IMF Survey : IMF Adjusts Its Policy on Arrears to Official Creditors

IMF News, December 10, 2015

Source details

Canonical URL: IMF Survey : IMF Adjusts Its Policy on Arrears to Official Creditors

Publication date: December 10, 2015.
The IMF approved a reform (approved on December 8) changing how it approaches financing decisions when a borrower nation is in arrears to official bilateral creditors.
The reform allows the IMF, in certain carefully defined circumstances, to provide financing to a country even when it has outstanding arrears to official bilateral creditors.

Two core problems motivated the reform:
- Reliance on Paris Club processes when Paris Club creditors no longer account for the bulk of official financing. Creditors such as China, Brazil, India, and Saudi Arabia have become increasingly important lenders and are not Paris Club members.
- The old policy could allow official creditors holding a minority of claims to block or delay IMF support, creating holdout incentives and potential free-riding that could delay crisis resolution and raise costs for all parties.
IMF staff first raised concerns in 1989 and reiterated them in a May 2013 paper, noting risks from extending protections automatically to non-contributing creditors and the potential unfairness where the Paris Club accounted for only a minority of official claims.

The policy explicitly addresses:
- Situations where non-Paris Club creditors account for a majority of contributions.
- Mitigating the holdout problem where minority creditors can block timely IMF support.
If there is a Paris Club agreement that is "adequately representative" (i.e., Paris Club creditors account for a majority of the required contributions from official bilateral creditors over the program period), the IMF can proceed on the assumption that the debtor will negotiate comparable terms with non-Paris Club official creditors.
If there is no adequately-representative Paris Club agreement, the IMF Board could nevertheless approve financing if three criteria are satisfied:
- (i) there is a need for prompt IMF support (that is, waiting until all creditors have reached an agreement with the debtor would be too costly);
- (ii) the debtor is making good faith efforts to reach an agreement with the creditor(s); and
- (iii) the decision to provide financing, given the circumstances, would not have an undue negative effect on the IMF’s ability to mobilize official financing packages in future cases.

The policy specifies various factors to assess whether criteria (ii) and (iii) are met; staff will provide analysis and recommendations, but ultimate judgments rest with the IMF Board.
Both the debtor and official bilateral creditors will have opportunities to voice and discuss concerns as part of the decision-making process.
The policy preserves the possibility for official bilateral creditors owed arrears to give their consent to IMF financing; Board judgments are required only when some official bilateral creditors have not provided consent.

Broad gains: the reform is expected to promote more efficient resolution of sovereign debt crises, benefiting creditors, debtors, and the international financial system.
For official creditors:
- Timely IMF support increases chances of maximizing value of creditors' claims or minimizing losses once restructuring is deemed necessary.
- The reform reduces the ability of holdout creditors to block or delay IMF support, strengthening incentives for collective action.
- Non-Paris Club official creditors are protected from having no leverage whenever a Paris Club agreement exists that is not adequately representative.
For debtor countries:
- It becomes more difficult for holdout creditors to block timely IMF support.

Staff concerns predate recent high-profile cases: the May 2013 paper raised issues before the Russian loan to Ukraine existed.
The 2013 Board request for reconsideration of policy was part of broader work on strengthening the framework for sovereign debt restructuring.

Source: IMF Survey : IMF Adjusts Its Policy on Arrears to Official Creditors (December 10, 2015).