The call came in response to concerns held by economists and policymakers for several years that more needs to be done to strengthen the architecture of the international financial system.
This in response to recent emerging market financial crises, chiefly those sparked by the wave of currency collapses that began in south-east Asia in 1997.
In a speech to the National Economists’ Club at Washington DC’s American Enterprise Institute on Monday night, IMF first deputy managing director Anne Krueger acknowledged a ‘gaping hole’ in existing arrangements.
She said: ‘We lack incentives to help countries with unsustainable debts to resolve them promptly and in an orderly way. At present the only available mechanism requires the international community to bail out the private creditors.’
She said the IMF wanted to create a ‘catalyst’ that would encourage debtors and creditors to come together to restructure unsustainable debts in a timely and efficient manner.
‘This catalyst would take the form of a framework offering a debtor country legal protection from creditors that stand in the way of a necessary restructuring in exchange for an obligation for the debtor to negotiate with its creditors in good faith and to put in place policies that would prevent a similar problem from arising in the future,’ she said.
‘The mere knowledge that such a framework was in place should encourage debtors and creditors to reach agreement of their own accord. Our model is one of a domestic bankruptcy court, but for a number of reasons it could not operate exactly like that. It is better to think of it as an international workout mechanism.’
The proposal will be discussed in more detail at a meeting of the IMF’s executive board next month.
Kreuger said the change would cut the cost of restructuring for emerging countries but would not be ‘an easy option’. For creditors it would increase the likelyhood of an ‘orderly’ restructuring, a more preferable option.
But she warned change could not be immediate. ‘Even with unanimous political support this approach could not be in place for at least two or three years.
‘So none of what I have to say tonight has implications for our current negotiations with member countries – Argentina and Turkey, for example.’
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