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Transcript of the Conference Call with the Press on the Release of the IMF Paper on Sovereign Debt Restructuring - Recent Developments and Implications for the Fund's Legal and Policy Framework
May 23, 2013
Sean Hagan, General Counsel and Director, Legal Department;
Hugh Bredenkamp, Deputy Director, Strategy and Policy Review Department;
Robert Sheehy, Deputy Director, Monetary and Capital Markets Department;
Reza Baqir, Division Chief, Strategy and Policy Review Department; and
Olga Stankova, Senior External Relations Officer, External Relations Department.
MS. STANKOVA: Hello, everybody, and welcome to the conference call on the release of the board paper on Sovereign Debt Restructuring— Recent Developments and Implications for the Fund’s Legal and Policy Framework.
The conference call is on the record and it’s embargoed for release with the paper and supporting documents until 4:00 p.m. eastern standard time, 21:00 GMT.
Let me introduce the speakers. They represent three authoring departments that worked on the paper: Sean Hagan, General Counsel and Director of the Legal Department. Hugh Bredenkamp, Deputy Director in the Strategy and Policy Review Department. Robert Sheehy, Deputy Director in the Monetary and Capital Markets Department, and Reza Baqir, Division Chief, Strategy and Policy Review Department.
Hugh will make introductory remarks and then we will take your questions.
MR. BREDENKAMP: Okay, thank you, Olga.
So, the IMF’s Executive Board has not discussed this topic since 2005 and there have been a number of important developments in sovereign debt restructurings since then. So, the background to this paper is we felt it was time to take stock.
Greece had executed the largest sovereign debt restructuring in history in February 2012. We had a number of other countries who have recently launched restructurings, including Belize, Jamaica St. Kitts and Nevis, and Grenada. And separately, as was already being discussed by many experts in the field, there is the ongoing litigation against Argentina and New York, which could have important implications for future sovereign debt restructurings by increasing the leverage of holdout creditors.
There's also been active discussion of debt restructuring issues in international fora, including the Institute for International Finance in Washington, which recently issued an annex to its principles to stable capital flows and fair debt restructuring in light of the restructuring experience in Greece.
So, this is the context. Of course, any review needs to start with a diagnosis of the problems. And, so, the paper that you have spends quite a lot of time on this diagnosis. This is the first step in a deliberative process that we expect to continue over the coming year or so.
Before getting to the diagnosis of the problem, the paper starts by recapping the IMF’s current legal and policy framework for sovereign debt restructuring. It then goes on to review recent restructuring under this framework to identify the issues that we see as having emerged from this experience. And towards the end of the paper, you'll see that, since the debt restructuring debate is underway in other fora, we also describe some of the recent initiatives and highlight differences with the Fund’s existing framework.
Now, in terms of the issues, the paper identifies a number, but probably the two most important ones are first of all what we see as a pattern of delays in the initiation of effective debt restructurings that restore sustainability and, second, issues of how to overcome collective action problems once the debt restructuring has been initiated.
On the first of these issues, on why restructurings tended to be too little too late, the paper analyzes some of the incentives behind delays and discusses the problems that these delays create.
In a nutshell, delayed or insufficient restructurings can impede economic recovery, they can deter investment, they also create opportunities for private creditors to cash out in a run up to the restructuring, leaving the official creditors, that is the taxpayers, on the hook. To the extent that they are insufficient to deal with the debt sustainability problem, they can also result in repeat reschedulings, which tends to compound the cost for the debtor nation.
On the second of the main issues, the paper discusses how the current contractual, market-based approach to debt restructuring is becoming less effective in overcoming collective action problems, especially in pre-default cases.
Now, in light of these cases, the paper, and this is really the purpose of the paper, proposes a forward-looking work program to consider whether the Fund’s lending policies could and should be adapted in ways that may mitigate some of these incentive problems and encourage a more efficient and fair approach to debt restructuring. Since this is just the first step in the process, the paper doesn't propose any solutions. It, instead, guides the direction for further work and provides some examples of the sorts of options that could be considered as we go forward.
On collective action problems, the paper suggests that we should explore ways to strengthen the contractual approach, since we don’t see sufficient support in the international community at this stage for an SDRM-type approach.
In terms of next steps, our Board discussed this paper on May 20, last Monday, and the Board agreed that the staff should do further work on these issues. We envisage that this work will include a more extensive study of the case histories, not only of countries that went through debt restructurings, but also those that were able to work their way out of debt difficulties without a restructuring.
The follow-up work will also look carefully at the alternative policy options, assessing the costs and benefits before coming back to the Board with some concrete proposals, and we envisage that it could be a year or so from now before the Board is ready to consider whether it wants to make any modifications to Fund policies in this area. Thanks.
MS. STANKOVA: Thank you, Hugh. Next question, please.
QUESTIONER: Firstly, the exceptional access policy created for right ahead of the Greek program or actually for the Greek program, didn’t that create debt restructuring problems because the IMF was pushing for debt restructuring in 2011 but caved in to the face of European political pressures? So, the DSA which said the debt was unsustainable without a restructuring, the exceptional access policy allowed you to overlook the DSA warnings.
MR. BREDENKAMP: First of all, just on the Greek case at that time, I don't believe the paper said that the debt was unsustainable.
QUESTIONER: No.
MR. BREDENKAMP: The issue was the probability.
QUESTIONER: Sorry. The issue was what?
MR. BREDENKAMP: Was the probability of the sustainability, where we felt that, given the situation at the time, it was not possible to argue that sustainability was there with a high probability, which is the standard that was required for exceptional access under the policy at the time. So, there were conflicting considerations. Obviously, the primary focus is to help the member country involved, but we also do have to take account of international spillover effects and, in the case at the time, there were considerable concerns about possible contagion effects if a restructuring were to go ahead at that time, given that European policies at that time had not established yet the kinds of firewalls that would have been necessary to proceed with a restructuring without creating those contagion problems.
QUESTIONER: So, okay, I appreciate that. And then, secondly, you talk about the growing role in changing composition of official lending, require a clearer framework for OSI.
Can you just elaborate on that a little bit more? And how exactly the IMF could sort of change its lending practices to force sort of a more efficient debt restructuring process?
MR. BREDENKAMP: The issue here is the Fund’s lending decisions inevitably influence a country’s decision as to whether or not it has to restructure its debt. To the extent that we are willing to provide support and depending on the scale of the support we provide, that obviously does have a bearing on whether or not a country will have to go ahead with a restructuring at that time.
And, so, there is a question as to whether in certain circumstances where we see debt sustainability as being in doubt but not yet necessarily lost, there are issues of wanting to avoid Fund financing leading to an exit by private creditors with Fund and perhaps other official sector money coming in as a substitute for that.
QUESTIONER: Okay, but just coming back to your original question though, if Greece isn't the place where there was “too little too late,” transferring the burden from the private sector to the official sector and amounting costs, then where are you pointing to that there has been “too little too late?”
MR. BREDENKAMP: No, I think we do suggest in the Greek case that at the outset of the program, there were these contagion concerns. What we argue in the paper is that, in retrospect, there may be better ways to deal with those contagion concerns than making the adaptation in the exceptional access policy. At least in the way that it was done.
And, so, what we’re going to look at is alternative ways of achieving similar objectives. We do think that when it became clear that a restructuring was needed in Greece, it would have been better if it had been done more quickly than it was and that could have been helped if--for the firewalls and other measures in Europe--if it had been possible to put those in place more quickly, as well.
QUESTIONER: But couldn’t the Fund have said look, we won't lend, we won't go into a program unless two conditions, you put a firewall in place to contain the contagion and, two, there is a restructuring? I mean, doesn't the Fund have that sort of leverage?
MR. BREDENKAMP: If we were putting in place a firewall, it takes time; as I say, it could perhaps have been done quicker, but it certainly would have taken time in any event. And Greece was facing a critical situation with the risk of spillover effects to the rest of Europe had it not been handled quickly and decisively.
QUESTIONER: Thank you for doing this. Two questions. The first, please, I would like to ask about Argentina, the case of Argentina. First of all, I saw your comment and the first question is: The holdouts have been litigating for more than 11 years. So, it seems to be that the only that they could not affect the restructuring process is to lose. If they win, they will affect the restructuring process.
So, the first question is that one. The only way the holdouts can avoid any complication in the restructuring process of the debt is to lose because if they win, I think they are disturbing the thing.
And the second one is if you can comment if you have any kind of consultation with the court if you are planning to do so, if you are going to send this document to them. If there is any kind of consultation with the court about this issue because I understand it’s the first time that you make a point of the thing. Thank you.
MR. HAGAN: Let me answer your second question first. There has been no consultation between the IMF and either the district court in New York or the U.S. Court of Appeals in Second Circuit.
With respect to your second question, what the paper does is the paper does not call into question the merits of this case in terms of whether or not the interpretation of the contract was correct or the interpretation of the statute is correct. What it does is, if one assumes that this decision stands, it looks at the implications of this decision on the restructuring process more generally.
Not specifically in the case of Argentina, but more generally, what are the implications of this case for sovereign debt restructuring and it makes an assessment that it will indeed enhance the leverage of holdout creditors. But the assessment here is intended to look at the system more generally and is not intended to basically delve into the details of the Argentine case. Thank you.
QUESTIONER: Hi, thank you very much.
I saw a line in one of the documents which said “although directors recognized that case of (inaudible) could in principal be addressed under a statutory framework,” you haven't gone down that route.
But my question really was: What does “statutory framework” mean there? Is it the (inaudible) agreement of the IMF or it is asking member states to change their law? I’m just inquiring that sentence.
MR. HAGAN: Yes, I think if you read the paper, you will see that the reference to a “statutory framework” are generally intended to refer to indeed the type of proposal that was envisaged under the sovereign debt restructuring mechanism. That would involve an amendment to the IMF’s Articles of Agreement.
What the paper points out is that there is not adequate support to amend the Articles of Agreement to achieve that, which is why the paper is proposing -- and I think executive directors generally support it -- the notion of looking at a collective action framework that is based in contract rather than in statute. The notion of country-specific statutory frameworks is not discussed in the paper in any depth or not proposed in the paper in any detail and was not discussed at the executive board. Of course, it was the approach that was relied upon by Greece for its domestic law bonds, but it is not a framework that is proposed in the paper.
QUESTIONER: Hi, all. I didn’t have a whole lot of time to read everything, but I wanted to ask for a little elaboration on point number 32 regarding creditor bail in at the start as a condition of IMF participation, which seems to me, I don't know, on its face potentially kind of revolutionary in the sense of it’s not just the Fund coming in here to cure a balance of payments problem, but really kind of a wholesale look at the country’s finances that pulls everybody to the table all at once.
And one question, for example, I have to ask is: Doesn't that almost necessarily have to be universal all the time because then you'd create sort of two classes of discussion, which seems to somewhat unstable, the ones where you ask for a creditor bail in and the ones where you don’t and then in and of itself is a pretty powerful signal about whether you think it’s solvency versus liquidity.
So, I mean, putting that on the table, doesn't it mean to even entertain that idea, you're really changing the way the IMF does business?
MR. BREDENKAMP: I think this is an issue that we would have to look at in the next phase of the work. As you will see when you look at the public information notice that we put out with the paper, the Executive Board’s discussion on this topic indicates that the membership is not inclined to go down a route that will involve very rigid rules in this area. They want flexibility to deal with cases as they arise and deal with unforeseen contingencies.
I think what we’re looking for in the next phase of the work is whether we can come up with criteria that could help guide that discretion in perhaps a more orderly way than has been the case in the past, but I don't think we’re going down the road towards a very, very rigid sort of one-size-fits-all framework.
QUESTIONER: Right, right. If I could just follow-up on that, I think that’s what I’m sort of saying here is that if there's agreement that creditor bail in from the beginning might be a good idea sometimes, right, that you kind of have to include that possibility as part of your toolkit all the time. In other words, you have to be flexible and say whenever we think a country might need help, creditor bail in is going to be one of the things we look at from the start.
MR. BREDENKAMP: I assume it would be something we would look at, but whether you would necessarily want to deploy that particular approach in every case is something that we’ve not yet determined.
QUESTIONER: Yes, fair enough, fair enough, but, I mean, to put it on the table means you wanted sort of at your disposal from the beginning of the process rather than getting six months into it and realizing hey, this isn't going to work unless we get the creditors involved. Because you rightly point out essentially particularly in Greece, much of the money that the IMF was sending out the door particularly in the first month of the program was simply going to pay off the bond holders.
MR. BREDENKAMP: Yes, but we have had experience with different ways of keeping creditors on the hook while we’re determining whether a country can work its way out of a debt issue without necessarily having restructuring or especially restructuring with haircuts. We have different avenues, different methods to do that, including in the current crisis, and in some cases, those other methods might be more appropriate or the parties involved might prefer those routes rather than going down this alternative, which would be this kind of debt re-profiling --
QUESTIONER: What are some of those other methods?
MR. BREDENKAMP: Well, for example, in the Asian crisis, there was a concerted effort to essentially use moral suasion to keep banks rolling over their credit lines. A similar exercise was done, the so-called Vienna Initiative, under the current crisis.
QUESTIONER: Yes, okay.
MR. BREDENKAMP: And in Turkey’s crisis, we used this kind of approach very successfully. It obviously becomes harder as the creditor base becomes more fragmented. That kind of approach is more difficult, but that’s why you would want to look at it case by case.
QUESTIONER: Just following up on the previous question and your response, so, to be clear, hasn’t the IMF been able to go into situations where there's a request for a program and say well, yes, we’re willing to as part of the negotiations to extend a line of credit, but there must be some sort of either usually private debt restructuring or private bail in or official. I mean, to me, I would take the opposite view to that that has already existed. Are you not confirming that?
MR. BREDENKAMP: I’m certainly confirming that a standard principle of Fund lending is that we need to catalyze the financing of other creditors rather than substituting for it. So, in general, if we end up in a situation where IMF money has gone in and private money has gone out, the program has not worked as we intended. And, so, in most cases, we will try to set things up so that that doesn't happen and that can be done in different ways using different approaches.
MR. HAGAN: If I could just perhaps take a slightly different angle, I think it’s helpful to distinguish between two different circumstances. One is where the Fund is providing large financing to a country that is in a financial crisis, but the fundamental judgment is that the debt is sustainable. There really isn't a problem. And in those circumstances, and we’ve had experiences like this, we actually avoid a restructuring and since the cost of restructurings are high both for the country and for the system, that’s not a bad thing.
The problem that is identified in this paper is circumstances where we judge that the debt either is unsustainable or there's a serious risk that it will be. And in those circumstances, first of all, when we judge that the debt is unsustainable, we are actually precluded from lending in the absence of a restructuring. Because, if we continue to provide financing in the absence of a restructuring, we are actually making the problem worse for the country because a restructuring is inevitable. So, it’s better to do it earlier rather than later, which is the central message in the paper.
So, to your point, we have, in fact, had for many years this requirement. The point that is raised in the paper is because this is a difficult call, there may be circumstances where the country has lost market access where it’s not entirely clear whether or not the debt is sustainable or unsustainable because this is a judgment call. But, in the interim, Fund financing is essentially allowing creditors to basically exit unscathed at par and the problem is at the end of the day, there is a restructuring because we determine the debt to be unsustainable, they will have left completely and that is a problem.
And, so the question is how to resolve this sort of interim issue and the paper doesn't come up with a fully elaborate proposal, but says one possible approach is not to have a restructuring during the interim, but some form of re-profiling that keeps the creditors there, it helps limit the amount of financing that the Fund has to provide, but in the event that there is a restructuring, they will participate.
But one of the things that I would like to emphasize in going back to Mr. Talley’s point, the concept of private sector involvement and burden-sharing is not a revolutionary concept. There are countless board papers that are entitled “Private Sector Involvement.” So, the principle has always been there. The question is how we apply that principle in light of experience and in the context of evolving International Monetary System.
QUESTIONER: So, just to be clear here, there is some sense within the Fund that its control over the financing and debt restructuring process has been lost and it wants to reassert its role within that monetary system, and, yes, these papers will explore how to do that?
MR. HAGAN: I wouldn’t characterize it in terms of losing or regaining. I think that’s far too binary. I think if you look at the relevant paragraph in the paper. Let me find it for you. Paragraph 32. I think the issue is stated in a more nuanced way and, as you know, these issues are pretty complex. So, I think it would be best to look at the language in 32.
As you pointed out, we do have considerable leverage in this process because even though a decision to restructure is that of the sovereign, in reality, countries generally tend to initiate a restructuring when we can no longer provide financing without a restructuring because we’ve judged the debt to be unsustainable. So, we recognize that through our lending mandate, we do have considerable influence on the process and this paper doesn't suggest that we’ve lost it.
QUESTIONER: Okay, and may I just for housekeeping, I think you're terming “restructuring” as actually a loss on the value, the original value, a haircut, whereas re-profiling, you're talking about changing the maturities. Am I understanding that correctly?
MR. HAGAN: Correct, that’s a very good point. We generally refer to restructuring as a reduction in the net present value of a claim while the re-profiling does not necessarily suggest that.
QUESTIONER: Okay, so, because in the wider market, I thought debt restructuring included re-profiling. So, okay, thank you.
MR. SHEEHY: I think, Mr. Talley, you're correct that there is a general understanding in the market that restructuring would include both of those alternatives either a re-profiling or a restructuring because depending on exactly what is agreed in terms of future interest payments and discount rates, you can get a net present value reduction under either one of those alternatives.
What we’ve tried to do in the paper is to be perhaps a little more nuanced in terms of our own internal way of looking at it, but we’re trying to distinguish between face value reduction or a haircut on the one hand and re-profiling of payments on the other.
MS. STANKOVA: If we don’t have any more questions, we will conclude the call. Thank you.
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