Summing Up by the Acting Chairman—Fund Policy on Arrears to Private Creditors—Further Considerations, Executive Board Meeting 99/64, June 14, 1999

Directors welcomed the opportunity to reexamine the criteria set out earlier for Fund lending into arrears to private creditors stemming from sovereign defaults and from the imposition of exchange controls that lead to an interruption in debt-service payments by nonsovereign borrowers.

Directors emphasized that the modification of the financing assurances and arrears policies to permit lending into arrears is an adaptation of existing policies to changing circumstances, and is intended to reinforce the Fund’s ability to promote effective balance of payments adjustment while providing adequate safeguards for the use of the Fund’s resources.

Directors concurred that the criteria set out earlier for the case of sovereign arrears may be too restrictive and could lead to instances in which creditors particularly bondholders could exercise a de facto veto over Fund lending. They also considered that the criteria set out earlier for the case of nonsovereign arrears are too restrictive, as they may not take adequate account of the possibility that, even when both creditors and debtors are willing to participate in collaborative negotiations, the process of debt renegotiation may be protracted. Directors noted that in the case of nonsovereign arrears to private creditors, it would be important to ensure that appropriate steps are taken to protect creditors’ interests. One suggestion to staff in this regard was to consider the establishment of an escrow account into which debt-service payments in local currency to nonresident creditors would be made. Against the background of variations in institutional arrangements and members’ capacity, however, Directors considered that it would be difficult to specify as a criterion for lending into nonsovereign arrears the implementation of specific mechanisms to protect creditors’ interests; instead, this judgment would need to be made on a case-by-case basis.

Directors agreed that Fund lending into sovereign arrears to private creditors (including bondholders and commercial banks) should be on a case-by-case basis and only where:

• (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and

• (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors.

Directors agreed that Fund lending into nonsovereign arrears stemming from the imposition of exchange controls should be on a case-by-case basis and only where:

• (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and

• (ii) the member is pursuing appropriate policies, is making a good faith effort to facilitate a collaborative agreement between private debtors and their creditors, and a good prospect exists for the removal of exchange controls.

In both cases, all purchases by the member would be subject, as provided at present, to financing reviews to bring developments at an early stage to the attention of the Executive Board, and to provide an opportunity for the Board to consider whether adequate safeguards remain in place for further use of the Fund’s resources in the member’s circumstances. Specifically, such reviews would provide a basis to assess whether the member’s adjustment efforts are considered to be undermined by developments in creditor-debtor relations.

Directors noted that the policy outlined above supersedes all previous policies regarding lending into arrears to private creditors.

Finally, Directors noted that it would be important to monitor experience with lending into arrears and to keep the policy outlined above under review, so as to ensure that it achieves its objectives.

BUFF/99/71,

June 18, 1999