IMF Managing Director Kristalina Georgieva and colleagues just published a blog titled “Reform of the International Debt Architecture is Urgently Needed.” Many of us strongly agree. The blog and the longer paper released at the same time review the many dimensions of the problems. But it seems to me there are three critical and urgent issues that should rise to the top of the agenda for the upcoming meetings of the G20 and the IMF and World Bank: (1) making temporary debt service standstills work for poor countries with demonstrable need; (2) shifting into high gear for IMF finance, especially for poor countries; and (3) making IMF finance contingent on private creditor participation in debt restructurings. IMF shareholders should seize the moment to give the Fund a mandate to develop feasible but fit-for-purpose proposals in these areas.
1. Temporary Standstills
In the Debt Service Standstill Initiative (DSSI), the G20 launched an experiment in the form of a sweeping solution that offers all poor countries temporary debt service relief by all creditors.
It’s not working well. There is open conflict among official creditors; private creditors reject participation; many debtor countries don’t want to participate; and rating agencies have basically defined comparable treatment across public and private creditors (which is the DSSI goal) as triggering default.
In the G20’s defense, if there ever was a time for sweeping solutions, this is it. As the IMF’s Georgieva has said, this is a global crisis like no other. It is the mother of all contagion episodes. Some poor countries’ own policies may have put them in a weak position going into the crisis, but they cannot fiscally adjust their way out of it.
So even if the parties are mostly against one-size-fits-all solutions, the global system needs some way to extend a temporary debt service moratorium to a defined set of poor countries with demonstrable need and interest in the face of this massive global crisis.
If a case-by-case approach makes everyone more comfortable, that puts the spotlight squarely on the IMF, the only credible arbiter of which countries should be included in the standstill. We need some kind of objective determination by the IMF that identifies those countries for which continued debt service to all creditors demonstrably and materially pushes debt sustainability farther away, rather than closer.
And we need the official sector to work closely with rating agencies and financial regulators to enshrine a crucial distinction: an individual debtor government’s decision to default because it can not or will not pay is not the same thing as complying with an external determination that a temporary standstill is in the systemic interest as well as in that country’s interest.
Going forward, bond issuances and loan agreements should include provisions which permit temporary suspension of debt service without triggering an event of default if the IMF makes such a determination in a systemic crisis for a specific set of debtor countries. For the present, all creditors and rating agencies and regulators should agree that forbearance in these cases is the right temporary response to avoid worse debt sustainability (and restructuring) problems in the future.
For understandable reasons, the IMF will not relish this role. So its major shareholders will have to give it an explicit mandate to take it up.
2. Large-Scale IMF Finance
We need a temporary solution—the standstill. And we need a long-term solution in insolvency cases—orderly restructurings with comparable treatment when sovereign debt is judged by the IMF as unsustainable. But we also need another interim solution—large-scale IMF finance during global crises when ultimate debt sustainability prospects are unknowable.
So far, the IMF has provided $31 billion in emergency financing to 76 countries, including 47 low income countries (LICs), as well as debt service relief on its own credits to poor countries. Much more will be needed in the months ahead. But the IMF’s rules prohibit moving forward with its larger and longer-term programs when there is no identified path to debt sustainability. So there is no way in the near term to move from limited emergency financing to larger-scale financing.
The case for a new facility to bridge that gap is compelling, as Matthew Fisher and Adnan Mazarei have argued. Not only is this crisis unprecedented; the standard solutions that Fund programs are supposed to support to resolve balance of payments problems—country-specific fiscal adjustment, financial, and structural reforms—are not going to work during a massive and likely prolonged global shock to both demand and supply.
G20 and other IMF shareholders should give the Fund a mandate to design and fund such a facility and soon.
3. Make IMF Finance Contingent on Private Creditor Participation
For the long-term solution in insolvency cases—debt restructurings based on IMF debt sustainability findings—the long-standing problem has been that the IMF has had to come forward with new financing before it is clear how much private creditors will contribute to the return to debt sustainability. This makes it very hard to strike the right balance between new taxpayer money and private creditor contributions to debt resolution.
Collective action clauses (CACs) have helped a lot to shorten this period. But CACs are still a partial solution, especially as much of the debt—particularly for LICs—is in the form of loans, rather than bonds.
It is time to move forward on an idea that has been discussed for some time—making IMF finance contingent on private creditor participation in debt restructurings.
The mechanics are feasible since IMF programs are disbursed in tranches. Fund programs could be launched and initial tranches disbursed before restructurings are agreed. The program could then explicitly tie disbursement of later tranches at appropriate points and of appropriate sizes to a certain threshold of private creditor participation in negotiated restructurings.
Public creditors have traditionally acted through the Paris Club in accordance with this logic. Paris Club reschedulings, driven by IMF debt sustainability analyses, come early in the process, so that the official bilateral contribution to closing finance gaps is known before the bulk of IMF finance flows. If China, outside the Paris Club, continues to insist that much of its official development finance is commercial and should be treated as private credits, this approach would help address the risk of using IMF finance to bail out China.
At the same time, the risk to debtor LICs of getting caught in a struggle between the IMF and private creditors must also be addressed. The IMF must move part-way off the sidelines: it should take a formal, active role in engaging with creditors to help them understand the realities of debtor country repayment capacity. It seems reasonable for the IMF to make a strong case directly to creditors for its own debt sustainability analysis.
Private creditors would have to decide whether their repayment prospects are better or worse by accepting a deal supported by Fund financing. That is a fair decision to be left to private creditors and more fair to taxpayers than bailing out private creditors without appropriate burden sharing.
Here too, G20 and IMF shareholders should give the IMF a mandate to design such contingency provisions and operating arrangements.
There are some occasions where there is no substitute for shareholders stepping up collectively to provide direction. This is one of them. We lack not ideas but political will and practical implementation schemes, which will take time to develop. But time is not on anyone’s side.