On October 7, Anne Krueger, first deputy managing director of the International Monetary Fund, discussed two proposed changes to IMF procedures. "The common aim is to find mechanisms that allow countries with clearly unsustainable debt burdens to restructure in a fashion that preserves economic activity and asset values while protecting creditor rights," she said. "We need to insure that debtors and their creditors face incentives to move more rapidly . . . on restructurings that allow sustainability to be restored."
Krueger spoke at a symposium following the fourth annual joint meeting of the shadow financial regulatory committees from the United States, Japan, Latin America, and Europe. R. Glenn Hubbard, chairman of the President's Council of Economic Advisers, and Allan H. Meltzer of AEI joined her on the panel.
Krueger presented the Sovereign Debt Restructuring Mechanism (SDRM), a statutory change that would be akin to an IMF-organized bankruptcy court for nations and their creditors. (A major difference lies in the fact that no party could be forced into SDRM.) The other proposal is to implement collective action clauses (CACs), which are intended to smooth the default and restructuring process by eliminating the veto of minority creditors. Krueger characterized SDRM and CACs as complementary parts of IMF reform.
Noting that the basic effort is to improve economic growth and living standards, she said, "Work on the SDRM is part of a broader agenda to improve the fund's capacity to assist its member countries in strengthening their underlying macroeconomic framework for purposes of growth."
The other two panelists disagreed with such significant reform. Meltzer favored a market solution and a different mission for the IMF. The market is already finding some creative solutions, he said, and might make such institutional changes unnecessary.
Meltzer argued for a more strictly defined role of the IMF when treating financial crises. The IMF should get involved when a country is facing problems that the fund can help with, mainly those that occur because of credit market problems, not because a country has instituted bad policy. The IMF should distinguish between the kind of countries it is dealing with, and until it realizes that it "ought to help countries that help themselves by having sustainable good policies and [not] help countries that don't, we are not going to have happy solutions to these problems," Meltzer said.
Like Meltzer, Hubbard was wary about the proposed reforms. In his view, the IMF should turn its attention to reforms such as SDRM only after reconsidering its lending policies, and particularly the incentives leading countries to seek its assistance.
Following this panel discussion, the joint shadow committees released a statement addressing the IMF proposals. Echoing some of Meltzer's sentiments, the statement critiqued the proposals. "The Shadow Committees believe that the IMF proposals go both too far and not far enough. They go too far with respect to the immediate reforms suggested for the sovereign debt resolution process. We favor a more gradual approach that begins by strengthening existing contractual means for resolving debt problems. They fail to go far enough with regard to reforming the IMF's policies that give rise to incentives to postpone the recognition and resolution of unsustainable debt."
The committees urged caution, stating: "Given the rapid pace of innovation in which market participants are developing new approaches to dealing with the inefficiencies in the debt renegotiation process, we believe that an incremental approach is best. Consequently, CACs should be adopted. But premature adoption of the SDRM might be counterproductive or foreclose other beneficial adaptations."
