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29. Nov. 2002 erlassjahr.de commentary Firmly on the wrong path: SDRM after the Annual Meetings 2002 We have commented comprehensively upon the SDRM proposal, as it was presented at the Annual Meeting of the Bank and the Fund last September (see: „No way, IMF!“, available at: www.erlassjahr.de). During those meetings there has been some discussion between FTAP proponents and the Fund staff. These debates have left disappointingly few traces in the three statements, which have been made since September by the staff and leadership of the Fund on this issue. This article is to comment upon these statements, not repeating the general critique of the SDRM proposal viewed from an angle of fairness and transparency, which in our view is essential for any meaningful reform. The key flaws of the SDRM as opposed to a fair and transparent mechanism can be summarized as follows:
Since end September 2002 there have been three statements made by leading staff of the IMF:
All three documents are available from the IMFs website (www.imf.org). The documents went a long way repeating the state of the debate after one year of discussions. The general tone reveals an obvious interest by the Fund to accommodate concerns of all stakeholders, including NGOs, by some occasional friendly rhetoric, taking up formulations, key words and quotes form the respective contexts. On the level of content, however, there is not much change from the pre-Washington state of the art. 1. Trying to hide the obvious: The Fund on its own role In both her speeches Krueger suggested that there would be no role of the Fund at all. Krueger-II states: What formal role would the IMF have under the SDRM proposal? The short answer is: None. – only to continue a few lines later: At the same time, the IMF has a crucial role to play now, and in the future,in enabling the international community to reach a judgment on the sustainability of a country's debt and the appropriateness of its economic policies. How can this contradiction between „no role“ and the „crucial role“ be resolved? Simply by establishing that the Fund plays this role right now, even in the absence of the SDRM. In other words: there can be nothing wrong with things we are already doing. However, the critique of the fatal double role of the Fund as a lender and the „expert“ who assesses the country’s economic situation has been very much at the heart of NGO’s positions. So, why does the IMF insist on the role which has drawn that much of a fierce critique from all sides? For „consistency’s“ sake. This is because there has to be some degree of consistency between the Fund's judgments about the sustainable economic program and the feasible size of primary surpluses, on the one hand, and the extent of restructuring agreed to by the creditors and the debtors, on the other. So, in broad terms, the Fund's role will continue to be what it has been to date, namely that of signaling its willingness to support a country's economic policies and providing financial assistance through an IMF-supported program (when the country's situation looks sustainable going forward). In her October speech Krueger (I) had put it even more clearly: there has to be consistency between the Fund's judgments about the sustainable economic program and the feasible size of primary surpluses, on the one hand, and the size of the "haircut" agreed to by the creditors and the debtors, on the other. It is not that surprising that the Fund sticks like glue to its monopoly on assessing the debtor’s economic situation, as it implies a huge amount of influence over a procedure’s outcome. What in fact is surprising is the degree of chutzpah with which it rules out that the Funds could, like any creditor, base its lending decision on its own assessment, but leave any judgement beyond this to the parties involved, i.e. an institution which the parties might wish to nominate in order to have data harmonized and evidence produced. In the light of this insistence on its role, NGOs need to be alarmed, when Krueger (I) with pretended humbleness points out some need for reform in the Fund as well: Work on the SDRM has to go hand-in-hand with several other reforms including: Increasing the Fund's capacity to assess better the sustainability of a member country's debt (...). After the lousy quality of the Bank and the Fund’s projections on HIPC debt sustainability had been revealed by NGOs, some important Fund members including G7 governments saw some strong need for a counterbalance to the Funds monopoly. The German government suggested the establishment of an NGO advisory group, which might feed critical evidence into future analysis done by the IFIs. With the view that Ms. Krueger now has on this proposal, namely increasing the Fund's capacity to assess better… NGOs must certainly not let themselves be lured into such an „advisory“ role. As long as they would not advise an independent panel, but rather the creditor IMF, nobody, except for the Fund itself, will have anything to win from that exercise. Washington (and Berlin), don’t count on us! It should be added that the sneaky style of pretending „no role“, while claiming key positions, does not only start when it comes to assessing debt sustainability. Already the verification process once a country has filed for an SDRM is claimed to be an IMF core task, even if only implicitly. The „double trigger“ of the SDRM (Krueger-II) requires that after the debtor has filed for the process, there needs to be a „validation“ from the creditors. However, creditors at that moment will certainly not be in a position to organise and come to a sound common assessment in the necessarily short timeframe. Guess, who is meant to stand ready and step in? It needs to be pointed out, alltogether, that this validation-trigger is useless, because the system is a self-regulating one. The Fund itself has time and again explained that it would be a costly exercise for a country to unnecessarily file for an SDRM. Interrupting relations with creditors will always lead to a difficult situation, particularly for a dependent Southern economy. It only makes sense, if at the end of the day an unsustainable situation is resolved and the relationship between the indebted country and the outside world is re-established on a new and more sound basis. If the once initiated process gets stuck because it turns out to be simply unfounded (and is declared so by a truly impartial arbitration panel), the debtor country itself will be the greatest looser. Finally, one quite new aspect regarding the Funds role can be found in Boorman, when he asks: How can the incumbent government, and the relevant Ministers and officials, be persuaded to accept that reality and approach creditors for relief? We all certainly look forward to an IMF which serves to persuade debtor governments to approach their creditors (including the IMF) for relief! 2. Clarifications – unwelcome ones Contrary to the supposed comprehensiveness of the SDRM the IMF has excluded not only countries, but also classes of debts. First, it has withdrawn from earlier statements, which clearly indicated that an SDRM should serve any country which needed it, in order to restate that HIPC is for the poor and SDRM for the Emerging Markets (Boorman). It is indeed shocking to see how little the institution has learned from HIPCs failures. It remains to be seen if the Bretton Woods Institutions really dare to come up with an enhanced enhanced HIPC, when in the near future more and more post-relief HIPCs run into default (as Bank and Fund foresee themselves) – while other countries are receiving treatment under a fairer and more comprehensive scheme. It is important to note that the IMF has never given any reason, why HIPCs should be excluded from a new scheme. Moreover the IMF understands the SDRM to be only meant for external debt. However, critical countries like Brazil are suffering from a huge amount of internal debt. The Fund pretends it can fix the incoherencies between both by the same kind of „comparative treatment clauses“, which have largely failed to work in the Paris Club, ever since the official sector claimed leadership in international debt management. What would the Fund and the international community at large actually do, once the Argentine government keeps servicing internal debt in full while external creditors have suffered a haircut, because, f.i. key government officials have their stakes in the respective banks and investment funds? In Washington the Deputy Secretary general of the Club had declared that the Club did not (yet) have a position on SDRM. It is quite sad, that the Fund already bowed to the Paris Club’s only supposed interest to remain out of the (SDRM-)picture, before Club members were even able to formulate a request to that respect. Hasn’t the Club been the Nr.1 model for an incomprehensive and thus futile scheme for debt management? 3. Clarifications – welcome ones Two passages of Ms. Kruegers (II) statement are really useful: For the first time the IMF has produced a bit of clarity regarding what it understands by debt sustainability. She stated: A sovereign debt is sustainable when the sovereign can, with reasonable policies, service the debt to an extent that the future debt-to-GNP ratio will ultimately stabilize or fall. It is unsustainable when, under any realistic set of policies and circumstances that can be envisaged, the debt-to-GDP ratio (or debt-to-export ratio in some cases) will rise without limit. In the latter circumstance, debt will ultimately have to be restructured with a reduced net present value (NPV) relative to its face value. She is even more precise, when defining: in circumstances where the real rate of growth of the economy plus the primary surplus as a percent of GDP is less than the interest payments as a percent of GDP, the debt-to-GDP ratio will grow indefinitely. This is not the most elaborated and development-oriented of all sustainability definitions, but for the first time it reveals what the Fund has on its mind, when it comes to considering a debt burden as unsustainable. It even allows for a bit of calculation, how much relief would actually be needed. NGOs are indeed challenged to take the concept up and to confront it with their own proposals, like those related to the Millennium Development Goals. Second Ms. Krueger (II) deserves praise for her lucid rejection of the notion that an orderly framework might actually raise borrowing costs for the debtor. This argument originally brought up by private apologetics of the status quo, has resounded from many angles, including Emerging Market governments throughout the SDRM debate. She rejects the idea as illogical and by pointing to the historical evidence, which could be drawn form experiences with national insolvency legislation. F.i. the 1978 bankruptcy act in the US has not led to a drying up of credit markets – quite to the contrary. On the logical side she rightfully expects from an orderly framework more sound policies on the part of the debtor, an increased recovery rate through a more timely and faster restructuring, and finally smaller haircuts for the creditors – all in all nothing that tended to make borrowing more costly. It could be added that an orderly framework will also result in less irresponsible lending by all creditors, including the IMF, in the first place. 4. Are we there at all? The IMF and the NGO proposal Boorman started by giving an overview on current proposals on the table. Strangely enough he mentioned the well-known SDRM, the CAC proposal of the US-government, a proposal by two J.P.Morgan economists, to exchange existing claims against new ones, which carry a CAC (thus rather an option 2b than 3), and fourth the option to stick with existing procedures. Neither he nor Krueger even mentioned US-chapter 9, which is underlying the FTAP proposal. En passant he mentions the NGO call for truly independent decision making, only to (falsely) claim that the current SDRM will be in line with that. Contrary to f.i. the World Bank, which quite often claims to take inspiration from NGOs on board, Fund staff at least in this debate seem quite afraid of acknowledging that there was something conceptual out there which is quite ahead of their own proposals regarding values like impartiality and comprehensiveness, which they claim to be guiding principles of the SDRM. This is quite contrary to the openness with which NGOs meet when they set up personal dialogue with Fund staff. Only once they left a trace: In the end of her statement (II), Krueger could not help but insert the wonderful quote by Adam Smith "when it becomes necessary for a state to declare itself bankrupt ... a fair, open and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor." It is hard to believe that she dug this out of her Smith compendium. More probably she took it from the introduction of Kunibert Raffer’s „What’s good for the United States must be good for the World“. What a pity, she did not acknowledge that! |
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