Public Information Notice: IMF Executive Board Discusses Involving the Private Sector in the Resolution of Financial Crisis
IMF News, September 19, 2000
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- Published: September 19, 2000
Executive Board assessment and overall conclusion
- Executive Directors agreed that good progress has been made in developing a framework for involving the private sector in forestalling and resolving financial crises, and welcomed the convergence of views on many topics evident in the discussion.
- Valuable experience has been gained with securing the involvement of the private sector in the resolution of individual cases, highlighting both strengths and limitations of current international tools for securing concerted private sector involvement.
- Directors concurred more needs to be done to operationalize policies to balance:
- clarity to guide market expectations, and
- operational flexibility anchored in a clear set of principles to allow effective crisis responses.
- Directors welcomed the establishment of the Capital Markets Consultative Group and the Managing Director’s intention to report to the IMFC.
- The staff paper underlying the discussion will be posted on the IMF website.
Prevention (first line of defense)
- Prevention remains the first line of defense against a financial crisis.
- Critical elements of a preventive policy framework:
- adoption of consistent macroeconomic and exchange rate policies;
- sound debt management;
- effective supervision over financial systems.
- The primary Fund tool for prevention is surveillance.
- Surveillance is increasingly focused on improving the environment for private sector decision-making by:
- measures to improve the transparency of members’ policies;
- development and strengthening of standards;
- assessment and reduction of members’ vulnerability to financial crises.
- Directors emphasized the value to borrowing countries of establishing regular procedures for dialogue with private creditors and called on staff to follow up in Article IV consultations with emerging market countries and report back to the Board.
Resolving balance of payments difficulties and role of private sector
- Members may face a spectrum of external stresses:
- some can be corrected promptly without official financial support;
- some require a Fund arrangement complementing corrective measures;
- severe cases may face loss of market access and require working with all creditors to ensure continued financing.
- Concerted private sector involvement may be required when creditor cooperation is insufficient to ensure orderly resolution.
- Fund approach should be flexible and require considerable judgment; program documentation to the Board should clearly state expected private sector financing.
- Scenarios and implications:
- If financing needs are relatively small or market access likely to be regained soon, strong adjustment policies plus Fund support should catalyze private sector involvement.
- If early restoration of market access on sustainable terms is unrealistic or debt burden unsustainable, more concerted private creditor support, possibly including debt restructuring, may be necessary.
- Critical assessment factors for prospects of regaining market access include:
- profile of debt service and debt stock;
- strength of fiscal accounts and the financial system;
- previous levels of market access and market indicators;
- strength of macroeconomic and structural policies;
- authorities’ commitment to sustain implementation of the reform program;
- level of reserves and availability of financing;
- stage of the crisis and experience with creditor-debtor relations.
- Directors called on staff to strengthen analytic work to assess the pace and magnitude of a resumption of market access.
- Views on linking private sector involvement to Fund access:
- Some Directors favored linking a strong presumption of required concerted private sector involvement to the level of member’s access to Fund resources (rules-based predictability).
- Others warned a threshold trigger could hinder resumption of market access and increase market volatility.
- Reference was made to the presumption of continued private sector involvement for members drawing on the Supplementary Reserve Facility.
- Consensus points:
- Fund operations should, to the extent possible, limit moral hazard and recognize the limited availability of Fund financing.
- Reliance on the catalytic approach at high levels of access requires substantial justification.
- Tools and measures:
- Promote use of existing tools, including collective action clauses in international sovereign bonds and contingent lines of credit.
- In some cases, collaborative agreements with banks or specific creditors may be possible; in others, additional measures may be required, with potential negative spillovers considered.
- Staff should examine debt restructuring processes and relative treatment of different types of debt, guided by the principle that no private debt category should be regarded as inherently senior relative to others in a similar position.
- Further consideration needed on treatment of sovereign bonds relative to Paris Club and other official bilateral creditors.
Standstills: preliminary considerations
- Directors welcomed preliminary discussion of standstills and regarded the staff paper as a helpful first step; empirical evidence on standstills is limited and analysis is somewhat speculative.
- Definition and range:
- “Standstill” covers techniques for reducing net payment of debt service or net outflows of capital after loss of spontaneous market access — from voluntary creditor arrangements to concerted measures.
- Feasibility and creditor heterogeneity:
- Voluntary agreements may be feasible when creditors are reasonably homogenous and have an interest in a long-term relationship (e.g., exposure predominantly commercial banks or suppliers).
- More difficult to secure voluntary standstills when nonbank investors holding sovereign claims are significant, given less homogeneous interests.
- Unilateral standstills and consequences:
- In extreme circumstances, if voluntary standstill impossible, members may find it necessary as a last resort to impose a unilateral standstill.
- A sovereign-only standstill may stabilize the balance of payments but could risk triggering capital outflows.
- If tightening policies and exchange rate flexibility fail to stop outflows, members may need to consider more comprehensive exchange or capital controls, tailored to country-specific characteristics and existing control infrastructure.
- Controls are no substitute for strong adjustment policies and should be used only in exceptional circumstances.
- Costs, duration, and signaling:
- Some Directors argued a standstill could serve both member and creditors’ interests and should be maintained for the shortest possible period to halt runs and provide breathing space for corrective policies or restructuring.
- Many Directors warned the threat of a standstill could precipitate outflows and be destabilizing.
- Concerns about debtor moral hazard were raised; others noted compulsory standstills impose significant costs on the member (e.g., lost output).
- Rights of creditors need protection in a standstill.
- Spillovers and medium-term effects:
- A standstill by a systemically important country could cause substantial spillovers to other emerging markets, with strength and duration depending on international market conditions and transmission mechanisms.
- Medium-term availability of private capital may be reduced by exchange or capital controls because investors re-evaluate default and transfer risk, but corrective policies and creditor cooperation can mitigate this over time.
- Fund endorsement and operational mechanisms:
- Most Directors saw the Fund’s appropriate signal for accepting a member-imposed standstill as lending into arrears to private creditors, under established policy when essential for program success and member is making a good-faith effort to reach orderly creditor agreement.
- Some Directors favored an amendment to Article VIII Section 2(b) to provide temporary stay on creditor litigation; others did not favor this, noting recent cooperative agreements were not hampered by litigation.
- Fund support for standstills could reduce financing costs by assuring creditors of an orderly comprehensive approach, increasing clarity and predictability; other Directors worried Fund endorsement could increase price and reduce availability of private capital.
- Market incentives and operational challenges:
- A clear framework for invoking standstills could encourage markets to limit vulnerability build-up, but could also incentivize creditors to shorten maturities or construct complex instruments to evade standstills.
- Complex operational issues raised by standstills warrant further consideration.
Areas for further work and the IMF’s near-term work program
- The discussion highlighted areas requiring further work. The work program will include:
- The promotion of a constructive dialogue between members and their creditors.
- The strengthening of the basis for assessments of the pace and magnitude at which countries in crisis can regain market access.
- The strengthening of the basis for assessments of medium-term viability, and whether or not there is a need for debt restructuring.
- Further work on debt restructuring, and in particular, the relation between the treatment of Paris Club and private sector claims.
- Further work on assessing the extent of moral hazard.
Public Information Notice: IMF Executive Board Discusses Involving the Private Sector in the Resolution of Financial Crisis — September 19, 2000