement at the IMFC for moving our work forward, filling in some of the technical details that remain to be filled in. And it turns out that by the time you get to the last pieces of it, some of the least contentious ones enlarge that don't affect those who are discussing the overall framework, are nonetheless very important in putting it in place. And that discussion is still going on.
I think there is a question as to how long it will take staff and others to work out those details and to have everything in the form of a proposal that would work.
But certainly if we can move it forward that quickly, and if the IMFC urges us to do so, we will move it forward as quickly as we can.
QUESTION: We have been talking about Argentina a lot and they have an election coming up in March. You guys have made a lot of comments about they having very little consensus there, which they clearly don't have. At what point would it make sense just to sort of say that you will deal with the next government?
MS. KRUEGER: That is a very hard question, and I do not think I can give you a precise answer. I think a lot would depend on how things evolve, what their situation was. And as of now, what we are discussing with the authorities and trying to get through, is a program that would be a transition program that would carry through to the end of 2003. If a new government is elected in March as is the current schedule, the new President would take over in May. By the time the new government were organized, they would be looking at 2004, anyway. So how much of an issue that would be would depend somewhat on the timing of the agreement.
QUESTION: Back on Brazil. Some have said that the IMF loan to Brazil is nothing but an illusion because it won't do anything unless the new government really agrees with all the negotiations that will go through after the elections, and that one of the reasons some say that the markets are not taken seriously. Can you respond to that, please?
MS. KRUEGER: Well, the first part of the response is that something has changed in the markets because the markets were depreciating the exchange rate. And I think the Brazilian paper was up to 2,300 basis points over LIBOR. The exchange rate was certainly more depreciated than it is now, etc. And something happened in August, at least, that has stabilized things more or less in the 1,700 basis point range. And with the exchange rate in the 3.10, 3.15 range, so I would disagree with the characterization that nothing has happened. That would be the first part.
The second part would be that the program is predicated first on the view that Brazil's policies are sensible, and secondly, that any President-elect, in his own self interest, will want to carry those programs forward. What was happening was that the market was reacting to the uncertainty. With a program there, the authorities had more resources with which to support economic activity and prevent more tightening of policy, which would help the Brazilian economy. Meanwhile the program is backloaded, so that the new President-elect, if he does not wish to follow those policies, which we think unlikely anyway, would really show it early in the game and the loan then would not have as much meaning to it.
QUESTION: Just wanted to know what is your analysis about the impact if Argentina goes to default with the IMF and World Bank and the IDB. As you know, there is a payment they have due in October for $800 million and the possibilities are high that they cannot meet that commitment.
MS. KRUEGER: I think the authorities are very much aware of the penalties to them and the degree to which they would be cutting themselves off from the international financial community, even significantly further than they have so far, and they are working very hard to avoid that outcome for that reasons.
QUESTION: But if they arrive without an agreement to that payment they will have to use reserves and then that will be more difficult for them to afterwards go out from there.
MS. KRUEGER: Well, if they used reserves, they are still current with the IMF and the World Bank and the IDB and so on, in which case, as long as that is the case, they are current and there is no economic penalty internationally.
QUESTION: Again, going back to Argentina. You refer constantly to the political consensus in Argentina, and this includes different branches of the government. How do you intend to evaluate this? Are you going to send somebody to have meetings to try to establish that?
MS. KRUEGER: Well, that is a difficult question, and it is going to, as you correctly imply, be something of a judgment call. On the other hand, there are things that authorities do when they are committed that are different than when they are not committed, and a lot of it is by action. Some of the things that have been happening-such as the economic subversion concept—while working its way through Congress again, speak pretty strongly at least to those people not being committed to a program, that looks to I think the rest of the world as if it makes sense. So I think, as I say, there are a number of things that go into the judgment, but some of them are pretty conclusive.
QUESTION: Dr. Krueger, as you know, through the Basel Committee and other groups, one concept that is trying to be applied to financial statements, and this is a financial statement obviously, is value at risk. In the context of Argentina, I am wondering to what extent do you see the IMF's assets, i.e. its loans to Argentina, being a value at risk?
I would like to particularly ask about this year when you have been extending for one year Argentina's loan repayments. If my memory serves, the first of those one-year extensions occurred fairly early in the year. So you have got that one year coming up in the first quarter of next year. To what extent is that repayment at risk and what is going to happen if there is no interim agreement at that point?
MS. KRUEGER: Well, first there are procedures within the IMF for covering non-payments, and if you like I can ask Mr. Kuhn to go into as much detail as you would like on it. It turns out there are procedures whereby the interest charged to other members goes up a bit. There are other ways in which indeed the IMF can cover a fair amount of shortfall in that regard.
I think what I would say is that I do not believe that the people in any country want to see the kind of economic difficulties that Argentina is in now to continue indefinitely, and it is my view that at some point in the not very distant future—I do not know whether it is this year, next year or what—there will be this political consensus that is necessary to bring being the economic policies and framework that will permit Argentina to very quickly restore living standards and resume growth.
So even should Argentina be unable, or unwilling, to make a payment or two next year, I am reasonably confident that within several years the Argentines would be back in full compliance. So while I see value at risk, I do not see, so to speak, that it is the whole of the outstanding debt of Argentina so much as it could be that the net present value for a little bit was slightly lower.
Mr. Kuhn, would you like to say anything on that?
MR. KUHN: No, thank you.
MS. KRUEGER: Okay.
QUESTION: On the SDRM debate, you have said many times that are two ideas. The first one is that governments wait too long before seeking a restructuring. And the other one is the mechanism would only be invoked in very limited circumstances, and specifically when a country's debt had become unsustainable. How do you know if governments are waiting too long before seeking a restructuring or if it has not become unsustainable yet?
MS. KRUEGER: The unsustainable part is conceptually the easier, so let me start there, and really just try an extreme case. To my knowledge, no country in the world is in this kind of a mess, but let us just take an extreme case where it is quite clearly unsustainable.
Imagine a country that is having to pay, let us say, 10 percent real interest rate, which is not terribly high, and has a debt equal to 200 percent of GDP. There is no way for such a country to be able to cover the interest payments on its debt, which means it is going to have to borrow more, and it is going to have to borrow more at a rate that, even if it could grow at a reasonable rate, is not going to be such that the debt to GDP ratio can do anything but rise. That is unsustainable.
Now, the problem is that in the real world countries do not get the 200 percent and the real interest rate shoots up before that, so there is a judgment as to what the longer term realistic real interest rate is and so on and so forth. But nonetheless, the notion of unsustainability is clear, if the authorities believe that they cannot generate a primary surplus of more than X, and if they believe that the growth rate will be Y, then they can't be having interest payments on the debt, where X plus Y is a percent of GDP or the debt will go up in perpetuity.
But you see, people can get optimistic as to the growth rate. "Well, we can grow at 6 or 7 percent and the interest rate will fall to 3 percent." You know, so that by the time you get done, it is relatively straightforward, but it does become judgment, and mostly the markets look at what has been the track record of on the primary surplus and the growth relative to the debt burden. And then they form a judgment, and that determines the real interest rate which is part of the whole thing.
So it is not an easy calculation, but I do not think anybody willingly restructures early, so I think by the time people have done it, the markets have either signaled to them that this is absolutely essential and we just know you cannot do it, or alternatively, they look at the numbers and they themselves conclude that they cannot possibly generate the additional tax revenue or whatever to cover it.
So in theory, it is a little bit hard. It is kind of, you know it when you see it.
MR. HACCHE: We will stop there then. Thank you very much for coming.
[End of press briefing.]
IMF EXTERNAL RELATIONS DEPARTMENT