Opening Remarks for the Sovereign Debt Restructuring Mechanism Conference, By Mr. Horst Köhler, Managing Director, IMF

IMF News, January 22, 2003

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Authors: Mr. Horst Köhler
Published: January 22, 2003

Context and purpose

Given at the Sovereign Debt Restructuring Mechanism Conference, Washington DC.
By Mr. Horst Köhler, Managing Director, International Monetary Fund, Washington DC, January 22, 2003.
Motivation: discuss how to deal with unsustainable sovereign debt and the proposal of a Sovereign Debt Restructuring Mechanism (SDRM).

Problems identified

Rapid integration of global markets has increased both opportunities and risks: "the rapid pace of integration of global markets has offered considerable opportunities for growth and development" but "both in scale and in volatility, also pose risks to debtors and creditors alike."
Increased complexity of sovereign debt restructuring:
- "In the past two decades, we have witnessed a dramatic increase in international capital flows, especially private flows."
- Twenty years ago, sovereign debt consisted mainly of syndicated bank loans and restructuring "was relatively straight-forward."
- Today the market has "an enormous diversity of debt instruments and a multiplicity of creditors."
- Example: "Argentina alone has some 700,000 retail creditors!"
Collective action problem: while creditors as a group may prefer restructuring, individual creditors may "have an incentive to decline participating in a cooperative agreement and instead pursue aggressive litigation."

Proposed role of the official sector and IMF

Case for official sector intervention: "To fill this gap in the system and address the collective action problem, I believe there is a case for the official sector to step in."
IMF stance:
- The First Deputy Managing Director's proposal (autumn of 2001) "represented a bold attempt to outline a possible solution" and has "evolved since then."
- The proposal is "work in progress" and the Fund sees itself "as a participant in the search for better answers, not as dictating a single solution."
- The IMF welcomes input from all parties, including the private sector.

Alternatives and complementary approaches

Sovereign Debt Restructuring Mechanism is not the only solution; other approaches include:
- Collective action clauses (CACs) in bond contracts:
- "We have long considered them as useful and important."
- Some markets already use them; "New York is not among them."
- Limitations: existing stock of bonds largely lacks CACs and aggregation issues arise across diverse debt instruments.
- IMF "fully support those who call on the private sector to move ahead forcefully on CACs."
- Voluntary code of good conduct:
- Draws on principle that "transparent guidelines of best practice can have a salutary effect."
- Experience in domestic insolvency suggests informal rules and procedures "can be very helpful, and in many cases avoid recourse to the formal process altogether."
The IMF is "fully engaged also in the discussion of these proposals, and I view them as complementary to a statutory approach."

Objectives for the conference

Three objectives:
- Remind participants of the problem the SDRM is trying to address: "not to make sovereign default easier and more frequent, but rather, in those rare case where debt has become truly unsustainable, to make a messy process more orderly and preserve value for debtors and creditors alike."
- Clarify the state of the discussion and the nature of the proposals the IMF has made.
- Bring the IMF's work to a provisional close embodied in "a single, clear, and understandable design." Governors have asked "in full unanimity, to formulate a concrete proposal by the time of our Spring meetings this April," and the conference is "an important stepping stone" toward that.

Broader implications and closing

Globalization requires investment to ensure opportunities are widely shared and risks contained: "Globalization offers many opportunities, and integration in the world economy is surely the most potent instrument for poverty alleviation."
The international financial architecture "currently lacks a transparent and orderly approach to resolving cases of unsustainable debt."
Progress in filling this gap will improve "both crisis prevention and, in cases where a crisis is unavoidable, to its resolution."
Closing remark: "It is in the interest of all parties, private and public sectors, creditors and debtors, to work toward solutions that enjoy broad acceptance."

Opening Remarks for the Sovereign Debt Restructuring Mechanism Conference, By Mr. Horst Köhler, Managing Director, International Monetary Fund, Washington DC, January 22, 2003.