WASHINGTON May 23 The International Monetary
Fund has begun to rethink how it should handle bailouts for
countries that run into financial trouble, with staff suggesting
private-sector creditors should regularly be required to bear
some of the load.
The proposal is part of a major review the IMF has launched
of its policies relating to sovereign debt restructurings that
is expected to take up to a year.
It conducted its last review in 2005, but decided a fresh
look was needed in light of a number of recent sovereign debt
restructurings, including one by Greece, which was the largest
In a paper that was discussed by the IMF's executive board
on Monday, staff recommended the fund consider making a creditor
bail-in a condition for IMF lending to a troubled country.
The IMF wants to ensure that its emergency loans are not
used to bailout private creditors.
"While bail-in measures would be voluntary - ranging from
rescheduling of loans to bond exchanges that result in long
maturities - creditors would understand that the success of such
measures would be a condition of fund support," the report said.
One aim would be to ensure private capital does not flee.
Creditors have been forced to take harsh "haircuts" in accepting
writedowns on the value of their bonds in recent sovereign debt
restructurings, including Greece.
The fund said that the proposed bail-ins would typically
involve rescheduling debt, giving it more time to figure out the
scale of the country's problems.
The report also highlighted recent U.S. court rulings on
Argentina's long-running battle with creditors holding its
defaulted debt, and warned that they could undermine other
sovereign debt restructuring efforts by strengthening the
leverage of creditor "holdouts."
U.S. courts ruled in favor late last year of "holdout"
creditors who had rejected Argentine debt exchanges in 2005 and
2010 and sued to be repaid in full on their defaulted bonds.
A U.S. judge ordered Argentina to pay the holdouts the full
$1.33 billion owed them the next time it serviced restructured
debt. Argentina appealed, and a ruling by the 2nd U.S. Circuit
Court of Appeals is expected in the coming weeks.
"The Argentine decisions, if upheld, would likely give
holdout creditors greater leverage and make the debt
restructuring process more complicated," the IMF report said.
It cited two main concerns. First, the court rulings would
interrupt the flow of payments to creditors who took part in the
restructuring, thereby discouraging other creditors from taking
part in future restructurings. Secondly, the ruling is likely to
increase the risk that the number of holdouts will multiply.
The IMF said it had not been in contact with the U.S. courts
and was not offering an opinion on the merits of the case.