## _wp1320 ## Source details **Canonical URL:** [_wp1320](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1320.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1320.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1320.pdf.json) --- ### Introduction and overview - Sovereign debt crises returned to centre stage following problems since 2010 in the European Union’s Economic and Monetary Union (EMU or the euro area). - Two main pillars of the pre-crisis international framework for sovereign debt crises: - The Fund’s lending policies and financing facilities (non-concessional lending highlighted). - The inclusion of Collective Action Clauses (CACs) in sovereign bonds issued in key jurisdictions. - Shift in sovereign borrowing from syndicated bank loans to bonds in the late 1980s amplified collective action problems (coordination failures, litigation, holdouts), increasing both the likelihood and the cost of crises. - Main paper objectives: - Review how and why the two pillars evolved since the mid-1990s. - Analyze the impact of recent crises on these pillars. - Highlight open issues and the importance of crisis prevention for systemically important countries. ### Key findings (summary) - Two main phases in the evolution of the Fund’s lending framework: - First phase: From the Mexican crisis of 1994-95 to the reforms of March 2009 — move from “constructive ambiguity” (notably the Exceptional Circumstances Clause, ECC) to constrained discretion via rule-based procedures. - Second phase: From March 2009 reforms onward — systematization and reinforcement of the Exceptional Access Policy (EAP), creation of precautionary facilities. - March 2009 reforms introduced: - New precautionary facilities to contain contagion for countries with broadly sound fundamentals. - Clarification that the ECC could be invoked only when all four substantive EAP criteria were satisfied (dramatically constrained prior discretion). - Greek program of May 2010 was a landmark: - IMF committed €30 billion (equivalent to 3,200 per cent of quota). - Bilateral contributions from other euro-area member countries: €80 billion. - Joint rescue package approved: €110 billion on May 9. - Program conditionality negotiated and monitored by a Troika: IMF, European Commission, European Central Bank. - EAP amended to include a “systemic clause” allowing exceptional access when “there is a high risk of international systemic spillovers” even if debt sustainability is uncertain. - CACs developments: - March 2011 European Council decision to include standardized and identical CACs in all new euro-area sovereign bonds with maturity above one year (effective January 1, 2013 as noted). - Greek March–April 2012 debt exchange activated CACs and illustrated their practical use. - Open uncertainties about CACs: - Transition problem: speed of CACs spreading into outstanding stock of sovereign bonds. - Aggregation problem: CACs commonly bind within a single bond issue but not across multiple issues. - CACs address mainly the holdout problem and do not solve all restructuring market failures (e.g., debtor-in-possession/interim financing is within IMF’s LIA policy remit). ### Evolution of the IMF’s lending framework (mid-1990s to 2008) - Notion of BoP need examined in 1994: present need, prospective need, potential need — all relevant to Fund lending. - Normal access limits (since October 1992): two types — annual and cumulative; initially 68 percent and 300 percent of quota respectively; annual limit raised to 100 percent in October 1994 for transition economies. - Exceptional Circumstances Clause (ECC) introduced (Supplementary Financing Facility, 1979) allowed surpassing normal limits in unspecified extraordinary situations; invoked repeatedly after 1994-95 Mexican crisis. - Concerns because repeated ECC use created perception of insufficiently systematic Fund lending, raising moral hazard and market uncertainty worries. - Exceptional Access Policy in Capital Account Crises (EAP, developed 2002–2003) formalized four substantive criteria for exceptional access: - Criterion 1.0 (Exceptional BoP pressures) – The member is experiencing exceptional balance-of-payments pressures on the capital account resulting in a need for Fund financing that cannot be met within the normal limits; - Criterion 2.0 (Debt sustainability in the medium term) – A rigorous and systematic analysis indicates that there is a high probability that debt will remain sustainable; - Criterion 3.0 (Expectation of re-entry to capital market) – The member has good prospects of regaining access to private capital markets within the time Fund resources would be outstanding; - Criterion 4.0 (Strong program design and implementation) – The policy program provides a reasonably strong prospect of success, including institutional and political capacity to deliver adjustment. - LIA (Lending-Into-Arrears) policy formalized lending to members with arrears and good-faith engagement with creditors; linked to how restructuring decisions affect exceptional access. ### Tests and applications of the EAP pre-2009 - Argentina (2003) and Brazil (2003) tested the EAP outside classic capital account crises: - Argentina received exceptional access of over 420 percent of quota in a 3‑year SBA despite payment arrears and apparent unsustainable debt (assessed under LIA). - Brazil received additional financing of 150 percent of quota for total cumulative about 340 percent to cope with scheduled IMF repayments and support exit from official support. - Reviews in 2004–2005 reaffirmed procedural application of EAP even when not strictly capital-account crises, while preserving the Board’s discretion. ### Reforms and systematization after the global crisis (March 2009 onward) - March 2009 overhaul included: - Rationalization of lending facilities; elimination of some previous facilities. - Doubling of ordinary access limits (from pre-2009 levels) to 200 per cent of quota annually and 600 per cent of quota cumulatively. - Formalization of High-Access Precautionary Stand-by Arrangements (HAPAs). - Creation of the Flexible Credit Line (FCL), Precautionary Credit Line (PCL), and later the Precautionary and Liquidity Line (PLL). - G-20 complementary measures (April 2009): - Tripling of IMF financial resources from $250 billion to $750 billion. - An extraordinary SDR allocation of $250 billion. - EAP amendments (March 2009) clarified: - Criterion 1.1 – The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or the capital account, resulting in a need for Fund financing that cannot be met within the normal limits. - Criterion 2.1 – A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. Debt sustainability will be evaluated on a forward-looking basis and may take into account intended restructuring; applies only to public (domestic and external) debt but incorporates potential contingent liabilities from private external indebtedness. - FCL not subject to EAP given ex ante qualification; PCL/PLL subject to EAP where relevant. ### The Greek crisis, systemic clause, and large EU–IMF packages - Greek program May 2010: - IMF committed €30 billion (3,200 per cent of quota). - Bilateral contributions from euro-area members: €80 billion. - Total joint rescue package: €110 billion approved May 9. - Creation of European Financial Stability Facility (EFSF) the same day to support joint EU–IMF rescue packages. - EAP amended in May 2010 to include systemic clause (Criterion 2.2): - Criterion 2.2 – A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. However, in instances where there are significant uncertainties that make it difficult to state categorically that there is a high probability that debt is sustainable, exceptional access would be justified if there is a high risk of international systemic spillovers. Debt sustainability evaluated on a forward-looking basis and may take into account intended restructuring; applies only to public debt; analysis incorporates potential contingent liabilities including private external indebtedness. - Subsequent EU–IMF rescue packages justified by systemic clause: - Ireland: total package €85 billion; IMF committed one third of total (equivalent to about 2,300 per cent of quota). - Portugal: total package €78 billion; IMF committed one third of total (equivalent to about 2,300 per cent of quota). - Greece (March 15, 2012): total package over €170 billion; IMF committed three elevenths of the total (2,200 per cent of quota). - Quota details for Greece: - In May 2010, Greece’s quota in the Fund was SDR 823 million. - Greece’s quota increased to SDR 1,102 million when the 2008 Quota and Voice Reforms became effective on March 3, 2011. ### Collective Action Clauses (CACs): adoption, limitations, and role - CACs designed to facilitate voluntary, timely, and orderly restructuring by allowing a qualifying majority of bondholders to modify Reserved Matters and bind dissenters. - Types of CACs: - Majority representation clauses; - Majority amendment clauses; - Majority enforcement clauses. - Diffusion of CACs: - February 2003: Mexico issued $1 billion bond with CACs on U.S. market; paid no discernible yield premium. - By end-2003 nearly 70 percent (by value) of new sovereign bonds under New York law contained CACs; over 90 percent by 2005; same number reported for 2010 (Bradley and Gulati, 2012). - Inclusion of CACs in domestic-law bonds remained far less widespread. - European Council March 2011 decision: - Standardized and identical CACs to be included in all new euro-area sovereign bonds with maturity above one year (effective January 1, 2013 as noted). - Greek debt exchange March–April 2012: - Activation of CACs and retroactive insertion in much of sovereign debt governed by Greek law (via act of parliament, February 2012). - Institute of International Finance (IIF) played a creditor coordination role. - CAC limitations and concerns: - Transition problem: speed of spread across outstanding bonds. - Aggregation problem: difficulty of aggregating votes across multiple issues and across different governing laws/jurisdictions. - CACs primarily address holdout litigation risk; they do not substitute for mechanisms to provide interim debtor-in-possession financing (LIA policy role) or resolve all market failures in restructuring. - Standardization and aggregation clauses may affect the geography of international financial markets if not globally adopted. ### Policy trade-offs, implications, and unresolved issues - Core policy trade-off in Fund lending: predictability and rules-based lending vs. flexibility to act as lender of last resort (constructive ambiguity). - March 2009 reforms strengthened rules-based approach, reduced scope for ad hoc exceptions, and broadened EAP coverage to potential BoP needs. - The systemic clause broadened Fund capacity to respond to systemic spillovers but raised concerns: - Potentially lower evidentiary bar on debt sustainability when systemic spillover risk invoked; might weaken market discipline if perceived to sustain expectations of official financing for systemically relevant countries. - Mitigating factors: stringent program design and conditionality, risk‑mitigating procedures, and heightened scrutiny remain integral to exceptional access decisions. - CACs useful but not panacea: - Help address creditor holdouts, but do not resolve aggregation across issues or provide restructuring interim financing. - SDRM (statutory mechanism) would have addressed broader issues but was politically infeasible; disappearance of SDRM left reliance on CACs plus IMF LIA policy and official coordination. - Important open issues highlighted: - Speed and extent of CAC diffusion into outstanding sovereign debt. - Legal and practical aggregation of votes across multiple issues and jurisdictions. - Relationship between CACs and credit derivatives (legal features). - Need for stronger capital and liquidity requirements, appropriate resolution mechanisms for financial institutions, and larger official financial pools (regional firewalls) to enable safe use of CACs and orderly restructurings. - Continued emphasis on crisis prevention, particularly for systemically important countries. ### Systemic clause: scope, rationale, and implications - Introduction of a systemic clause to justify exceptional access to the Fund’s resources in case of a “high risk of international systemic spillovers” has broadened the scope of application of the EAP, but may have to some degree expanded the room for discretion. - Rationale: - The greater size, interconnectedness, and sophistication of international capital markets amplify the potential for pure contagion and international spillovers, including from countries that do not meet the commonly-accepted definition of systemically-important economies on the basis of size. - Cross-border interdependencies magnify collective-action and time-inconsistency problems, raising the costs (if not the likelihood) of sovereign debt crises through contagion. - Policy trade-off: - Strict ex ante enforcement of market discipline (letting countries default if debts are unsustainable) may be rational, but ex post contagion and systemic stability risks can make default less preferable in practice. - Combined effects of higher potential for systemic crises and the systemic clause may increase the number of exceptional access cases, with consequences for: - analytical requirements for surveillance and lending; - adequacy of financial resources; - burden-sharing and cooperation with regional financial arrangements. ### Analytical requirements, firewalls, and crisis prevention - Need for improved analytical capabilities to identify and monitor systemic risks to underpin decisions under the systemic clause. - Key tasks: - Clarify the notion of systemic spillovers and give it operational content to assist program design and ensure evenhandedness (IMF, 2012b). - Address difficult questions such as how to distinguish ex ante genuine systemic threats, where to draw dividing lines, and how to prevent unjustified large-scale Fund loans. - Adequacy of official financial resources (“firewalls”): - Permanent expansion of firewalls is needed given larger financing needs of systemically relevant economies and stronger sovereign–banking inter-linkages. - At minimum, more predictable means to quickly mobilize additional resources in systemic emergencies. - Recent temporary and regional resource augmentations (exact figures preserved): - A new wave of bilateral borrowing agreements for almost $460 billion was agreed in June 2012, and some were signed in October 2012. - In Asia, the size of the Chiang Mai Initiative Multilateralization (CMIM) was doubled to $240 billion in May 2012. - European Stability Mechanism (ESM) became operational since October 2012, providing a financial backstop of €700 billion for euro-area countries. - In October 2012 the ECB announced its decision on new Outright Monetary Transactions. - Implication: - Regional financing mechanisms and bilateral contributions will continue to complement IMF quotas; ensuring their effective and consistent deployment to support IMF lending arrangements is crucial. - Crisis prevention as priority: - Strengthening crisis prevention capabilities (analytical, institutional, financial) should be given distinct priority. - Prevention components: - Sound public finances and fiscal discipline. - Making sovereign default threats more credible to foster timely and gradual market discipline ex ante. - Consistent and timely private-sector assessment of sovereign risks and fiscal and banking transparency. - Recent transparency initiatives are welcome but markets also need incentives to use available information. - Policy responses to reinforce credibility of default threats: - Contain economic costs of default and ensure they are borne mainly by debtor countries and private creditors. - Effective ex ante debt restructuring procedures (e.g., CACs) and a well-designed crisis management framework (including firewalls) to reduce uncertainty and unpredictability. - Sovereign–bank linkages: - Two-way linkages can undermine prevention, management, and resolution frameworks (sovereign interventions to support domestic banks create sizable public contingent liabilities; banks’ holdings of sovereign bonds transmit sovereign risks to banking funding costs). - Severing these linkages is challenging; it is virtually impossible to fully protect banks from a severely distressed sovereign. - Key mitigants: sound supervisory and macroprudential policies, appropriate bank resolution regimes to reduce expectations of government support for distressed banks. - Ensuring adequate capital and liquidity buffers for financial systems is integral to making sovereign defaults more credible and boosting crisis prevention. ### Crisis resolution, CACs limits, and collective governance - CACs are potentially cost-effective devices to contain creditor holdout problems and facilitate restructuring of unsustainable sovereign debts without imposing statutory constraints on countries’ sovereignty. - Limits and challenges: - No predefined framework (CACs or the SDRM) alone suffices to address unprecedented systemic risks associated with a systemically important country default. - Transition and aggregation problems complicate CAC effectiveness; retroactive imposition (e.g., Greece) is possible but proactive inclusion is smoother. - Uncertainty whether CACs will be used widely across diverse sovereign securities and whether standardized aggregation clauses will be legally acknowledged in relevant jurisdictions. - Preconditions for safe activation of CACs in a high-contagion environment: - Stronger capital and liquidity frameworks for financial institutions. - Availability of adequate regional and global firewalls to contain contagion from strong bank–sovereign linkages. - Thorough assessment of credit derivatives’ implications for restructuring and legal consequences. - Complementarity: - Better sovereign bond restructuring processes do not eliminate the need for official lending as a supporting component. - IMF is more likely to share crisis-manager roles with regional institutions and financing arrangements. - Even with rigorous debt sustainability analysis, macroeconomic adjustment—particularly significant, frontloaded fiscal consolidation—remains necessary in debt resolution strategies supported by official financing. - Collective solutions and global governance: - Systemic sovereign debt crises require specific collective solutions across prevention, management, and resolution stages. - Solutions require active contributions from actors at national, regional, and global levels and must be part of a broader collective governance framework for systemic fiscal and financial risks. ### Numerical and factual highlights (preserved exactly as in the source) - Public debt-to-GDP ratios in G-20 advanced countries: from 80 percent in 2007 to close to 120 percent expected in 2012 (IMF, 2012c). - IMF resources tripled from $250 billion to $750 billion (G-20, April 2009). - Extraordinary SDR allocation: $250 billion (April 2009). - IMF normal access limits (pre-2009): annual and cumulative initially 68 percent and 300 percent of quota; annual limit raised to 100 percent in October 1994. - Post-March 2009 ordinary access limits: 200 per cent of quota annually and 600 percent of quota cumulatively. - Greek IMF commitment May 2010: €30 billion (equivalent to 3,200 per cent of quota). - Bilateral contributions to Greek package: €80 billion. - Joint EU–IMF rescue package for Greece: €110 billion approved May 9, 2010. - Ireland package: €85 billion. - Portugal package: €78 billion. - Greece (March 15, 2012) package: over €170 billion. - IMF commitments: one third of total for Ireland and Portugal (equivalent to about 2,300 per cent of quotas); three elevenths for Greece (2,200 per cent of quota). - Greece’s quota: SDR 823 million (May 2010); SDR 1,102 million (effective March 3, 2011). *IMF Working Paper content as supplied.* ### References........... .................................................................................................. ### _wp1320 - References........... .................................................................................................. ### Introduction and overview - Sovereign debt crises returned to centre stage following problems since 2010 in the European Union’s Economic and Monetary Union (EMU or the euro area). - Two main pillars of the pre-crisis international framework for sovereign debt crises: - The Fund’s lending policies and financing facilities (non-concessional lending highlighted). - The inclusion of Collective Action Clauses (CACs) in sovereign bonds issued in key jurisdictions. - Shift in sovereign borrowing from syndicated bank loans to bonds in the late 1980s amplified collective action problems (coordination failures, litigation, holdouts), increasing both the likelihood and the cost of crises. - Main paper objectives: - Review how and why the two pillars evolved since the mid-1990s. - Analyze the impact of recent crises on these pillars. - Highlight open issues and the importance of crisis prevention for systemically important countries. ### Key findings (summary) - Two main phases in the evolution of the Fund’s lending framework: - First phase: From the Mexican crisis of 1994-95 to the reforms of March 2009 — move from “constructive ambiguity” (notably the Exceptional Circumstances Clause, ECC) to constrained discretion via rule-based procedures. - Second phase: From March 2009 reforms onward — systematization and reinforcement of the Exceptional Access Policy (EAP), creation of precautionary facilities. - March 2009 reforms introduced: - New precautionary facilities to contain contagion for countries with broadly sound fundamentals. - Clarification that the ECC could be invoked only when all four substantive EAP criteria were satisfied (dramatically constrained prior discretion). - Greek program of May 2010 was a landmark: - IMF committed €30 billion (equivalent to 3,200 per cent of quota). - Bilateral contributions from other euro-area member countries: €80 billion. - Joint rescue package approved: €110 billion on May 9. - Program conditionality negotiated and monitored by a Troika: IMF, European Commission, European Central Bank. - EAP amended to include a “systemic clause” allowing exceptional access when “there is a high risk of international systemic spillovers” even if debt sustainability is uncertain. - CACs developments: - March 2011 European Council decision to include standardized and identical CACs in all new euro-area sovereign bonds with maturity above one year (effective January 1, 2013 as noted). - Greek March–April 2012 debt exchange activated CACs and illustrated their practical use. - Open uncertainties about CACs: - Transition problem: speed of CACs spreading into outstanding stock of sovereign bonds. - Aggregation problem: CACs commonly bind within a single bond issue but not across multiple issues. - CACs address mainly the holdout problem and do not solve all restructuring market failures (e.g., debtor-in-possession/interim financing is within IMF’s LIA policy remit). ### Evolution of the IMF’s lending framework (mid-1990s to 2008) - Notion of BoP need examined in 1994: present need, prospective need, potential need — all relevant to Fund lending. - Normal access limits (since October 1992): two types — annual and cumulative; initially 68 percent and 300 percent of quota respectively; annual limit raised to 100 percent in October 1994 for transition economies. - Exceptional Circumstances Clause (ECC) introduced (Supplementary Financing Facility, 1979) allowed surpassing normal limits in unspecified extraordinary situations; invoked repeatedly after 1994-95 Mexican crisis. - Concerns because repeated ECC use created perception of insufficiently systematic Fund lending, raising moral hazard and market uncertainty worries. - Exceptional Access Policy in Capital Account Crises (EAP, developed 2002–2003) formalized four substantive criteria for exceptional access: - Criterion 1.0 (Exceptional BoP pressures) – The member is experiencing exceptional balance-of-payments pressures on the capital account resulting in a need for Fund financing that cannot be met within the normal limits; - Criterion 2.0 (Debt sustainability in the medium term) – A rigorous and systematic analysis indicates that there is a high probability that debt will remain sustainable; - Criterion 3.0 (Expectation of re-entry to capital market) – The member has good prospects of regaining access to private capital markets within the time Fund resources would be outstanding; - Criterion 4.0 (Strong program design and implementation) – The policy program provides a reasonably strong prospect of success, including institutional and political capacity to deliver adjustment. - LIA (Lending-Into-Arrears) policy formalized lending to members with arrears and good-faith engagement with creditors; linked to how restructuring decisions affect exceptional access. ### Tests and applications of the EAP pre-2009 - Argentina (2003) and Brazil (2003) tested the EAP outside classic capital account crises: - Argentina received exceptional access of over 420 percent of quota in a 3‑year SBA despite payment arrears and apparent unsustainable debt (assessed under LIA). - Brazil received additional financing of 150 percent of quota for total cumulative about 340 percent to cope with scheduled IMF repayments and support exit from official support. - Reviews in 2004–2005 reaffirmed procedural application of EAP even when not strictly capital-account crises, while preserving the Board’s discretion. ### Reforms and systematization after the global crisis (March 2009 onward) - March 2009 overhaul included: - Rationalization of lending facilities; elimination of some previous facilities. - Doubling of ordinary access limits (from pre-2009 levels) to 200 per cent of quota annually and 600 per cent of quota cumulatively. - Formalization of High-Access Precautionary Stand-by Arrangements (HAPAs). - Creation of the Flexible Credit Line (FCL), Precautionary Credit Line (PCL), and later the Precautionary and Liquidity Line (PLL). - G-20 complementary measures (April 2009): - Tripling of IMF financial resources from $250 billion to $750 billion. - An extraordinary SDR allocation of $250 billion. - EAP amendments (March 2009) clarified: - Criterion 1.1 – The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or the capital account, resulting in a need for Fund financing that cannot be met within the normal limits. - Criterion 2.1 – A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. Debt sustainability will be evaluated on a forward-looking basis and may take into account intended restructuring; applies only to public (domestic and external) debt but incorporates potential contingent liabilities from private external indebtedness. - FCL not subject to EAP given ex ante qualification; PCL/PLL subject to EAP where relevant. ### The Greek crisis, systemic clause, and large EU–IMF packages - Greek program May 2010: - IMF committed €30 billion (3,200 per cent of quota). - Bilateral contributions from euro-area members: €80 billion. - Total joint rescue package: €110 billion approved May 9. - Creation of European Financial Stability Facility (EFSF) the same day to support joint EU–IMF rescue packages. - EAP amended in May 2010 to include systemic clause (Criterion 2.2): - Criterion 2.2 – A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. However, in instances where there are significant uncertainties that make it difficult to state categorically that there is a high probability that debt is sustainable, exceptional access would be justified if there is a high risk of international systemic spillovers. Debt sustainability evaluated on a forward-looking basis and may take into account intended restructuring; applies only to public debt; analysis incorporates potential contingent liabilities including private external indebtedness. - Subsequent EU–IMF rescue packages justified by systemic clause: - Ireland: total package €85 billion; IMF committed one third of total (equivalent to about 2,300 per cent of quota). - Portugal: total package €78 billion; IMF committed one third of total (equivalent to about 2,300 per cent of quota). - Greece (March 15, 2012): total package over €170 billion; IMF committed three elevenths of the total (2,200 per cent of quota). - Quota details for Greece: - In May 2010, Greece’s quota in the Fund was SDR 823 million. - Greece’s quota increased to SDR 1,102 million when the 2008 Quota and Voice Reforms became effective on March 3, 2011. ### Collective Action Clauses (CACs): adoption, limitations, and role - CACs designed to facilitate voluntary, timely, and orderly restructuring by allowing a qualifying majority of bondholders to modify Reserved Matters and bind dissenters. - Types of CACs: - Majority representation clauses; - Majority amendment clauses; - Majority enforcement clauses. - Diffusion of CACs: - February 2003: Mexico issued $1 billion bond with CACs on U.S. market; paid no discernible yield premium. - By end-2003 nearly 70 percent (by value) of new sovereign bonds under New York law contained CACs; over 90 percent by 2005; same number reported for 2010 (Bradley and Gulati, 2012). - Inclusion of CACs in domestic-law bonds remained far less widespread. - European Council March 2011 decision: - Standardized and identical CACs to be included in all new euro-area sovereign bonds with maturity above one year (effective January 1, 2013 as noted). - Greek debt exchange March–April 2012: - Activation of CACs and retroactive insertion in much of sovereign debt governed by Greek law (via act of parliament, February 2012). - Institute of International Finance (IIF) played a creditor coordination role. - CAC limitations and concerns: - Transition problem: speed of spread across outstanding bonds. - Aggregation problem: difficulty of aggregating votes across multiple issues and across different governing laws/jurisdictions. - CACs primarily address holdout litigation risk; they do not substitute for mechanisms to provide interim debtor-in-possession financing (LIA policy role) or resolve all market failures in restructuring. - Standardization and aggregation clauses may affect the geography of international financial markets if not globally adopted. ### Policy trade-offs, implications, and unresolved issues - Core policy trade-off in Fund lending: predictability and rules-based lending vs. flexibility to act as lender of last resort (constructive ambiguity). - March 2009 reforms strengthened rules-based approach, reduced scope for ad hoc exceptions, and broadened EAP coverage to potential BoP needs. - The systemic clause broadened Fund capacity to respond to systemic spillovers but raised concerns: - Potentially lower evidentiary bar on debt sustainability when systemic spillover risk invoked; might weaken market discipline if perceived to sustain expectations of official financing for systemically relevant countries. - Mitigating factors: stringent program design and conditionality, risk‑mitigating procedures, and heightened scrutiny remain integral to exceptional access decisions. - CACs useful but not panacea: - Help address creditor holdouts, but do not resolve aggregation across issues or provide restructuring interim financing. - SDRM (statutory mechanism) would have addressed broader issues but was politically infeasible; disappearance of SDRM left reliance on CACs plus IMF LIA policy and official coordination. - Important open issues highlighted: - Speed and extent of CAC diffusion into outstanding sovereign debt. - Legal and practical aggregation of votes across multiple issues and jurisdictions. - Relationship between CACs and credit derivatives (legal features). - Need for stronger capital and liquidity requirements, appropriate resolution mechanisms for financial institutions, and larger official financial pools (regional firewalls) to enable safe use of CACs and orderly restructurings. - Continued emphasis on crisis prevention, particularly for systemically important countries. ### Numerical and factual highlights (preserved exactly as in the source) - Public debt-to-GDP ratios in G-20 advanced countries: from 80 percent in 2007 to close to 120 percent expected in 2012 (IMF, 2012c). - IMF resources tripled from $250 billion to $750 billion (G-20, April 2009). - Extraordinary SDR allocation: $250 billion (April 2009). - IMF normal access limits (pre-2009): annual and cumulative initially 68 percent and 300 percent of quota; annual limit raised to 100 percent in October 1994. - Post-March 2009 ordinary access limits: 200 per cent of quota annually and 600 percent of quota cumulatively. - Greek IMF commitment May 2010: €30 billion (equivalent to 3,200 per cent of quota). - Bilateral contributions to Greek package: €80 billion. - Joint EU–IMF rescue package for Greece: €110 billion approved May 9, 2010. - Ireland package: €85 billion. - Portugal package: €78 billion. - Greece (March 15, 2012) package: over €170 billion. - IMF commitments: one third of total for Ireland and Portugal (equivalent to about 2,300 per cent of quotas); three elevenths for Greece (2,200 per cent of quota). - Greece’s quota: SDR 823 million (May 2010); SDR 1,102 million (effective March 3, 2011). *Italic source attribution: IMF Working Paper content as supplied.* ### introduction of a systemic clause to justify exceptional access to the Fund’s resources in case ### introduction of a systemic clause to justify exceptional access to the Fund’s resources in case ### Systemic clause: scope, rationale, and implications - Introduction of a systemic clause to justify exceptional access to the Fund’s resources in case of a “high risk of international systemic spillovers” has broadened the scope of application of the EAP, but may have to some degree expanded the room for discretion. - Rationale: - The greater size, interconnectedness, and sophistication of international capital markets amplify the potential for pure contagion and international spillovers, including from countries that do not meet the commonly-accepted definition of systemically-important economies on the basis of size. - Cross-border interdependencies magnify collective-action and time-inconsistency problems, raising the costs (if not the likelihood) of sovereign debt crises through contagion. - Policy trade-off: - Strict ex ante enforcement of market discipline (letting countries default if debts are unsustainable) may be rational, but ex post contagion and systemic stability risks can make default less preferable in practice. - Combined effects of higher potential for systemic crises and the systemic clause may increase the number of exceptional access cases, with consequences for: - analytical requirements for surveillance and lending; - adequacy of financial resources; - burden-sharing and cooperation with regional financial arrangements. ### Analytical requirements for surveillance and crisis management - Need for improved analytical capabilities to identify and monitor systemic risks to underpin decisions under the systemic clause. - Key tasks: - Clarify the notion of systemic spillovers and give it operational content to assist program design and ensure evenhandedness (IMF, 2012b). - Address difficult questions such as how to distinguish ex ante genuine systemic threats, where to draw dividing lines, and how to prevent unjustified large-scale Fund loans. - Timing trade-off: - Waiting for systemic spillovers to materialize risks sub-optimal ex post responses; timely intervention is essential. ### Adequacy of official financial resources (“firewalls”) - Core issue: availability and adequacy of financial resources deployable credibly by the official sector. - Imperatives: - Permanent expansion of firewalls is needed given larger financing needs of systemically relevant economies and stronger sovereign–banking inter-linkages. - At minimum, more predictable means to quickly mobilize additional resources in systemic emergencies. - Lessons from Europe: - Official-sector responses were often more reactive than proactive (region-specific factors: incomplete political union, complex decision processes). - Untimely, piecemeal, and poorly sequenced responses aggravated market reactions and allowed markets to “game” the official sector into providing more money ex post. - IMF role and capacity constraints: - IMF has pivotal analytical, financial, and legal tools (including NAB arrangements), but financing needs of euro-area program countries proved too large to be addressed by the Fund alone and required larger contributions from European partners. - Adequate IMF lending capacity is vital for crisis management and crisis prevention (boosting credibility of Fund-led adjustment and precautionary arrangements). - Quotas and resource augmentation history: - Over the years IMF shareholders have typically resisted increases in its permanent resources. - 2009 decision to triple Fund resources (via bilateral loans to be subsequently folded in the NAB). - 2010 decision to double IMF quotas with a rollback of the NAB. - Recent temporary and regional resource augmentations (exact figures preserved): - A new wave of bilateral borrowing agreements for almost $460 billion was agreed in June 2012, and some were signed in October 2012. - In Asia, the size of the Chiang Mai Initiative Multilateralization (CMIM) was doubled to $240 billion in May 2012. - European Stability Mechanism (ESM) became operational since October 2012, providing a financial backstop of €700 billion for euro-area countries. - In October 2012 the ECB announced its decision on new Outright Monetary Transactions. - Implication: - Regional financing mechanisms and bilateral contributions will continue to complement IMF quotas; ensuring their effective and consistent deployment to support IMF lending arrangements is crucial. ### Crisis resolution and Collective Action Clauses (CACs) - Role of CACs: - CACs are potentially cost-effective devices to contain the creditor holdout problem and facilitate restructuring of unsustainable sovereign debts without imposing statutory constraints on countries’ sovereignty. - The decision to include standardized and identical clauses in all new euro-area sovereign bonds with maturities above one year will significantly boost CAC dissemination. - Limits and challenges: - No predefined framework (CACs or the SDRM) alone suffices to address unprecedented systemic risks associated with a systemically important country default. - Transition and aggregation problems complicate CAC effectiveness; retroactive imposition (e.g., Greece) is possible but proactive inclusion is smoother. - Uncertainty whether CACs will be used widely across diverse sovereign securities and whether standardized aggregation clauses will be legally acknowledged in relevant jurisdictions. - Novel systemic factors affecting restructuring: - Heightened sovereign–bank inter-linkages in integrated regions. - Massive use of credit default swaps relative to crises of the late 1990s. - These elements may limit CACs’ credibility as a Plan B to avoid official bailouts. - Preconditions for safe activation of CACs in a high-contagion environment: - Stronger capital and liquidity frameworks for financial institutions. - Availability of adequate regional and global firewalls to contain contagion from strong bank–sovereign linkages. - Thorough assessment of credit derivatives’ implications for restructuring and legal consequences. - Complementarity: - Better sovereign bond restructuring processes do not eliminate the need for official lending as a supporting component. - IMF is more likely to share crisis-manager roles with regional institutions and financing arrangements. - Even with rigorous debt sustainability analysis, macroeconomic adjustment—particularly significant, frontloaded fiscal consolidation—remains necessary in debt resolution strategies supported by official financing. ### Crisis prevention as priority - Principal conclusion: strengthening crisis prevention capabilities (analytical, institutional, financial) should be given distinct priority. - Reasons: - Potentially very large economic costs of disorderly restructuring/default of a systemic country. - Uncertainty about the effectiveness and availability of existing crisis-management and crisis-resolution tools. - Prevention components: - Sound public finances and fiscal discipline. - Making sovereign default threats more credible to foster timely and gradual market discipline ex ante. - Consistent and timely private-sector assessment of sovereign risks and fiscal and banking transparency. - Recent transparency initiatives are welcome but markets also need incentives to use available information. - Policy responses to reinforce credibility of default threats: - Contain economic costs of default and ensure they are borne mainly by debtor countries and private creditors. - Effective ex ante debt restructuring procedures (e.g., CACs) and a well-designed crisis management framework (including firewalls) to reduce uncertainty and unpredictability. - Sovereign–bank linkages: - Two-way linkages can undermine prevention, management, and resolution frameworks (sovereign interventions to support domestic banks create sizable public contingent liabilities; banks’ holdings of sovereign bonds transmit sovereign risks to banking funding costs). - Severing these linkages is challenging; it is virtually impossible to fully protect banks from a severely distressed sovereign. - Key mitigants: sound supervisory and macroprudential policies, appropriate bank resolution regimes to reduce expectations of government support for distressed banks. - Ensuring adequate capital and liquidity buffers for financial systems is integral to making sovereign defaults more credible and boosting crisis prevention. ### Collective solutions and global governance - Systemic sovereign debt crises require specific collective solutions across prevention, management, and resolution stages. - Solutions require active contributions from actors at national, regional, and global levels and must be part of a broader collective governance framework for systemic fiscal and financial risks. - Recent global developments reflect substantial progress since the global crisis onset, but the unprecedented systemic threats (U.S. financial markets meltdown, euro-area collapse) justify stronger crisis prevention capabilities at all levels. - Hope expressed that the “Great Scare” of recent crises will incentivize decisive strengthening of prevention capabilities. *Source: _wp1320 - introduction of a systemic clause to justify exceptional access to the Fund’s resources in case* ### Chapter 11 of the U.S. Bankruptcy Reform Act”. 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Remarks at the Brussels Economic Forum 2011, “Rethinking Economic Policy in Europe – A New Era of EU Economic Governance”. Brussels, May 18. *Source: _wp1320 - Chapter 11 of the U.S. Bankruptcy Reform Act”. Virginia Journal of International Law, Vol. 21, No. 2, pp. 305-341.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1320.pdf_