Press Release: IMF Executive Board Discusses Reforming the Fund's Policy on Non-Toleration of Arrears to Official Creditors
IMF News, December 10, 2015
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- Published: December 10, 2015
Background and mandate
- Executive Board discussion date: December 8, 2015; press release date: December 10, 2015.
- Linked to Executive Board guidance from May 2013 and follow-up to the earlier staff paper “Sovereign Debt Restructurings—Recent Developments and Implications for the Fund’s Legal and Policy Framework.”
- May 2013 work program asked staff to present options for reforming the Fund’s policy framework in four areas:
- (i) the relationship between the Fund’s lending framework and sovereign debt vulnerabilities;
- (ii) the effectiveness of the contractual, market-based approach to debt restructuring in overcoming collective action problems;
- (iii) the framework for official sector involvement; and
- (iv) issues related to private sector involvement in debt restructurings including the lending-into-arrears policy.
- Staff have advocated reform of the Fund’s policy on non-toleration of arrears to official bilateral creditors since 1989.
Summary of the proposed reform
- Objective: strengthen incentives for collective action among official bilateral creditors when official sector involvement in a debt restructuring is necessary.
- Proposal structure: a two-step process:
- Step 1: Fund encourages the debtor and its creditors to reach a representative collective agreement or, failing that, agreements with each creditor.
- Step 2: If creditors remain unwilling to reach an agreement and do not consent to Fund financing despite arrears owed, the Fund would nevertheless consider lending into arrears owed to official bilateral creditors where specific criteria are satisfied.
- Decision process: any lending-into-arrears decision would be subject to Executive Board approval, case by case, and include safeguards to preserve the Fund’s ability to mobilize official financing in the future.
Executive Board assessment — key findings and principles
- Directors welcomed the discussion and reiterated the importance of all four work streams from May 2013.
- Directors noted changing landscape for official finance warrants review of the non-toleration policy to avoid hold-out creditors blocking timely Fund support.
- Emphasized that:
- Prompt Fund support maximizes the value of creditors’ claims or minimizes their losses and maintains debtor capacity to service debt.
- The reform does not alter current practice where terms offered to official bilateral creditors have typically been more favorable than those received by private creditors.
- The reform does not imply any increase in the frequency with which official bilateral creditors may be called upon to restructure their claims in future cases.
- Many Directors stressed minimizing instances of arrears to official bilateral creditors given their critical financing role in crises.
- Balance required between timely Fund support and safeguards for official bilateral creditors.
Revised policy text endorsed by nearly all Directors
- Paris Club outcome:
- If an agreement is reached through the Paris Club that is adequately representative, the Fund would rely on current practices—arrears considered eliminated for both participating and non-participating creditors when financing assurances are received from the Paris Club in anticipation of an Agreed Minute.
- Fund open to engaging with another representative standing forum should one emerge.
- Where an adequately representative agreement has not been reached through the Paris Club, the Fund would consider lending into arrears owed to an official bilateral creditor only where all the following criteria are satisfied:
- • Prompt financial support from the Fund is considered essential, and the member is pursuing appropriate policies;
- • The debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with the parameters of the Fund-supported program—i.e., that the absence of an agreement is due to the unwillingness of the creditor to provide such a contribution; and
- • The decision to provide financing despite the arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases.
Interpretation and application guidance
- Judgment: application of the three criteria requires case-specific judgment guided by the following considerations:
- First: “adequately representative” defined as providing a majority of the total financing contributions required from official bilateral creditors over the program period.
- “Contribution” comprises, and is limited to, debt relief and new financing (e.g. loans, bond financing, guarantees, and grants).
- Second: assessment of good faith by the debtor will consider, inter alia:
- whether the debtor approached the creditor bilaterally or through a relevant grouping of official bilateral creditors (including ad hoc creditor committees);
- whether the debtor offered to engage in substantive dialogue and a collaborative process to reach agreement;
- whether the debtor provided the creditor relevant information on a timely basis consistent with the Fund’s policy on confidentiality of information;
- whether the debtor offered terms consistent with the parameters of the Fund-supported program.
- Note: if the debtor requested terms from an official bilateral creditor that would result in financing contributions that exceeded the requirements of the program it would generally not indicate good faith.
- Assessment will also consider whether a creditor is being asked to make a contribution disproportionate relative to other official bilateral creditors.
- Third: assessing undue negative effect on the Fund’s ability to mobilize official financing packages will consider the signal to official bilateral creditors as a group:
- This criterion would normally not be satisfied where the creditor or group of creditors that has not reached agreement accounts for an adequately representative share, i.e., a majority, of total financing contributions required from official bilateral creditors over the program period.
- Assessment would also consider the creditor’s track record of providing contributions in past debt restructurings under Fund-supported programs, even if the creditor does not account for an adequately representative share.
Consent, emergency financing, and operational procedures
- Creditor consent:
- An official bilateral creditor may choose to consent to Fund financing notwithstanding arrears owed to it; in such cases the Board would not need to judge whether the three criteria are satisfied.
- The Fund would continue to encourage parties to reach an agreement during the program since regularization of arrears is an objective of any Fund-supported program.
- Emergency situations:
- In exceptional circumstances (e.g., aftermath of a natural disaster) where there is insufficient time for good faith efforts, the Fund may provide financing under the Rapid Credit Facility (RCF) or the Rapid Financing Instrument (RFI) despite arrears owed to official bilateral creditors and without assessing the three criteria or obtaining creditor consent.
- Expectation that RCF/RFI support would help advance normalization of relations with official bilateral creditors and resolution of arrears; subsequent Fund arrangements would be subject to all three criteria.
- Implementation mechanics:
- Policy enters into effect immediately and applies to all future purchases or disbursements (including under existing arrangements), with respect to existing and future arrears.
- While unresolved arrears to official bilateral creditors remain outstanding, every purchase or disbursement after arrangement approval will be subject to a financing assurances review by the Board and verification that all three criteria are satisfied for continued use of Fund resources.
Governance, safeguards, and review
- Safeguards:
- Decisions to lend into arrears remain subject to Executive Board approval, case by case.
- Policy designed to preserve the Fund’s ability to mobilize official financing packages in the future and to provide appropriate safeguards for official bilateral creditors.
- Director concerns:
- Some Directors expressed reservations about the term “normally” in the third criterion, fearing inconsistent application with the principle of uniformity of treatment.
- A few Directors were concerned about protection of official bilateral creditors vis-à-vis private creditors; however, Directors generally judged that the policy preserves differential safeguards for official bilateral creditors, including the third criterion requirement.
- Review timeline:
- Directors agreed the policy may need to be reviewed within a relatively short period, namely, two to three years, depending on case complexity and frequency.
Source: Press Release No. 15/555, December 10, 2015 (IMF Communications Department).