December 10, 2015
IMF COMMUNICATIONS DEPARTMENT |
| Media Relations |
|---|
| E-mail: media@imf.org |
| Phone: 202-623-7100 |
With Sean Hagan, General Counsel and Director of the Legal Department
Hugh Bredenkamp, Deputy Director of the Strategy and Policy Review Department (SPR)
Ángela Gaviria, Communications Department
MS. GAVIRIA: Hello, good morning everyone. I’m Angela Gaviria with the Communications Department of the IMF. Welcome to this conference call on the paper titled, “Reforming the Fund’s Policy on Non-Toleration of Arrears to Official Creditors.” Let me introduce the speakers. With me are Sean Hagan, General Counsel and Director of the Legal Department of the IMF, and Hugh Bredenkamp, who is Deputy Director of the Strategy and Policy Review Department of the Fund. They will have some brief remarks and then they’ll take your questions.
MR. BREDENKAMP: As at least some of you will be aware, we’ve been working over the last two and a half years on reviewing and revising the IMF’s policies in the context of sovereign debt crises. The overall goal of this work program is to make the resolution of sovereign debt crises more efficient and to reduce the cost for everybody involved, the debtors, the creditors, and the international financial system as a whole.
We’ve worked on several strands of this and I think we’ve had conversations with you before on some pieces of work in this area. You may remember the work we did last year on strengthening collective action clauses in the private creditor context to promote more effective resolution and collective action in the private context. The paper we’re talking about this morning is about resolution and collective action in an official creditor context.
Back in May 2013, when we articulated this work program, and put it on the agenda of the IMF’s Board, we highlighted two principal issues in this area of official creditor or sovereign debt problems that we felt needed to be looked at again and the potential need for reform of the IMF’s policies.
One problem that we highlighted was that the IMF’s policy up until yesterday was that we had relied exclusively on the need for official sector restructurings on Paris Club processes.
Essentially, when the Paris Club group of official creditors reached an agreement to restructure their claims on a particular country, the IMF would take that agreement as given. We would assume that, as is implied in Paris Club agreements, all other official creditors will provide comparable treatment to the debtor, and if there are any arrears to non-Paris Club creditors they would essentially be assumed away because of that comparable treatment assumption. Based on the Paris Club agreement we would then go ahead and lend to the debtor country if all the other conditions are met.
The first problem we flagged in 2013 was that, while this is not an unreasonable approach when the Paris Club accounts for the majority of the official creditors, we’ve seen in recent years an increasing number of cases where, in fact, the Paris Club only accounted for a minority--in some cases, quite a small minority--of the claims on a particular country.
The second problem we flagged was that in cases where there is no Paris Club agreement, the Fund’s ability to lend to countries could potentially be held hostage to a particular official creditor who was owed arrears and was not willing to participate in a debt restructuring. In that context, the Fund’s policy at the time would not allow us to go forward and lend, so it was a classic holdout problem, to use the terminology of the collective action sovereign debt literature.
Just as we were concerned about holdout risks in the private context, here was a potential problem of holdouts in the official sector context. We had put this problem on the agenda back in May 2013 and given some indication of what kind of reform may be needed. We’ve been working on this for much of this year, coming up with a proposal on how to address it. There’s been extensive consultations within the official community on how to do this.
Essentially the proposal, as you’ll see in the paper, addresses the problems in the following way. We would, in future, envisage a two-stage process for dealing with cases where there’s a need for an official restructuring, i.e. of official sector claims, and there may be arrears that need to be restructured and in that way resolved.
We would continue to rely on a Paris Club agreement to fulfil that function, so long as that is representative of a majority of the financing needed from the official sector by the debtor country. So where it’s a majority, to assume that the minority follows the Paris Club is not an unreasonable assumption. We would maintain that approach and we could go ahead in that context.
If there is no Paris Club agreement that’s representative in that sense, or there is no Paris Club agreement at all because the debts have not been brought to the Paris Club for treatment or the Paris Club members could not reach consensus on an agreement, then the debtor would be expected to try and reach agreements with each of its individual official creditors. If that also fails, and we have some arrears outstanding, we have official creditors who have not been able to agree on how to participate in the needed restructuring. Then, and only then, the Fund would consider lending into arrears to those non-participating creditors.
Even then we would do so only if all three of the conditions that we lay out in the paper are met. The first one is that the need to move ahead and provide financial support to the debtor is urgent, because if it’s not urgent then more time could, in principle, be taken to try and reach an agreement with all its creditors. If the need is urgent, that would be a basis for going forward, even in the presence of arrears.
Second, there’s a requirement that the debtor be attempting in good faith to reach an agreement with its creditors. We won’t go into detail, but the paper describes what good faith negotiations should entail. Finally, the Fund’s Executive Board needs to reach an assessment that lending into arrears to the non-participating, if you like, holdout official creditors in an official context would not, given the circumstances, be unduly detrimental to the Fund’s ability to mobilize official financing in future program cases. This is an important consideration.
Obviously, there’ll be a lot of judgment involved here. The Board will have to make the judgment. In the paper we talk about some of the specific circumstances or specific considerations that the Board would take into account in reaching that judgement. We can talk about those if you’re interested. So let me stop there.
MS. GAVIRIA: Thank you, Hugh. Sean, would you like to add something?
MR. HAGAN: This framework in the paper is somewhat technical and relatively complex, but I think it’s underpinned by some general principles which cut across all of the sovereign debt work that we’ve been doing. As Hugh has indicated, this is part of the broader work stream.
The first is that when we talk about restructuring we’re talking about rare cases. Generally we want debt to be paid on time, but there are circumstances where essentially the debtor does not have the capacity to repay and the debt is unsustainable. So we’re dealing in a subset of those cases. The second point is that even when that happens, we want to try and avoid arrears. We would prefer the restructurings to take place where arrears do not emerge.
But we’ve also experienced, over the years, that there are circumstances where we don’t have an entirely collaborative process because we have some creditors who are not, essentially, willing to participate collaboratively and they hold out. So we have this holdout problem, which is when arrears arise. That is something which we confronted in the late 80s in the private sector context, and we decided that we were not going to allow those creditors, those holdout creditors, to hold the system hostage, and we were going to be willing to lend into arrears because we felt that the Fund support was necessary, and that it was in the interest of all the other creditors as well that support be provided and the restructuring go forward.
So as Hugh has indicated, what we’re doing here is to basically allow us to have a similar mechanism with official creditors. Now, between ’89 and now, in some respects, the problem in the official sector was mitigated because we had a collective action mechanism that dealt with the minority holdouts through the Paris Club. Because the Paris Club was a mechanism that allowed us, based on its comparability of treatment principle, and where there was a representative portion of creditors, to essentially deem away the arrears of non-Paris Club creditors.
Well, that collective action mechanism has become less effective because increasingly there are creditors that are outside the Paris Club. This is the point that we recognized in 2013, which created some urgency to the reform. We could no longer rely exclusively on the Paris Club as a way of addressing this collective action problem, and therefore, we needed to come up with a more durable and sustainable collective action mechanism. It is this reform that is designed to create a collective action mechanism that, again, allows us to provide financing in circumstances where we do have holdouts but where the debtor, the Fund, and most creditors actually want a restructuring to go forward. It’s that issue that we’re trying to address.
The final point I would make is that while this is a common problem, this solution is not entirely symmetrical with private creditors. You will see that in designing the solution the Board was very sensitive to the fact that there are specific qualities of official debt that make it particularly valuable to the Fund and to sovereign debtors, and that we need to be cognizant of those differences when designing the solution. So there are aspects of this approach that are different from the lending into arrears policy that is applicable in the private context.
MS. GAVIRIA: Thank you, Sean. We’re ready for questions now.
QUESTIONER: Hi. Thank you for doing the call. I’d like to ask my questions in the context of this current situation around the Ukrainian debt to Russia, even though I understand that you do not see them as necessarily (inaudible). So my first question is to Mr. Hagan. I know you say that the Board will ultimately decide, but has your department looked at the status of the debt and recognize it as being official or non-official?
MS. GAVIRIA: Is that your only question?
QUESTIONER: No, but the next question comes from the answer to the first one.
MS. GAVIRIA: We’re focusing on the paper. QUESTIONER: Yes. My next question is about Ukraine acting in good faith because we know that Ukraine does not recognize the status of the debt, so how does that square with the requirement that the debtor acts in good faith? Then, frankly, I looked at your paper. Your policy approach is understandable, but I do not see a mechanism, it’s not there, that explains how it will work in practice. What comes first? What comes next? How is it developed? How is it determined and things like that? That’s it.
MR. HAGAN: I think that we want to basically have a discussion here that deals with the policy reform rather than specific cases. Nevertheless, I can respond to your last question. This is typical for all Fund policies, which is that they do allow for the exercise of discretion by staff and the Board. No policies are self-executing in the Fund.
What they do is to set forth general criteria that guide the exercise of that discretion so as to ensure uniformity of treatment amongst members. But they do allow for discretion because, essentially, every case is different, and these general principles need to be applied in the context of the circumstances that arise. You are absolutely correct. This policy, when you read it, is not self-executing. It does require judgement and, actually, we think that’s appropriate.
QUESTIONER: Hi. It seems to me that two of the key questions in the policy that you’ve laid out are, first of all, what constitutes good faith? Secondly, how do you define a holdout? Can you talk a little bit more about that? What do good faith negotiations look like? Is that one on one bilateral negotiations between the debtor and the creditor? Also, how will it be determined that a creditor is exhibiting holdout-like behavior?
MR. BREDENKAMP: If you look in the press release that we published with the paper, the policy is laid out in detail in the Executive Board assessment section. There’s a paragraph on how we would envisage the Board assessing this good faith criteria. As Sean has just said, each of these criteria requires judgement, and so we have laid out the considerations that would guide that judgment.
In the case of the good faith criterion, first of all, we indicate that the debtor would need to have approached its creditor--the creditor to whom it owes arrears or is seeking relief from its claim--as an official creditor. So, either through a relevant grouping of official bilateral creditors or directly, it must have offered to engage in a substantive dialogue with that creditor to try and reach an agreement. It must provide relevant information to the creditor as an official creditor. It must have offered to engage in a substantive dialogue with that creditor to try and reach agreement, it must provide relevant information to the creditor on a timely basis on the nature of the debtor's financial situation and needs, and it must have offered the creditor terms that are broadly consistent with the parameters of the Fund-supported program. What that latter condition means is this: a Fund program generally programs a certain amount of financing and implies a certain overall treatment of official sector claims. If a debtor asks its creditors for treatment that is a lot more onerous, a lot more generous from the debtor's point of view, than the Fund program requires, that would generally not constitute good faith. So those are the key considerations.
In terms of how we would then identify a holdout, essentially a holdout creditor would be one to whom the debtor has made all these approaches in good faith -- has made a request that conforms to the good faith requirements I just described -- and yet the creditor is unwilling to participate. There is a provision that you'll see in the policy that prescribes that where the majority of creditors are unwilling to participate, the Fund would normally not then lend into arrears. So a holdout would generally have to be in a minority of the creditors for us to execute this policy.
QUESTIONER: Hi, thank you for doing that. I'm sorry, I know you don't want to get into specifics, but how do you respond to the claims of Russia that this decision to change this rule was politically motivated?
MR. HAGAN: I think that when we are assessing the value of this reform, it really should be assessed in terms of whether it fixes a general weakness in the system. And I think we have for some time identified collective action problems as a general weakness. The fact that this reform takes place in the context of a case that illustrates this general weakness, I don't think in any way undermines the value of the reform or the legitimacy of the reform.
QUESTIONER: I just wanted to be clear exactly on the change in the Paris Club aspect of this. Obviously Russia is a member of the Paris Club as it stands, so in the future only a majority of the Paris Club members have to sign up to this rather than a unified thing? Is that right? I mean, how has this changed that sort of element of the negotiations? And with regard to Greece, if this had been in place at the start of the year, would this have changed the nature of the negotiations, them going into the summer and obviously there is still debt restructuring to be resolved there? And how might this feed into any future talks over a Greek-style situation if we could try and keep it hypothetical?
MR. BREDENKAMP: Well, first of all, nothing in this policy affects the rules that the Paris Club themselves apply, which are entirely a matter for the Paris Club members. The Paris Club has always operated on consensus, meaning everybody has to basically agree within the group and that will remain the case.
In terms of the Fund's policies and how we interpret a particular Paris Club agreement, what changes is that in the past we would accept an agreement as essentially indicating agreement with all creditors if the Paris Club reaches an accord, regardless of whether the Paris Club members in that particular country case cover a majority of the claims. And what we're saying now is that under the new policy we would only regard the Paris Club as effectively eliminating arrears for all creditors if it accounts for a majority of the claims in the particular case.
On the Greece question, I mean obviously we're not getting into the country specifics. But the point is that the creditors in the case of Greece, the official creditors, have chosen not to go through the Paris Club route, so it wouldn't be relevant.
QUESTIONER: But just on the Russian point, because obviously Russia is seen as a holdout here, will this enable the IMF to lend to Ukraine, regardless of Russia's position? Just to be clear on this issue.
MR. BREDENKAMP: If you take any country case, if all the conditions we've laid out in the policy are met, then the Board could decide to lend into arrears.
QUESTIONER: Thanks very much for holding the call. I also wanted to follow up on the Paris Club issue. So, in the situation where the so-called holdout creditor is a member of the Paris Club, is it the case that you have to try to resolve the issue through the Paris Club first and then only after that, if it has perhaps not worked or failed or whatever, then the Fund considers lending into arrears, or under the criteria that you laid out? Is that correct?
MR. HAGAN: Yes, that's more or less correct. In fact, in that context you can actually see this reform supporting the Paris Club process. Let's imagine that most of the claims are being held by Paris Club creditors and there is a Paris Club discussion -- and as you know the Paris Club operates by consensus; there has to be unanimous support in the Paris Club -- and let's imagine that actually there was a creditor in the Paris Club that was not willing to go along with that consensus. Under the policy prior to this reform, first of all, there would be no Paris Club agreement, and secondly, because we would have at least one creditor with arrears, we would not be able to provide any financing. The existence of this reform creates a useful backdrop to any Paris Club discussions because any potential holdouts in the Paris Club discussions will be aware that if there is not a Paris Club agreement the Fund does have a framework that would enable us to go forward in any event, under carefully circumscribed situations. And that would hopefully provide an incentive for that creditor to join the consensus in the Paris Club. So we view this very much as being supportive of the Paris Club process. Again, in those circumstances where most of the claims are held in the Paris Club. In those cases where they're not, this reform does acknowledge the fact that it's probably no longer appropriate for the Paris Club process to drive this. We need to have a broader approach and this is what this reform tries to do.
QUESTIONER: I'm sorry, just to follow up on that. I mean, there's also a number of countries, you know, emerging markets that are not members of the Paris Club but have participated on an ad hoc kind of basis. Like China or -- I can't think of any other examples off the top of my head, but if we're talking about a holdout creditor who is not a permanent member, do they still get the chance to try the Paris Club framework first and then it defaults to the second set of circumstances? Or do you just skip the Paris Club and go straight to the second set?
MR. HAGAN: No. Actually if you look at the paper, it talks about whether a Paris Club agreement is representative. So even if the creditor may not be a permanent member of the Paris Club but decides on an ad hoc basis to join the Paris Club and reaches agreement there, then that counts. And that would potentially make it a representative Paris Club agreement. Okay?
QUESTIONER: All right. Thank you.
QUESTIONER: Thank you very much. This is just a quick question on the third criteria where it relates to whether the Fund's ability to raise cash in the future will be affected. I think we said it again on the call that this criterion would normally not be satisfied where the creditor or group of creditors doesn't account for a majority. But does that mean it's purely a numbers game because, some hold outs, it may be a case of strength of feeling that determines whether they come back to the table in the future rather than numbers.
MR. BREDENKAMP: Could you clarify the question? I'm not sure what you're getting at. Sorry.
QUESTIONER: Sorry. Is it right to say that if there are a majority of creditors who holdout, then you would normally not lend into arrears? And in terms of making that decision then, is it not also affected by the creditors opinion on the matters and their strength of feeling because what determines whether they'll participate in programs in the future is surely more than just a question of ticking boxes.
MR. BREDENKAMP: I see what you're saying. Yes, it is in a sense in the eye of the beholders, of the creditors. And of course the reason why this is a legitimate dimension to put into the policy is because all official creditors are represented around the table in the IMF's Board. So they will be able to express their views on what the implications would be of the IMF lending into arrears, and in a particular case under the given circumstances of that case.
MR. HAGAN: Just to pick up on that, the concept is that we don't want this policy to undermine the availability of official sector financing going forward because that's a particularly important source of financing for the Fund. We’ll look at what types of actions by us are probably in most cases going to undermine that future financing. And essentially, what we are saying in this criterion is that we would be sending a pretty negative signal that could undermine financing going forward if we were to apply this not only with respect to the minority holdouts, but with respect to the majority as well. So we're kind of making an assumption here that as a general rule we're sending a pretty bad signal if we basically ignore the arrears of the majority.
Now, I have to tell you that is a different rule to the one that we apply in the private sector context. And this is a good example of where there's an asymmetry in the reform, right. Because in the private sector context theoretically we would be willing to lend into the arrears of all private creditors, and there is nothing in the policy that prevents that. But in the official sector context there is a sense that because of the importance of official sector financing, for us to ignore the majority would be problematic.
MR. BREDENKAMP: In that paragraph, one example of where lending into arrears would likely undermine our future fundraising capacity is if we were going to lend into arrears to a majority of the creditors, and so that is pretty much ruled out in normal cases. We give another example which is where the creditor or creditors involved have a track record of being a reliable contributor in past restructurings. That's a factor which we think the creditors would want to take into account. Because if a particular creditor is unable to or unwilling to contribute in one case, but in general has a very strong track record of contributing, again to use Sean's phrase, it would send a negative signal if the Board were to override whatever constraints that creditor is facing in this case and simply lend into arrears to them. So that's the basic underlying rationale.
MS. GAVIRIA: Thank you all for participating.
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