July 6, 2002
Let me say a few words about crisis prevention and then turn more specifically to the issue of private sector involvement (PSI) and the ongoing discussion on collective action clauses (CACs) and Sovereign Debt Restructuring (SDRM).
I'll be brief on crisis prevention. The initiatives of the last several years on transparency, on codes and standards, on strengthening domestic banking and financial systems have all become operational; there has been good progress in generating the various products—Reports on Standards and Codes (ROSCs), Financial Sector Assessments (FSAPs), and the like, and in securing country buy-in to greater transparency in data, in policy decisions, and in the release of Fund surveillance and program documents. There is also evidence that the markets are using these products in their own credit analysis and risk assessment. This said, more needs to be done. There needs to be greater consensus on the way in which to further integrate this work into the Fund's operations. And, while there has been enormous progress in getting acceptance and full buy-in of these efforts by member countries, more could be done, including by some of the countries represented here. These products could be made more user friendly to facilitate their use by markets and updated—and more of them should be released by the involved countries. In particular, and this is ironic since much of the work on architecture was stimulated by the crisis in Asia, the record of Asian countries on the release of Fund documents and in requesting assessments under FSAPs or ROSCs lags behind that of other regions of the world.1 There is substantial progress in other areas as well, including the attention given to debt management and debt sustainability issues and to vulnerability assessments, and the development of improved and more transparent mechanisms for debtor/creditor relations. I believe a case can be made that the more limited contagion seen in the weeks and months immediately following the developments in Argentina at the end of last year is at least partly attributable to progress in these areas and the fact that market surprises have been far fewer than in earlier crisis episodes.
There are still areas, of course, where much more needs to be done to make more robust the institutional underpinnings of all economies, especially those subjected to the forces of the international capital markets. Here I would mention just a few points:
1. There is a need to develop better domestic bankruptcy regimes. This means not just the legal foundations, but also the pre-bankruptcy processes for trying to resolve credit problems and ultimately, for agreeing the terms of bankruptcy—if that is the appropriate end game. It also means developing the judicial systems needed to assure fair and equitable treatment of all parties in such processes. Beyond this, there is also a need to deal better with systemic cases where the entire corporate system is under severe strain because of a macroeconomic crisis. The experience in Mexico, Indonesia and now what is going on in Argentina need to be studied carefully to develop a better set of responses—both legal and financial—to such situations.
2. There is also a need in many countries to deal with the practical policy-making requirements and disciplinary aspects of decentralized fiscal systems. We've seen these problems dramatically in Argentina. As the welcome processes of democratization spread and more countries adopt decentralized systems. Better models or best practices are needed to limit the potential downside risks of such systems, and to assure the appropriateness of the consolidated macroeconomic stance of the country.
Work is proceeding in these and other areas, both in the Fund and in other institutions. But the technical assistance demands to accelerate progress in these areas are very large.
3. As organizational matter regarding crisis prevention that is receiving increasing attention; is the conduct of Fund Surveillance. As you all know, the content of surveillance—including many of the initiatives referred to above—has expanded significantly in recent years. This is the reality of assessing vulnerabilities in a more complex environment of open and fast-moving capital markets. A great deal has been done to sharpen and focus the Fund's work in this area. However, questions have been raised regarding the independence of surveillance—the issue of whether staff conducting surveillance are sufficiently distant from other Fund operations with a country to assure a detached, medium term assessment of the country's policies, prospects and vulnerabilities. In program cases, the need is to ensure that the institution can stand back from all the mutual commitments that have been made, and the inevitable pressures of monitoring ongoing developments under a program, and ask at appropriate junctures whether it all remains appropriate to guarantee progress for the country over the medium-term. This was one element of the Executive Board's recent review of the conduct of surveillance. Fund management has made a number of organizational changes to try to assure this independence and is considering possible further moves.
Let me turn now to the still contentious and frustrating area of PSI and SDRM. Private sector involvement means different things to different people, but fundamentally it entails a decision about the size of the official sector's safety net for countries facing crisis. How much money should the international community provide? What is the appropriate mix of financing and adjustment? And what should be the contribution of the private sector? An important element of this is what to do in the fortunately still rare events when countries are forced to default on their debt. It is in this context that Fund management has proposed a statutory mechanism for the resolution of sovereign debt, the SDRM. I will return to this in a minute.
Frankly, I believe we could make better and faster progress in this area if there was broader agreement on the exact nature of the problem that the community is trying to address. People come at this issue from many angles:
While all of these concerns would appear to suggest more restrictive Fund financing in times of crisis, and greater involvement of private creditors in crisis resolution, the precise design and application of mechanisms to accomplish these aims could differ depending on the stress put on these various views. As we press forward on issues regarding collective action clauses and SDRM, it is worth reminding ourselves of these different motivations for PSI and how they may influence the preferred outcome.
While there is not full agreement on the motivation for PSI, there is greater agreement on the various factors that call for a better legal framework and more affective processes to deal with situations in which a sovereign's debt has become unsustainable and warrants restructuring.
These factors include:
All of this creates an urgency to move forward on the debate that has begun on collective action clauses and SDRM. So where do things stand?
First, there is no question that the proposals regarding SDRM made by Anne Krueger, the First Deputy Managing Director, have captured everyone's attention and galvanized the discussion on PSI.
Second, the response to raising these issues has generally been positive. Issues are being raised, ideas put forward, and both the requirements and possibilities of a solution considered in a constructive atmosphere. The private sector, in particular, while negative on the initial SDRM proposal, has been forthcoming and generally constructive in its response. Some old adversaries on collective action clauses, like the International Institute for Finance, have become advocates.
Third, there is agreement in the official community that the two basic approaches—the contractual and the statutory should be pursued in parallel and that what is done in the way of pushing ahead with the contractual approach is such that it would ultimately be compatible with an overarching SDRM framework, if that is what the community ultimately decides to adopt.
Nevertheless, the technical issues remain significant and the political possibilities uncertain. Similarly, the policy options seen for the Fund, in terms of creating incentives for the inclusion of collective action clauses in bank contracts or its role within a statutory framework are far from agreed. Let me try to summarize briefly where the debate stands and the work program—in the Fund and elsewhere—over the period up to the annual meetings.
There is, as I noted, agreement to move forward on two tracks: first, to encourage greater use of collective action clauses and to work to improve the design and effectiveness of those clauses; and second, to continue to examine the possibility for a statutory mechanism for more orderly and timely restructuring of unsustainable sovereign debts. A key challenge that confronts both approaches is the coordination of a diffuse and diverse creditor base with different creditors able to seek enforcement of their rights in different legal jurisdictions.
A major component of any effort to improve the current system is to allow a super-majority of creditors—across a broad range of instruments—to make the terms of a restructuring binding on those creditors that resist! This should help secure restructuring prior to default. But, in case default occurs, the new approach would also need to have the capacity to do the following:
Fourth and finally, some of us believe that there needs to be a more organized and predictable way to verify claims, oversee voting, and adjudicate disputes.
On collective action clauses, there has been progress:
There is promise in this area, as the inclusion or exclusion of such clauses in existing bonds is largely due to practice rather than the requirements of law and so there is precedent, and no legal impediment, to their inclusion.
The discussion taking place, I believe, shows that the earlier discussion in the official community was too simplistic—while encouraging the inclusion of CAC in bond contrasts, there was too little attention to the basic question "what clauses"?
The early market reaction to proposals to incorporate such "super collective action clauses" has generally been mixed to negative, with private creditors seeing them as potentially undermining their rights. Much more work will be needed to find acceptable formulations for such clauses.
Indeed, there are many efforts underway to refine, seek agreement on, and encourage the use of CACs. The Fund Board recently discussed these issues. The discussion was influenced by the fact that, notwithstanding official encouragement since the Rey report was issued in the mid 1990's, inclusion of CACs in sovereign bonds has not increased markedly. Directors called for continuing the effort to better understand the reasons for the reluctance to include such clauses, to encourage their inclusion, and for the Fund to monitor their use. There was widespread resistance among Directors, however, to conditioning access to Fund resources on the use of collective action clauses and little support for creating new financing facilities in the Fund, for example, to finance a member's needs that may arise in the context of a swap to retire existing debt that lacks collective action clauses. There were calls for the industrial countries to lead by example, by including such clauses in their own bonds, and Directors saw some merit in exploring whether securities registration and listing requirements in major jurisdictions could be changed so as to require the use of collective action provisions. Problems were seen with this proposal by some of the relevant Directors, however.
While work continues on collective action clauses, efforts will continue to flesh out the specifics of a statutory approach. The advocates of this approach see it as capable of resolving issues that remain problematic in the contractual approach. These problems with the contractual approach include:
1. persuading creditors and debtors to issue new debt and exchange existing debt for bonds that include these clauses;
2. dealing with the fact that emerging market sovereigns typically issue debt in several legal jurisdictions, where, even if identical language were used in CACs, there would be no guarantee of uniform interpretation or application across jurisdictions; and
3. coordinating the action of diverse creditors—not just bond holders—that hold a variety of credit instruments.
A statutory approach that empowered a super-majority of creditors to reach agreement with the debtor and to bind in the remaining creditors would resolve the problem posed by different legal jurisdictions by assuring legal uniformity in all jurisdictions. This could be done by establishing the SDRM through an amendment to the Fund's Articles of Agreement. Moreover, the establishment of a single and exclusive dispute resolution forum would ensure uniform interpretation. In short, a statutory approach would create a legal basis for creditors—not the Fund—to make the basic decisions regarding a possible stay and any restructuring agreement; it would provide a framework that would serve to act as if comprehensive and consistent CACs were incorporated into all debt instruments; and it would provide a mechanism to avoid fraud, protect inter-creditor equity, and resolve disputes.
On this last mentioned point, creation of a dispute resolution forum would provide an administrative function similar to that performed by domestic bankruptcy courts. It would also serve to resolve questions regarding the verification of claims and ensure the integrity of the voting process by creditors. This latter is an important concern of the private sector. The First Deputy Managing Director has put forward some ideas regarding the powers and composition of a dispute resolution forum, but these have not yet been considered by the Executive Board.
Around this two track approach, there is a very extensive and ambitious work program under way to address related issues. This work needs to address the following questions:
In addition, the Executive Board will soon take up the issues of how all of this should influence the Fund's policies on access to its resources under Fund-supported arrangements and the Fund's policies on lending into arrears.
Much of this work program needs to be carried out in close collaboration with the private sector. As I've noted, this has been a cooperative and constructive effort thus far. It may become more difficult, however, as preferred solutions begin to emerge more clearly in the official sector.
Reports on many of the issues within the work program are expected by the time of the Fund's Annual Meeting in early October.
Mr. Chairman, this is difficult and contentious terrain and I believe that the community has a long road ahead of it to deal with these important issues.
Thank you.
2 For example, Argentina has at least 88 different types of bonds outstanding.
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