Bracken: Debt Restructuring Plan Sparks Trouble - Emerging Market Creditors Are At Loggerheads With The IMF Over The Latter's Proposal To Overhaul Debt Restructuring.

(From The Banker)

Emerging market debt traders and creditors are on the warpath. They are planning some intensive lobbying during this month's annual meeting of the IMF and World Bank, in Washington. The objective is to kill off the proposal made by Anne Krueger, the IMF's first deputy managing director, to set up a sovereign debt restructuring mechanism (SDRM).

The opposition of many people in the private sector to a SDRM, a kind of international US Chapter 11 for bankrupt firms, looks more like a kneejerk reaction than a considered assessment.

Under the Krueger proposal, more decisions would be left to creditors and debtors, and an independent panel would resolve disputes. The case for creating the mechanism is that the absence of a predictable, orderly and rapid process for restructuring sovereign debts has costs for everybody. Debtors delay the inevitable restructuring, usually exhausting reserves in the process. This not only worsens a country's economic plight but leaves less in the coffers for creditors. When default eventually occurs, "rogue bondholders" can block agreement, holding out until they get a better deal than the majority. This possibility adds uncertainty about recovery value.

In any case, a SDRM is only intended for rare cases when "there is no feasible set of sustainable macroeconomic policies that would enable the debtor to resolve the immediate crisis", according to Ms Krueger.

Opposition points out flaws

However, the Institute for International Finance (IIF) in Washington, which mostly represents bank creditors, and the Emerging Markets Traders Association (EMTA) in New York, which represents traders, say that such a mechanism is unnecessary. They worry it would make it easier for countries to default, and say that concerns about rogue bondholders blocking restructuring deals are exaggerated.