WASHINGTON, June 20 The International Monetary
Fund should ask private bondholders to hold onto the debt of
financially distressed countries for longer, as the global
lender seeks to improve its sovereign debt restructuring
strategy, IMF economists said on Friday.
The IMF's deliberations have been shaped in part by its
experience bailing out Greece, where it agreed to lend to the
euro zone country without imposing losses on private creditors,
but later decided a debt write-down would be necessary.
The IMF now seeks to avoid a situation where its bailout
loans are used to pay off private bonds rather than provide more
direct help to the country in need.
In a paper published on Friday, the IMF economists argue
having the option of pushing back debt maturity would give the
IMF a middle option in deciding how to help heavily-indebted
This "soft" restructuring would leave private creditors
intact while relieving some of the stress on the country. The
economists emphasized that private creditors would have to agree
to any such plan.
At present, the IMF can either lend to a country it believes
will be able to pay back the debt, or force a debt restructuring
up-front if the debt is seen as unsustainable.
In 2010, when dealing with Greece, the IMF also amended its
rules to allow it to lend to countries where there is a "high
risk of international systemic spillovers," even if the Fund
worried the country would not be able to pay back the money.
At the time, the IMF worried Greece's debt problems could
spread to its neighbors in the euro zone.
"(But) it has become clear that the systemic exemption
established in 2010 does not provide a coherent long-term
solution to the problem," the authors wrote.
Economists and market analysts have raised concerns about
some of the Fund's proposals, saying they could risk market
contagion by prompting investors to flee a country as soon as
the IMF got involved, or raising interest rates to untenable
Critics also say new rules would not really help address
problems around sovereign debt restructuring, since even the
decision of whether a country has a "high" or "low" probability
of paying back its debts is subjective, dependent on a host of
intangible factors such as a country's commitment to reforms.
But the IMF staff argue the proposed rules would still be
flexible, allowing the Fund to decide on a case-by-case basis if
and how a country needs to restructure its debt. And they say it
may be desirable if investors think new rules would make an IMF
bailout less likely, and demand higher interest rates to hold
the debt, as it would lead to better risk pricing.
The IMF staff said the paper was still preliminary and they
would consult with markets further. The IMF said its next paper
on debt restructuring, later this year, will deal with
collective action clauses between nations and their debtors.
(Reporting by Anna Yukhananov; Editing by Paul Simao)