A quarterly magazine of the IMF

March 2002, Volume 39, Number 1

Sovereign debt bankruptcy rules

The IMF's Executive Board is studying how to help countries with unsustainable debt burdens resolve them in a prompt and orderly way. One possibility, proposed by IMF First Deputy Managing Director Anne Krueger in the fall of 2001, is the establishment of a sovereign debt restructuring mechanism incorporating some of the features of corporate bankruptcy regimes. Countries would be given legal protection while negotiating a debt-restructuring plan, during which time they would be expected to behave appropriately. All creditors would be obliged to comply with a plan approved by a large enough majority.

Krueger believes that such a debt-restructuring mechanism could encourage debtor countries and creditors to get together of their own accord before manageable problems erupt into full-blown crises. "Like a toothache sufferer delaying a visit to the dentist until the last possible moment, governments frequently try to put off the inevitable," she argues. "The citizens of the defaulting country experience greater hardship than they need to, and the international community has a tougher job helping pick up the pieces."

Debt restructuring has become more complicated over the past two decades, in part because of the growing use of bonds and complicated derivatives. Bondholders are more numerous, anonymous, and difficult to coordinate than banks. They also have a bigger incentive to sue debtors for repayment. Creditors often "rush for the exits," because they fear that restructuring will be disorderly. Krueger says that debtors, creditors, and the international community would all benefit from a more orderly process that encouraged creditors to remain involved. Her proposal, which has been widely covered in the press, has generated numerous responses as well as other proposals also under review.

New round of trade talks

A new round of multilateral trade negotiations was launched at the World Trade Organization's Fourth Ministerial Conference, held during November 9-14, 2001, in Doha, Qatar. The Doha Development Agenda—which highlights the fuller integration of developing countries into the trading system—provides for negotiations in 14 areas, with most scheduled to be concluded by January 1, 2005. Beyond talks on market access for goods and services, it sets the stage for substantial reductions of trade-distorting agricultural subsidies.

It also prepares the ground for negotiations in new areas, such as investment, competition policy, transparency in government procurement, and trade facilitation, subject to agreement on the negotiating terms and conditions at the WTO's 2003 Fifth Ministerial Conference. There was strong resistance by a number of developing countries to negotiations in these areas, indicating a need for consensus building in the period ahead.

The launch of the new round sends a clear signal rejecting inward-looking policies and protectionism. It reinvigorates the World Trade Organization and, with the accession of China and Taiwan Province of China at the Doha Conference, brings it closer to the goal of universal membership. At the same time, many items on the negotiating agenda are highly contentious, and the Doha Round may well prove to be among the most complex trade talks yet.

Financing for Development conference

The United Nations is holding a summit-level meeting in Monterrey, Mexico, during March 18-22, 2002, that will address the challenge of financing for development around the world. It will bring together heads of state and government and government officials; officials from the United Nations, the IMF, the World Bank, the World Trade Organization, and other international organizations; and representatives of civil society and the business sector. The goal of the summit is to build support to eradicate poverty, achieve sustained economic growth, and promote development.

The conference offers an opportunity to emphasize the "two pillars" of poverty reduction. The first is that each developing country takes responsibility for its own economic and social development. The second is that the international community provides an enabling environment—through financial aid, technical assistance, market access, and sound global trade and financial systems.

The conference holds the potential to make a significant contribution to achieving the universally shared objectives of development and poverty reduction, and meeting the Millennium Development Goals, including halving by 2015 the number of people living in extreme poverty. To that effect, the final preparatory meeting called for a new partnership between developed and developing countries, based on a commitment to sound policies, good governance, and the rule of law. Proposed domestic and international actions include mobilizing domestic resources; attracting international flows; promoting international trade as an engine for development; increasing international financial and technical cooperation; providing sustainable debt financing and debt relief; and enhancing the coherence and consistency of the international monetary, financial, and trading systems.

The IMF has participated—at the levels of Executive Board, management, and staff—in preparations for the conference and will stay actively involved in both the conference and its follow-up.